XML 42 R11.htm IDEA: XBRL DOCUMENT v2.4.0.8
FAIR VALUE MEASUREMENTS
 6 Months Ended
Jun. 30, 2014
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 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 June 30, 2014 and December 31, 2013, the fair values of cash and cash equivalents, and notes and interest payable approximate their carrying value.
 
Upon the merger between the Company (then known as Manhattan Pharmaceuticals, Inc., “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 reverse merger transaction (the “Exchange Transaction”) with TG Biologics, Inc. (“TGBio”) 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, and $18,614,000 at December 31, 2013 and $19,075,000 at June 30, 2014. 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 Exchange Transaction. No payments have been made on the 5% Notes as of June 30, 2014.
 
We elected the fair value option for valuing the 5% Notes upon the Exchange Transaction with TG Bio. We elected the fair value option 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 June 30, 2014 and December 31, 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 June 30, 2014 and December 31, 2013:
 
 
 
Financial liabilities at fair value
as of June 30, 2014
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5% Notes
 
$
—
 
$
—
 
$
159,214
 
$
159,214
 
Totals
 
$
—
 
$
—
 
$
159,214
 
$
159,214
 
 
 
 
Financial liabilities at fair value
as of December 31, 2013
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5% Notes
 
$
—
 
$
—
 
$
64,529
 
$
64,529
 
Totals
 
$
—
 
$
—
 
$
64,529
 
$
64,529
 
 
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 six months ended June 30, 2014:
 
Fair value at December 31, 2013
 
$
64,529
 
Interest accrued on face value of 5% Notes
 
 
461,127
 
Change in fair value of Level 3 liabilities
 
 
(366,442)
 
Fair value at June 30, 2014
 
$
159,214
 
 
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.