FAIR VALUE MEASUREMENTS

12 Months Ended

Dec. 31, 2012

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

NOTE 3 – FAIR VALUE MEASUREMENTS

We measure certain financial assets and liabilities at fair value on a recurring basis in the financial statements. The hierarchy ranks the quality and reliability of inputs, or assumptions, used in the determination of fair value and requires financial assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories:

· Level 1 – quoted prices in active markets for identical assets and liabilities;

· Level 2 – inputs other than Level 1 quoted prices that are directly or indirectly observable; and

· Level 3 – unobservable inputs that are not corroborated by market data.

As of December 31, 2012 and 2011, the fair values of cash and cash equivalents, and notes and interest payable, current portion approximate their carrying value.

Upon the merger between Manhattan and Ariston Pharmaceuticals, Inc. (“Ariston”) in March 2010, Ariston issued $15,452,793 of five-year 5% notes payable (the “5% Notes”) in satisfaction of several note payable issuances.  The 5% Notes and accrued and unpaid interest thereon are convertible at the option of the holder into Common Stock at the conversion price of $1,125 per share.  Ariston agreed to make quarterly payments on the 5% Notes equal to 50% of the net product cash flow received from the exploitation or commercialization of Ariston’s product candidates, AST-726 and AST-915.  The Company has no obligations under the 5% Notes aside from a) 50% of the net product cash flows from Ariston’s product candidates, if any, payable to noteholders; and b) the conversion feature, discussed above.

In connection with the Exchange Transaction in December 2011, the Company performed a valuation of the assets and liabilities of Manhattan immediately prior to the transaction. The cumulative liability including accrued and unpaid interest of these notes was approximately $16,876,000 immediately prior to the Exchange Transaction, and $17,727,000 and $16,883,000 at December 31, 2012 and 2011, respectively. As these notes payable are tied directly to net product cash flows derived from the preexisting products of the Company, this note and accrued interest was recorded at fair value of $3,287,700 as of the date of the Exchange Transaction. No payments have been made on these notes as of December 31, 2012.

We elected the fair value option for valuing the 5% Notes upon the completion of the reverse merger with TG Bio, as discussed above. The Company elected the fair value option in order to reflect in our financial statements the assumptions that market participants use in evaluating these financial instruments.

 
                The valuation method used to estimate the 5% Notes’ fair value was a discounted cash flow model, where the expected cash flows of AST-726 and AST-915 are discounted to the present using a yield that incorporates compensation for the probability of success in clinical development and marketing, among other factors. The discount rate used in this discounted cash flow model approximated 20% at December 31, 2012 and 2011. The assumptions, assessments and projections of future revenues are subject to uncertainties, are difficult to predict and require significant judgment. The use of different assumptions, applying different judgment to inherently subjective matters and changes in future market conditions could result in significantly different estimates of fair value and the differences could be material to our consolidated financial statements.

The Company’s financial liabilities measured at fair value on a recurring basis as of December 31, 2012 and 2011 were as follows:

	Financial liabilities at fair value as of December 31, 2012
	Level 1		Level 2		Level 3		Total
5% Notes	$	--	$	--	$	2,479,098	$	2,479,098
Totals	$	--	$	--	$	2,479,098	$	2,479,098

	Financial liabilities at fair value as of December 31, 2011
	Level 1		Level 2		Level 3		Total
5% Notes	$	--	$	--	$	3,294,797	$	3,294,797
Totals	$	--	$	--	$	3,294,797	$	3,294,797

The Level 3 amounts above represent the fair value of the 5% Notes and related accrued interest.

The following table summarizes the changes in Level 3 instruments for the years ended December 31, 2011 and 2012:

Balance at January 1, 2011	$	--
Transfer into Level 3		3,287,700
Interest accrued on face value of 5% Notes		7,097
Change in fair value of Level 3 liabilities		--
Balance at December 31, 2011		3,294,797
Interest accrued on face value of 5% Notes		844,173
Change in fair value of Level 3 liabilities		(1,659,872)
Balance at December 31, 2012	$	2,479,098

The change in the fair value of the Level 3 liabilities is reported in other (income) expense in the accompanying consolidated statements of operations.

Nonrecurring Fair Value Measurements

The Company’s assets measured at fair value on a nonrecurring basis as of December 31, 2012 were as follows:

	Fair value measurements as of December 31, 2012
	Level 1		Level 2		Level 3		Total impairment charge for the year ended December 31, 2012
Assets:
In-process research and development	$	--	$	--	$	2,797,600	$	(1,104,700	)
Total	$	--	$	--	$	2,797,600	$	(1,104,700	)

As a result of market changes affecting the commercial potential for the Ariston in-process research and development assets (AST-726 and AST-915), the Company determined that the asset's carrying value was no longer fully recoverable. Accordingly, during the year ended December 31, 2012, we recorded a non-cash impairment charge of approximately $1,104,700, which was recorded as impairment of in-process research and development in our consolidated statements of operations. The fair value of this asset was determined using a discounted cash flow model, where the expected cash flows of the Ariston assets are discounted to the present using a yield that incorporates compensation for the probability of success in clinical development and marketing, among other factors. This fair value measurement technique is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. Changes in the market or any of the assumptions used in determining the fair value of this asset may result in a further reduction to its estimated fair value and could result in additional and potentially full future impairment charges. Also contributing to the impairment charge was the Company’s decision during the year ended December 31, 2012 to discontinue future development activities for AST-915, following the analysis from a Phase I dose escalation trial, in which AST-915 failed to meet its primary efficacy endpoint.