FAIR VALUE MEASUREMENTS

3 Months Ended

Mar. 31, 2015

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

NOTE 4 – FAIR VALUE MEASUREMENTS

We measure certain financial assets and liabilities at fair value on a recurring basis in the 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 March 31, 2015 and December 31, 2014, the fair values of cash and cash equivalents, restricted cash, and notes and interest payable, current portion approximate their carrying value.

At the time of our merger (we were then known as Manhattan Pharmaceuticals, Inc. (“Manhattan”)) with 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.  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.

 

In connection with the exchange transaction with TG Biologics, Inc. (“TGBio”) in December 2011, we 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 transaction, and $19,544,720 at December 31, 2014 and $19,782,377 at March 31, 2015. As the 5% Notes are tied directly to net product cash flows derived from the preexisting products of Ariston, the 5% Notes and accrued interest were recorded at fair value of $3,287,700 as of the date of the transaction. No payments have been made on the 5% Notes as of March 31, 2015.

 

We elected the fair value option for valuing the 5% Notes upon the transaction with TGBio. 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 March 31, 2015 and December 31, 2014. 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 consolidated financial statements.

 

The following table provides the fair value measurements of applicable financial liabilities as of March 31, 2015 and December 31, 2014:

	Financial liabilities at fair value as of March 31, 2015
	Level 1		Level 2		Level 3		Total
5% Notes	$	--	$	--	$	272,206	$	272,206
Totals	$	--	$	--	$	272,206	$	272,206

	Financial liabilities at fair value as of December 31, 2014
	Level 1		Level 2		Level 3		Total
5% Notes	$	--	$	--	$	275,190	$	275,190
Totals	$	--	$	--	$	275,190	$	275,190

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 three months ended March 31, 2015:

Fair value at December 31, 2014	$	275,190
Interest accrued on face value of 5% Notes		237,657
Change in fair value of Level 3 liabilities		(240,641)
Fair value at March 31, 2015	$	272,206

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.