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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to                
Commission File Number: 001-36399
ADAMAS PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
 
42-1560076
(I.R.S. Employer Identification No.)
1900 Powell Street, Suite 1000, Emeryville, CA, 94608
(Address of principal executive offices) (Zip Code)
(510) 450-3500
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.001 per share
 
Trading Symbol(s)
ADMS
Name of each exchange on which registered
The Nasdaq Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  x   No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes  x   No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer¨Accelerated filerx
Non-accelerated filer¨Smaller reporting companyx
Emerging growth company¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  ¨  No  x
Number of shares outstanding of the issuer’s common stock, par value $0.001 per share, as of April 30, 2020, was 28,158,205.



Table of Contents
ADAMAS PHARMACEUTICALS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
 
   Page
 
    
  
  
  
  
  
  
 
 
 
    
 
    
 
 
 
 
 
 
 

2

Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
ADAMAS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share and per share data)
 March 31,
2020
December 31,
2019
Assets  
Current assets  
Cash and cash equivalents$45,541  $65,774  
Available-for-sale securities69,741  66,833  
Accounts receivable, net5,747  5,770  
Inventory5,381  5,267  
Prepaid expenses and other current assets6,974  6,676  
Total current assets133,384  150,320  
Property and equipment, net2,213  2,449  
Operating lease right-of-use assets7,704  8,048  
Prepaid expenses and other non-current assets1,010  1,341  
Total assets$144,311  $162,158  
Liabilities and stockholders’ deficit  
Current liabilities  
Accounts payable$3,672  $6,932  
Accrued liabilities15,044  16,117  
Current portion of long-term debt3,232  2,041  
Other current liabilities1,830  1,858  
Total current liabilities23,778  26,948  
Long-term debt126,065  125,674  
Long-term portion of operating lease liabilities7,823  8,272  
Other non-current liabilities2,498  2,157  
Total liabilities160,164  163,051  
Commitments and Contingencies (Note 7)
Stockholders’ deficit  
Preferred stock, $0.001 par value — 5,000,000 shares authorized, and zero shares issued and outstanding at March 31, 2020 and December 31, 2019
    
Common stock, $0.001 par value — 100,000,000 shares authorized, 28,158,205 and 27,964,778 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively
33  33  
Additional paid-in capital448,573  446,942  
Accumulated other comprehensive gain73  16  
Accumulated deficit(464,532) (447,884) 
Total stockholders’ deficit(15,853) (893) 
Total liabilities and stockholders’ deficit$144,311  $162,158  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3

Table of Contents
ADAMAS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
 Three Months Ended
 March 31,
 20202019
Revenues:
Product sales$14,481  $11,665  
Costs and operating expenses:  
Cost of product sales572  413  
Research and development2,465  10,214  
Selling, general and administrative, net24,552  27,688  
Total costs and operating expenses27,589  38,315  
Loss from operations(13,108) (26,650) 
Interest and other income, net84  723  
Interest expense(3,624) (3,731) 
Net loss $(16,648) $(29,658) 
Net loss per share, basic and diluted$(0.59) $(1.08) 
Weighted average shares used in computing net loss per share, basic and diluted28,030  27,453  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4

Table of Contents
ADAMAS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
(in thousands)
 Three Months Ended
 March 31,
 20202019
Net loss$(16,648) $(29,658) 
Unrealized gain on available-for-sale securities57  230  
Comprehensive loss$(16,591) $(29,428) 
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5

Table of Contents
ADAMAS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited)
(in thousands, except share data)
 Common StockAdditional Paid-In CapitalAccumulated Other Comprehensive Gain (Loss)Accumulated DeficitTotal Stockholders’ Equity
 SharesAmount
Balances at December 31, 201827,434,358  $32  $432,815  $(264) $(342,698) $89,885  
Exercise of stock options18,230  —  49  —  —  49  
Restricted stock units vested67,391  —  —  —  —  —  
Net unrealized gain on available-for-sale securities—  —  —  230  —  230  
Stock-based compensation—  —  3,410  —  —  3,410  
Net loss—  —  —  —  (29,658) (29,658) 
Balances at March 31, 201927,519,979  32  436,274  (34) (372,356) 63,916  

