FAIR VALUE MEASUREMENT AND FINANCIAL INSTRUMENTS

The carrying values of cash and cash equivalents, restricted cash, prepaid expenses and other current assets, and accounts payable on the Company’s consolidated balance sheets approximated their fair values as of September 30, 2019 and December 31, 2018 due to their short-term nature.

Certain of the Company’s financial instruments are measured at fair value using a three-level hierarchy that prioritizes the inputs used to measure fair value. This fair value hierarchy prioritizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:


Level 1:	Inputs are quoted prices for identical instruments in active markets,


Level 2:	Inputs are quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; or model-derived valuations whose inputs are observable or whose significant value drivers are observable.


Level 3:	Inputs are unobservable and reflect the Company’s own assumptions, based on the best information available, including the Company’s own data.

The following tables set forth the carrying amounts and fair values of the Company's financial instruments measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018 (in thousands):



	September 30, 2019
					Fair Value Measurement Based on
	Carrying Amount		Fair Value		Quoted Prices in Active Markets (Level 1)		Significant other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds (cash equivalents)	$	30,995	$	30,995	$	30,995	$	—	$	—
Liabilities:
Contingent consideration	$	95,000	$	95,000	$	—	$	—	$	95,000



	December 31, 2018
					Fair Value Measurement Based on
	Carrying Amount		Fair Value		Quoted Prices in Active Markets (Level 1)		Significant other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds (cash equivalents)	$	40,365	$	40,365	$	40,365	$	—	$	—
Liabilities:
Contingent consideration	$	48,400	$	48,400	$	—	$	—	$	48,400

The Company evaluates transfers between fair value levels at the end of each reporting period. There were no transfers of assets or liabilities between fair value levels during the nine months ended September 30, 2019.

Contingent Consideration

On September 20, 2016, the Company acquired Viventia through the issuance of common stock plus contingent consideration, pursuant to the terms of a Share Purchase Agreement (the "Acquisition"). The Company recorded the acquired assets and liabilities based on their estimated fair values as of the acquisition date and finalized its purchase accounting for the Acquisition during the third quarter of 2017. The contingent consideration relates to amounts potentially payable to Viventia's shareholders under the Share Purchase Agreement. Contingent consideration is measured at its estimated fair value at each reporting period, with fluctuations in value resulting in a non-cash charge to earnings (or loss) during the period. The estimated fair value measurement is based on significant inputs, including internally developed financial forecasts, probabilities of success, and timing of certain milestone events and achievements, which are not observable in the market, representing a Level 3 measurement within the fair value hierarchy. The valuation of contingent consideration requires the use of significant assumptions and judgments, which management believes are consistent with those that would be made by a market participant. Management reviews its assumptions and judgments on an ongoing basis as additional market and other data is obtained, and any future changes in the assumptions and judgments utilized by management may cause the estimated fair value of contingent consideration to fluctuate materially, resulting in earnings volatility.

The following table sets forth a summary of the change in the fair value of the Company's contingent consideration liability, measured on a recurring basis at each reporting period, for the nine months ended September 30, 2019 (in thousands):



Balance at December 31, 2018	$	48,400
Change in fair value of contingent consideration	(1,000		)
Balance at March 31, 2019	47,400
Change in fair value of contingent consideration⁽¹⁾	44,000
Balance at June 30, 2019	91,400
Change in fair value of contingent consideration⁽²⁾	3,600
Balance at September 30, 2019	$	95,000

The fair value of the Company’s contingent consideration was determined using probabilities of successful achievement of regulatory milestones and commercial sales, the period in which these milestones and sales are expected to be achieved ranging from 2021 to 2033, the level of commercial sales of Vicinium forecasted for the United States, Europe, Japan and other potential markets, and discount rates ranging from 6.6% to 13.7% as of December 31, 2018 and 5.8% to 12.2% as of September 30, 2019. There have been no changes to the valuation methods utilized during the nine months ended September 30, 2019.

⁽¹⁾During the quarter ended June 30, 2019, management reassessed the total addressable global market for NMIBC and determined that both the global market size and the estimated potential Vicinium commercial sales within the global market were likely higher than the Company’s previous estimates. Specific drivers of the increased revenue estimates include the expectation that Vicinium could achieve peak market penetration earlier than previously estimated and the expectation that Vicinium sales outside the United States could be two to three times the expected sales volumes in the United States. As contingent consideration incorporates a royalty rate of 2% on all commercial net sales of Vicinium through December 2033, an increase in expected future net sales correlated to a $44.0 million increase in the estimated fair value of the Company’s contingent consideration as of June 30, 2019.

⁽²⁾The $3.6 million increase in the estimated fair value of contingent consideration was primarily attributable to a slightly lower discount rate, based on prevailing market conditions as of September 30, 2019, applicable to the earnout royalty payments potentially payable to Viventia's shareholders under the Share Purchase Agreement.