10. Assets and Liabilities Measured at Fair Value

The Company's financial assets and liabilities are measured at fair value and classified within the fair value hierarchy which is defined as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 — Inputs other than quoted prices in active markets that are observable for the asset or liability, either directly or indirectly.

Level 3 — Inputs that are unobservable for the asset or liability.

A summary of the fair value of the Company's recurring assets and liabilities aggregated by the level in the fair value hierarchy within which those measurements fall as of December 31, 2017 are identified in the following table (in thousands):

	Level 2		Total
Assets:
Commercial paper	$	79,803	$	79,803
Asset-back securities		30,287		30,287
Corporate debt securities		199,012		199,012
Money market funds		2,598		2,598

	$	311,700	$	311,700

	Level 2		Level 3		Total
Liabilities:
Contingent consideration payable	$	—	$	25,400	$	25,400
Deferred compensation plan liability		2,258		—		2,258

	$	2,258	$	25,400	$	27,658

A summary of the fair value of the Company's assets and liabilities aggregated by the level in the fair value hierarchy within which those measurements fall as of December 31, 2016 are identified in the following table (in thousands):

	Level 2		Total
Assets:
Commercial paper	$	68,390	$	68,390
Corporate debt securities		74,535		74,535
Money market funds		1,829		1,829

	$	144,754	$	144,754

	Level 2		Level 3		Total
Liabilities:
Contingent consideration payable	$	—	$	269,722	$	269,722
Derivative liability		265		—		265
Deferred compensation plan liability		1,479		—		1,479

	$	1,744	$	269,722	$	271,466

See "— Note 11. Debt Instruments and Related Party Transactions" for the carrying amount and estimated fair value of the Company's Convertible Notes due in 2023. The Company did not have any Level 3 assets as of December 31, 2017 or 2016. The Company did not have any transfers between the Levels during the year ended December 31, 2017 and December 31, 2016.

Cash, Money Market Funds and Marketable Securities

The Company classifies its cash and money market funds within the fair value hierarchy as Level 1 as these assets are valued using quoted prices in active market for identical assets at the measurement date. The Company considers its investments in marketable securities as available for sale and classifies these assets within the fair value hierarchy as Level 2 primarily utilizing broker quotes in a non-active market for valuation of these securities. No changes in valuation techniques or inputs occurred during the year ended December 31, 2017. No transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the year ended December 31, 2017.

Contingent Consideration Payable

As discussed in "— Note 1. Business," on September 13, 2017, the Company reported that top-line data from the randomized, double-blind, placebo-controlled Phase 3 clinical study (ESSENCE, SD-005) to assess the efficacy and safety of the novel topical wound-healing agent SD-101 did not meet the primary endpoints or secondary endpoints in participants with EB. Based on these top-line data, the Company has no current plans to invest in any additional clinical studies or commercial preparation activities for SD-101. As such, the contingent consideration related to Scioderm is no longer payable as of September 30, 2017.

The contingent consideration payable resulted from the acquisition of Callidus, as discussed in "— Note 3. Acquisitions." The most recent valuation was determined using a probability weighted discounted cash flow valuation approach. Using this approach, expected future cash flows are calculated over the expected life of the agreement, are discounted, and then exercise scenario probabilities are applied. The valuation is performed quarterly. Gains and losses are included in the statement of operations.

As discussed in "— Note 3. Acquisitions," on July 5, 2016, the Company entered into the MiaMed Agreement with MiaMed. MiaMed is a pre-clinical biotechnology company focused on developing protein replacement for CDKL5 and related diseases. Under the terms of the MiaMed Agreement, the Company agreed to pay up to an additional $83.0 million in connection with the achievement of certain clinical, regulatory and commercial milestones, for a potential aggregate deal value of $89.5 million. The MiaMed Agreement was accounted for as an asset acquisition and as such the Company determined that a liability for future milestone payments is not required to be recorded until the actual contingencies are met and will be recorded to research and development expenses when the contingency is resolved.

The contingent consideration payable for Callidus has been classified as a Level 3 recurring liability as its valuation requires substantial judgment and estimation of factors that are not currently observable in the market. If different assumptions were used for the various inputs to the valuation approach the estimated fair value could be significantly higher or lower than the fair value the Company determined. The Company may be required to record losses in future periods, including expenses related to CDKL5.

On February 7, 2018, the Company announced positive results from the global Phase 1/2 clinical study (ATB200-02) to investigate ATB200/AT2221 in patients with Pompe disease. As a result of these positive results, the probability of success of ATB200 was increased to 71%-100% at December 31, 2017, which drove the increase in fair value of the liability. With these data, the Company plans to continue a series of collaborative discussions with regulators in the US and EU. This event was considered in the calculation of the Contingent Consideration as of December 31, 2017.

The following significant unobservable inputs were used in the valuation of the contingent consideration payable of Callidus for the ATB-200 Pompe program:

Contingent Consideration Liability	Fair value as of December 31, 2017	Valuation Technique	Unobservable Input	Range
			Discount rate	11.5%
Clinical and regulatory milestones	$25.0 million	Probability weighted discounted cash flow	Probability of achievement of milestones	71.0% - 100.0%
			Projected year of payments	2018 - 2022

Contingent consideration liabilities are remeasured to fair value each reporting period using projected revenues, discount rates, probabilities of payment and projected payment dates. Projected contingent payment amounts related to clinical and regulatory based milestones are discounted back to the current period using a discounted cash flow model. Revenue-based payments are valued using a monte-carlo valuation model, which simulates future revenues during the earn out-period using management's best estimates. Projected revenues are based on our most recent internal operational budgets and long-range strategic plans. Increases in projected revenues and probabilities of payment may result in higher fair value measurements. Increases in discount rates and the time to payment may result in lower fair value measurements. Increases or decreases in any of those inputs together, or in isolation, may result in a significantly lower or higher fair value measurement. There is no assurance that any of the conditions for the milestone payments will be met.

The following table shows the change in the balance of contingent consideration payable for the year ended December 31, 2017 and 2016, respectively (in thousands):

	Year ended December 31,
	2017			2016
Balance, beginning of the period	$	269,722		$	274,077
Payment of contingent consideration in cash		(10,000	)		(5,000	)
Payment of contingent consideration in stock		—			(6,115	)
Unrealized change in fair value change during the period, included in Statement of Operations		(234,322	)		6,760

Balance, end of the period	$	25,400		$	269,722

Deferred Compensation Plan- Investment and Liability

As disclosed in "— Note 9. Stockholders' Equity," the Deferral Plan provides certain key employees and members of the Board of Directors with an opportunity to defer the receipt of such participant's base salary, bonus and director's fees, as applicable. Deferral Plan assets are classified as trading securities and recorded at fair value with changes in the investments' fair value recognized in the period they occur. The asset investments consist of market exchanged mutual funds. The Company considers its investments in marketable securities, as available-for-sale and classifies these assets and related liability within the fair value hierarchy as Level 2 primarily utilizing broker quotes in a non-active market for valuation of these securities.