 Common StockAdditional Paid-In CapitalAccumulated Other Comprehensive GainAccumulated DeficitTotal Stockholders’ Deficit
 SharesAmount
Balances at December 31, 201927,964,778  $33  $446,942  $16  $(447,884) $(893) 
Exercise of stock options61,766  —  42  —  —  42  
Restricted stock units vested131,661  —  —  —  —  —  
Net unrealized gain on available-for-sale securities—  —  —  57  —  57  
Stock-based compensation—  —  1,589  —  —  1,589  
Net loss—  —  —  —  (16,648) (16,648) 
Balances at March 31, 202028,158,205  33  448,573  73  (464,532) (15,853) 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6

Table of Contents
ADAMAS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 Three Months Ended
 March 31,
 20202019
Cash flows from operating activities
Net loss$(16,648) $(29,658) 
Adjustments to reconcile net loss to net cash used in operating activities  
Depreciation236  368  
Stock-based compensation1,481  3,384  
Accretion of interest expense3,624  3,731  
Change in fair value of embedded derivative liability341  101  
Net accretion of discounts and amortization of premiums of available-for-sale securities(107) (337) 
Provision for write-down of inventory289    
Changes in assets and liabilities  
Accrued interest of available-for-sale securities218  (56) 
Accounts receivable, net23  (1,987) 
Inventory(234) 86  
Prepaid expenses and other assets33  347  
Operating lease right-of-use assets344  198  
Accounts payable(3,298) 3,319  
Current portion of long-term debt(2,042) (1,664) 
Long-term portion of operating lease liabilities(401) (234) 
Accrued liabilities and other liabilities(1,172) 1,485  
Net cash used in operating activities(17,313) (20,917) 
Cash flows from investing activities  
Purchases of property and equipment  (7) 
Purchases of available-for-sale securities(33,962) (20,811) 
Maturities of available-for-sale securities31,000  44,000  
Net cash provided by (used in) investing activities(2,962) 23,182  
Cash flows from financing activities  
Proceeds from issuance of common stock upon exercise of stock options42  66  
Net cash provided by financing activities42  66  
Net increase (decrease) in cash and cash equivalents(20,233) 2,331  
Cash and cash equivalents at beginning of period65,774  56,605  
Cash and cash equivalents at end of period$45,541  $58,936  
Supplemental disclosure of noncash activities  
Right-of-use assets obtained in exchange for operating lease liabilities$  $7,566  
Property and equipment in accounts payable and accrued expense$  $10  
Stock-based compensation capitalized in inventory$108  $26  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7

