Note 8. 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 March 31, 2018 are identified in the following table:

(in thousands)	Level 2		Level 3		Total
Assets:
Commercial paper	$	121,860	$	—	$	121,860
Asset-backed securities	47,828		—		47,828
Corporate debt securities	308,125		—		308,125
Money market funds	2,841		—		2,841
Derivative asset	—		2,238		2,238

	$	480,654	$	2,238	$	482,892

	Level 2		Level 3		Total
Liabilities:
Contingent consideration payable	$	—	$	26,500	$	26,500
Derivative liability	—		80,577		80,577
Deferred compensation plan liability	2,491		—		2,491

	$	2,491	$	107,077	$	109,568

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-backed 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

The Company’s Convertible Notes falls into Level 2 category within the fair value level hierarchy. The fair value was determined using broker quotes in a non-active market for valuation. The fair value of the debt at March 31, 2018 was approximately $642.3 million.

The Company did not have any Level 3 assets as of December 31, 2017.

Cash, Money Market Funds and Marketable Securities

The Company classifies its cash 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 debt securities and classifies these assets and the money market funds 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 three months ended March 31, 2018. No transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the three months ended March 31, 2018.

Contingent Consideration Payable

The contingent consideration payable resulted from the acquisition of Callidus Biopharma, Inc. (“Callidus”) in November 2013. 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.

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.

The following significant unobservable inputs were used in the valuation of the contingent consideration payable of Callidus for the ATB200 Pompe program:

Contingent Consideration Liability		Fair value as of March 31, 2018		Valuation Technique		Unobservable Input		Range
Clinical and regulatory milestones		$26.0 million		Probability weighted discounted cash flow		Discount rate Probability of achievement of milestones Projected year of payments		11.0% 71.0%-100.0% 2018-2022

Contingent consideration liabilities are remeasured to fair value each reporting period using 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. 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 three months ended March 31, 2018 and 2017, respectively:

	Three Months Ended March 31,
(in thousands)	2018		2017

Balance, beginning of the period	$	25,400	$	269,722
Changes in fair value during the period, included in Statement of Operations	1,100		4,578

Balance, end of the period	$	26,500	$	274,300

Deferred Compensation Plan - Investment and Liability

The Deferred Compensation Plan (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.

Derivative asset and liability

As disclosed in Note 5- Debt, subsequent to the underwritten public offering on February 15, 2018, the Company did not have sufficient unissued authorized shares to cover a conversion of the Convertible Notes. As a result, the Company accounted for the portion of the bifurcated conversion feature and the Capped Call Confirmations that would not be able to be net share settled as a current derivative liability and as a current derivative asset, respectively. The fair value of the debt portion was determined using the discounted cash flow method of the income approach and the fair value of the Capped Call Confirmations was determined using the Black-Scholes model. The derivative asset and liability have been classified as Level 3 recurring as their 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 determined by the Company.