FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2016

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENTS

We measure certain financial assets and liabilities at fair value on a recurring basis in the condensed consolidated financial statements. The fair value 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, 2016 and December 31, 2015, the fair values of cash and cash equivalents, restricted cash, and notes and interest payable, approximate their carrying value.

At the time of our merger (we were then known as Manhattan Pharmaceuticals, Inc.) with Ariston Pharmaceuticals, Inc. (“Ariston”) in March 2010, Ariston issued $15.5 million 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. We have 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.

The cumulative liability to the Ariston subsidiary including accrued and unpaid interest of the 5% Notes was approximately $17.0 million at September 30, 2016 and $19.9 million at December 31, 2015. No payments have been made on the 5% Notes as of September 30, 2016.

In December 2011, we elected the fair value option for valuing the 5% Notes. The fair value option was elected in order to reflect in our financial statements the assumptions that market participants use in evaluating these financial instruments.

As of December 31, 2013, as a result of expiring intellectual property rights and other factors, it was determined that net product cash flows from AST-726 were unlikely. As we have no other obligations under the 5% Notes aside from the net product cash flows and the conversion feature, the conversion feature was used to estimate the 5% Notes’ fair value as of September 30, 2016 and December 31, 2015. The assumptions, assessments and projections of future revenues are subject to uncertainties, 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 condensed consolidated financial statements.

The following tables provide the fair value measurements of applicable financial liabilities as of September 30, 2016 and December 31, 2015:

	Financial liabilities at fair value as of September 30, 2016
	Level 1		Level 2		Level 3		Total
5% Notes	$	--	$	--	$	117,126	$	117,126
Total	$	--	$	--	$	117,126	$	117,126

	Financial liabilities at fair value as of December 31, 2015
	Level 1		Level 2		Level 3		Total
5% Notes	$	--	$	--	$	211,549	$	211,549
Total	$	--	$	--	$	211,549	$	211,549

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, 2016:

Fair value at December 31, 2015	$	211,549
Interest accrued on face value of 5% Notes		674,699
Conversion of 5% notes		(30,601	)
Change in fair value of Level 3 liabilities		(738,521	)
Fair value at September 30, 2016	$	117,126

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.