Table of Contents
ADAMAS PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.     DESCRIPTION OF BUSINESS
Adamas Pharmaceuticals, Inc. (the “Company”) is a commercial-stage pharmaceutical company focused on delivering innovative medicines that reduce the burden of neurological diseases on patients, caregivers, and society. In August 2017, the U.S. Food and Drug Administration (FDA) approved GOCOVRI® (amantadine) extended release capsules, the first and only FDA-approved medication indicated for the treatment of dyskinesia in patients with Parkinson’s disease receiving levodopa-based therapy, with or without concomitant dopaminergic medications.
The Company was incorporated in the State of Delaware on November 15, 2000, and operates as one segment. The Company’s headquarters and operations are located in Emeryville, California.
2.     BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) considered necessary for the fair presentation of the periods presented. The condensed consolidated balance sheet at December 31, 2019 was derived from the audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP.
These interim financial results are not necessarily indicative of results to be expected for the full fiscal year ending December 31, 2020, or any other future period. Readers should read these interim unaudited condensed consolidated financial statements in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2019, included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission, or SEC. The Company’s critical accounting policies are detailed in its Annual Report on Form 10-K for the year ended December 31, 2019. The Company’s critical accounting policies have not changed materially from December 31, 2019.
Use of Estimates
The preparation of the accompanying consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses in the consolidated financial statements and the accompanying notes. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition and variable consideration, lease assets and liabilities, clinical trial accruals, fair value of assets and liabilities including short-term and long-term classification, embedded derivatives, income taxes, inventory, and stock-based compensation. Management bases its estimates on historical experience and on various other market-specific and relevant assumptions that management believes to be reasonable under the circumstances. Actual results may differ from those estimates.
Risks and Uncertainties
The outbreak of the novel Coronavirus (“COVID-19”), which is understood to have begun in December 2019, continues to grow both within the U.S. and globally. The World Health Organization has declared the outbreak of COVID-19 to be a pandemic, and the U.S. federal government has declared it a national emergency. The Company is subject to risks and uncertainties as a result of the outbreak of COVID-19. Despite disruptions to the Company’s business operations, the COVID-19 pandemic did not significantly impact GOCOVRI prescription refill rates for the three months ended March 31, 2020, and thus far management has observed no disruptions to its inventory on hand or planned manufacturing schedule. However, new prescription rates have slowed due to several factors, including: many
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healthcare providers have temporarily closed their offices or are restricting patient visits; patients are postponing visits to healthcare provider facilities; and the sales force has moved to conducting activities virtually with healthcare providers. While management believes this decline in new prescriptions to be temporary, the duration and severity is dependent on future developments, including new information that may emerge concerning the actions taken to contain or prevent further spread, all of which are highly uncertain and cannot be predicted with confidence.
As of the date of issuance of these condensed consolidated financial statements, due to the numerous uncertainties surrounding the COVID-19 pandemic, the Company is unable to predict the extent of the impact that the COVID-19 pandemic may have on the Company’s future business, financial results, liquidity and cash flows.
Liquidity
Since January 1, 2017, the Company has funded its operations primarily through a royalty-backed loan agreement (“Royalty-Backed Loan”) with HealthCare Royalty Partners III, L.P., (“HCRP”), sales of GOCOVRI, and sales of its common stock. In 2017, the Company entered into a Royalty-Backed Loan with HCRP, whereby the Company borrowed a total of $100.0 million. The Company made GOCOVRI available for physician and patient use in the fourth quarter of 2017, with a full commercial launch in January 2018. In January 2018, the Company completed a follow-on public offering of its common stock from which proceeds raised were approximately $134.3 million, net of underwriting discounts, commissions, and offering-related transaction costs. Prior to the generation of revenue from GOCOVRI, the Company had not generated any commercial revenue from the sale of its products.
In November 2019, the Company entered into a sales agreement with Cowen and Company, LLC, pursuant to which it may, from time to time, issue and sell shares of common stock having an aggregate offering value of up to $50.0 million. As of March 31, 2020, no shares had been sold under the sales agreement.
As of March 31, 2020, the Company had $115.3 million of cash, cash equivalents, and investments, which management believes will be sufficient to fund its projected operating requirements, including commercialization of GOCOVRI for the treatment of dyskinesia in patients with Parkinson’s disease and operations related to the continued development of ADS-5102 for other indications including MSW, for at least 12 months from the issuance of this quarterly report on Form 10-Q. However, it is possible that the Company will not achieve the progress it expects, because revenues from GOCOVRI may be less than anticipated, especially in light of the current COVID-19 pandemic, and the actual costs and timing of drug development, particularly clinical studies, and regulatory approvals are difficult to predict, subject to substantial risks and delays, and often vary depending on the particular indication and development strategy.
Recent Accounting Pronouncements
Accounting Pronouncements Adopted in 2020
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. The Company adopted the new guidance effective January 1, 2020, and determined the adoption did not have a material impact on its consolidated financial statements. Disclosures are updated in Note 3 “Fair Value Measurements”.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, which amends ASC 808 to clarify ASC 606 should apply in entirety to certain transactions between collaborative arrangement participants. The Company adopted the new guidance effective January 1, 2020, and determined the adoption did not have a material impact on its consolidated financial statements.
New Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments; in November 2018 the FASB issued a subsequent amendment ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses; in April 2019 the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments; in May 2019 the FASB issued ASU No. 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief; and in November 2019 the FASB issued
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ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. The new guidance changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. In November 2019 the FASB issued ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)—Effective Dates, which defers the effective date of ASU 2016-13 for all entities except SEC reporting companies that are not smaller reporting companies. As a smaller reporting company, this guidance is effective for fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company is currently evaluating the timing and effect the new guidance will have on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes, which is intended to simplify accounting for income taxes. It removes certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating but does not expect the new guidance to have a material impact on its consolidated financial statements.
3.     FAIR VALUE MEASUREMENTS
In accordance with ASC 820-10, Fair Value Measurements and Disclosures, the Company determines the fair value of financial and non-financial assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value, as follows:
Level 1 inputs, which include quoted prices in active markets for identical assets or liabilities;
Level 2 inputs, which include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. For available-for-sale securities, the Company reviews trading activity and pricing as of the measurement date. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data; and
Level 3 inputs, which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies, or similar valuation techniques, as well as significant management judgment or estimation.
The following table represents the fair value hierarchy for the Company’s financial assets and liabilities which require fair value measurement on a recurring basis (in thousands):
 March 31, 2020
 TotalLevel 1Level 2Level 3
Assets:    
Money market$21,744  $21,744  $  $  
Corporate debt25,621    25,621    
U.S. Treasury securities39,649    39,649    
Commercial paper4,471    4,471    
Total assets measured at fair value$91,485  $21,744  $69,741  $  
Liabilities:
Embedded derivative liability$2,498  $  $  $2,498  
Total liabilities measured at fair value$2,498  $  $  $2,498  

