Derivative Liability

12 Months Ended

Dec. 31, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Liability

DERIVATIVE LIABILITY

Exit Fee

In May 2018, in connection with entering into the 2018 Loan Agreement, as defined and discussed in Note 6 - Borrowing, we entered into an agreement pursuant to which we agreed to pay $1.5 million in cash (the "2018 Exit Fee") upon any change of control transaction in respect of the Company or if we obtain both (i) FDA approval of tenapanor for the treatment of hyperphosphatemia in adult patients with CKD on dialysis and (ii) FDA approval of tenapanor for the treatment of patients with IBS-C, which was obtained on September 12, 2019 when the FDA approved IBSRELA, a 50 mg, twice daily oral pill for the treatment of IBS-C in adults (the “2018 Exit Fee Agreement”). Notwithstanding the prepayment or termination of the 2018 Term Loan, our obligation to pay the 2018 Exit Fee will expire on May 16, 2028. We concluded that the 2018 Exit Fee is a freestanding derivative which should be accounted for at fair value on a recurring basis. The estimated fair value of the 2018 Exit Fee is recorded as a derivative liability and included in accrued expense and other current liabilities on the accompanying balance sheets.

The fair value of the derivative liability was determined using a discounted cash flow analysis and is classified as a Level 3 measurement within the fair value hierarchy since our valuation utilized significant unobservable inputs. Specifically, the key assumptions included in the calculation of the estimated fair value of the derivative instrument include: i) our estimates of both the probability and timing of a potential $1.5 million payment to Solar Capital Ltd. and Western Alliance Bank as a result of the FDA approvals, and ii) a discount rate which was derived from our estimated cost of debt, adjusted with current LIBOR. Generally, increases or decreases in the probability of occurrence would result in a directionally similar impact in the fair value measurement of the derivative instrument and it is estimated that a 10% increase (decrease), not to exceed 100%, in the probability of occurrence would result in a fair value fluctuation of no more than $0.1 million.

Changes in the fair value of recurring measurements included in Level 3 of the fair value hierarchy are presented as other income (expense), net in our Statements of Operations and were as follows for the years ended December 31, 2021, 2020 and 2019 (in thousands):

	2021		2020		2019
Fair value of exit fee derivative liability at January 1	$	1,376	$	969	$	533
Change in estimated fair value of derivative liability	$	(678)	$	407	$	436
Fair value of exit fee derivative liability at December 31	$	698	$	1,376	$	969

As discussed in Note 18 - Subsequent Events, on February 23, 2022, we entered into an additional exit fee agreement with Solar whereby we agreed to pay an exit fee in the amount 2% of the 2022 Term Loan funded upon the first to occur of a specified exit event or revenue achievement event.