. Liability Related to Sale of Future Royalties

September 18, 2015,

the Company entered into the Royalty Monetization with PDL for which it received gross proceeds of

$65.0

million. Under the Royalty Monetization, PDL will receive

75%

of the European royalties under the Amended License Agreement with Grünenthal, as well as

80%

of the

first

four

commercial milestones worth

$35.6

million (or

80%

$44.5

million), up to a capped amount of

$195.0

million over the life of the arrangement.

The Company periodically assesses the expected royalty and milestone payments using a combination of historical results, internal projections and forecasts from external sources. To the extent such payments are greater or less than the Company’s prior estimates or the timing of such payments is materially different than its prior estimates, the Company prospectively adjusts the amortization of the liability and the effective interest rate. From inception through

December 31, 2018,

the Company’s effective annual interest expense rate was approximately

13.0%.

During the

three

months ended

June 30, 2019,

the Company made a material revision to its estimates which resulted in an interest income rate on the Royalty Monetization liability balance at a prospective average rate of approximately

4.2%,

which will be applied over the remaining term of the agreement. The change in estimate of future payments to PDL was a result of lower projected European royalties and milestones from sales of Zalviso over the life of the liability. The change in estimate results in interest income being recognized prospectively, over the remaining term of the agreement, as the estimated expected payments are less than the

$65.0

million in gross proceeds received. The Company currently estimates that future payments to PDL over the remaining life of the arrangement will be approximately

$36

million, therefore, a contingent gain of approximately

$29

million

may

be recognized when it is realized upon expiration of the liability at the end of the Royalty Monetization term. Due to the significant judgments and factors related to the estimates of future payments under the Royalty Monetization arrangement, there are significant uncertainties surrounding the amount and timing of payments and the probability of realization of the estimated contingent gain.

The current change in estimate reduces the effective interest rate over the life of the liability to

by recording interest income over the remaining term of the arrangement as an offset to the interest expense that was recognized in prior periods. The change in estimate resulted in a decrease of

$2.7

million to the net loss and a decrease of

$0.03

to the net loss per share of common stock, basic and diluted, for both the

three

and

six

months ended

June 30, 2019.

The effective interest income rate for the

three

months ended

June 30, 2019

was approximately

4.2%.

The effective interest expense rate for the

six

months ended

June 30, 2019

was

1.4%.

The effective interest expense rate was approximately

13.4%

and

13.5%

for the

three

and

six

months ended

June 30, 2018,

respectively.

The following table shows the activity within the liability account for the

six

months ended and the period from inception to

June 30, 2019 (

in thousands):

	Six months ended June 30, 2019			Period from inception to June 30, 2019
Liability related to sale of future royalties — beginning balance	$	93,679		$	—
Proceeds from sale of future royalties		—			61,184
Non-cash royalty revenue		(161	)		(538	)
Non-cash interest expense recognized		611			33,483
Liability related to sale of future royalties as of June 30, 2019		94,129			94,129
Less: current portion		(592	)		(592	)
Liability related to sale of future royalties — net of current portion	$	93,537		$	93,537

As royalties and milestones are remitted to PDL from the Company’s subsidiary, ARPI LLC, as described in Note

“Organization and Summary of Significant Accounting Policies,” the balance of the liability will be effectively repaid over the life of the agreement. The Company records non-cash royalty revenues and non-cash interest income (expense) within its condensed consolidated statements of comprehensive loss over the term of the Royalty Monetization.