In October 2021, the Company and BVF entered into the BVF Agreement, under which BVF will fund the discovery and development of compounds for the treatment of inflammatory diseases (the Program) by providing the Company with a total of $15.0 million in three non-refundable payments. The Company received $5.0 million from BVF in the fourth quarter of 2021, $5.0 million in the first quarter of 2022, and the final $5.0 million payment in the fourth quarter of 2022. Under the BVF Agreement, the Company is obligated to perform research and development activities for the Program, to make contingent payments upon the achievement of certain clinical and regulatory milestones of up to $72.5 million or $160.0 million depending on whether the program is solely developed by the Company or as part of the Company's collaboration with Gilead, which under the Gilead Collaboration Agreement has an option to the Program. If commercialized, the Company is also obligated to pay mid- to high-single digit royalties based on net sales of products generated by the Program. Under the BVF Agreement, BVF also has the option to provide an additional $10.0 million in funding for the Program in exchange for an increase in the royalty rate.

The Company accounts for the BVF Agreement as a liability primarily because it has significant continuing involvement in generating the cash flows due to BVF. If the Program achieves certain development and regulatory milestones and commercial sales, the Company will recognize the milestone payments and royalties paid to BVF as a decrease to the accumulated liability with a corresponding reduction in cash.

The carrying amount of the liability for sale of future royalties is based on management's estimate of the future contingent milestones and royalties to be paid to BVF over the life of the arrangement as discounted using an imputed rate of interest. The excess of future estimated contingent milestone and royalty payments over the $15.0 million of allocated proceeds is recognized as non-cash interest expense using the effective interest method, which is reported in the condensed consolidated statements of operations as non-operating expense. As of September 30, 2022, the imputed effective rate of interest on the unamortized portion of the liability was approximately 20.6% and the liability was $11.7 million and is reported in other long-term liabilities on the condensed consolidated balance sheets.

The Company periodically reassesses the amount and timing of expected payments. To the extent such payments are greater or less than the Company's initial estimates or the timing of such payments is materially different than those estimates, the Company will adjust the liability and the effective interest rate using a retrospective method, catch-up method, or prospective method, subject to an accounting policy election applied on a consistent basis. As of September 30, 2022, there have been no changes to the estimated effective interest rate.

There are a number of factors that could materially affect the amount and timing of contingent milestone and royalty payments, most of which are not within the Company's control. The liability is recognized at fair value using significant unobservable inputs (Level 3 fair value inputs). These inputs are derived using internal management estimates, based in part on external data when available, and reflect management’s judgements and forecasts updated on a quarterly basis. The significant unobservable inputs include the forecasted revenues, the probability and timing of clinical and regulatory milestones, the expected term of the royalty stream, the royalty rate and the overall probability of success. A significant change in these unobservable inputs could result in a material increase or decrease to the fair value of the liability. To date there have not been any material changes resulting from changes in these unobservable inputs.

Changes to the liability for sale of future royalties were as follows for the nine months ended September 30, 2022 (in thousands):


	2022
Beginning balance, January 1	$	5,260
Cash received from BVF		5,000
Interest accretion		1,437
Ending balance, September 30	$	11,697

The Company incurred $0.5 million and $1.4 million in non-cash interest expense for the three and nine months ended September 30, 2022, respectively.