FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2013

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

NOTE 2 – 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 September 30, 2013 and December 31, 2012, the fair values of cash and cash equivalents, accounts payable, accrued expenses, and notes and interest payable 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 the 5% Notes was approximately $16,876,000 immediately prior to the Exchange Transaction, $17,727,000 at December 31, 2012 and $18,390,000 at September 30, 2013. As the 5% Notes are tied directly to net product cash flows derived from the preexisting products of the Company, the 5% Notes and accrued interest were recorded at fair value of $3,287,700 as of the date of the Exchange Transaction. No payments have been made on the 5% Notes as of September 30, 2013. 

We elected the fair value option for valuing the 5% Notes upon the completion of the Exchange Transaction 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 is a discounted cash flow model, where the expected cash flows of AST-726 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 September 30, 2013. 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 following table provides the fair value measurements of applicable financial liabilities as of December 31, 2012 and September 30, 2013:

	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 September 30, 2013
	Level 1		Level 2		Level 3		Total
5% Notes	$	—	$	—	$	2,269,046	$	2,269,046
Totals	$	—	$	—	$	2,269,046	$	2,269,046

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 during the nine months ended September 30, 2013:  

Fair value at December 31, 2012	$	2,479,098
Interest accrued on face value of 5% Notes		662,775
Change in fair value of Level 3 liabilities		(872,827)
Fair value at September 30, 2013	$	2,269,046

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