NOTE 4. DERIVATIVE LIABILITY

In May 2018, in connection with entering into the Loan Agreement, as defined and discussed in Note 5, the Company entered into an agreement pursuant to which the Company agreed to pay $1.5 million in cash (the “Exit Fee”) upon any change of control transaction in respect of the Company or if the Company obtains both (i) U.S. Food and Drug Administration (“FDA”) approval of tenapanor for the treatment of hyperphosphatemia in chronic kidney disease (“CKD”) patients on dialysis and (ii) FDA approval of tenapanor for the treatment of patients with irritable bowel syndrome with constipation (“IBS-C”), which was obtained on September 12, 2019 when the FDA approved IBSRELA® (tenapanor), a 50 milligram, twice daily oral pill for the treatment of IBS-C in adults (the “Exit Fee Agreement”). Notwithstanding the prepayment or termination of the Term Loan, as defined and discussed in Note 5, the Company’s obligation to pay the Exit Fee will expire on May 16, 2028. The Company concluded that the Exit Fee is a freestanding derivative which should be accounted for at fair value on a recurring basis. The estimated fair value of the Exit Fee is recorded as a derivative liability and included in accrued expenses and other current liabilities on the accompanying condensed balance sheets.

The fair value of the derivative liability was determined using a discounted cash flow analysis, and the key assumptions included in the calculation of the estimated fair value of the derivative liability include: (i) the Company’s estimates of both the probability and timing of payment of the Exit Fee to Solar Capital Ltd. and Western Alliance Bank as a result of the FDA approvals and (ii) a variable discount rate. Generally, increases or decreases in the probability of occurrence would result in a directionally similar impact in the fair value measurement of the derivative liability, and it is estimated that a 10% increase or decrease in the probability of occurrence would result in a fair value fluctuation of approximately $0.1 million.

Changes in fair value, which are presented as other income, net, in the Company's condensed statements of operations, were as follows:


	Three Months Ended March 31,
		2020		2019
Fair value of Exit Fee derivative liability at January 1	$	969	$	533
Change in estimated fair value of derivative liability		82		37
Fair value of Exit Fee derivative liability at March 31	$	1,051	$	570