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 December 31, 2019
 TotalLevel 1Level 2Level 3
Assets:    
Money market$27,720  $27,720  $  $  
Corporate debt22,576    22,576    
U.S. Treasury securities37,811    37,811    
Commercial paper10,928    10,928    
Total assets measured at fair value$99,035  $27,720  $71,315  $  
Liabilities:
Embedded derivative liability$2,157  $  $  $2,157  
Total liabilities measured at fair value$2,157  $  $  $2,157  
Money market funds are highly liquid investments and are actively traded. The pricing information on these investment instruments are readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy.
Corporate debt, U.S. Treasury securities, and commercial paper are measured at fair value using Level 2 inputs. The Company reviews trading activity and pricing for these investments as of each measurement date. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs represent quoted prices for similar assets in active markets or these inputs have been derived from observable market data. This approach results in the classification of these securities as Level 2 of the fair value hierarchy. In certain cases where there is limited activity or less transparency around inputs to valuation, the related assets or liabilities are classified as Level 3. The Company classified an embedded derivative related to the Company’s Royalty-Backed Loan with HCRP as a Level 3 liability.
The fair value of the embedded derivative as a result of a change in control was calculated using a probability-weighted discounted cash flow model. The model used in valuing this embedded derivative requires the use of significant estimates and assumptions including but not limited to: 1) expected cash flows the Company expects to receive on U.S. net sales of GOCOVRI and on royalties from Allergan on U.S. net sales of Namzaric; 2) the Company’s risk adjusted discount rates; and 3) the probability of a change in control occurring during the term of the note based on the percentage of similar companies that were acquired over the previous five year period. Changes in the estimated fair value of the bifurcated embedded derivative are reported as gains or losses in interest and other income, net, in the condensed consolidated statement of operations. In the periods presented, the Company evaluated the embedded derivative value as a result of an event of default and the value as a result of increased costs due to a regulatory change and considered both to have no material value based on current assessment of probability, but could become material in future periods if a specified event of default or regulatory change became more probable than is currently estimated. See Note 8 “Long-Term Debt” for further description.
At March 31, 2020, the embedded derivative related to the Royalty-Backed Loan was the only recurring fair value measurement with Level 3 unobservable inputs. A risk-adjusted discount rate of 21.5% and a probability of a change in control of 3.0% were applied to calculate the value of the embedded derivative. Significant increases (or decreases) in the discount rate, and significant increases (or decreases) in the probability of a change in control would result in a significantly higher (or lower) fair value measurement.
The following table sets forth changes in Level 3 liabilities measured at fair value on a recurring basis for the three months ended March 31, 2020 and 2019 (in thousands):
Three Months Ended
 March 31,
20202019
Beginning balance$2,157  $1,352  
Change in fair value included in interest and other income, net341  101  
Ending balance$2,498  $1,453  
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There were no transfers into or out of Level 3 during the three months ended March 31, 2020 and 2019.
4.     INVESTMENTS 
The Company’s investments consist of corporate debt, U.S. Treasury securities, and commercial paper classified as available-for-sale securities.
The Company limits the amount of investment exposure as to institution, maturity, and investment type. To mitigate credit risk, the Company invests in investment grade corporate debt, U.S. Treasury securities, and commercial paper. Such securities are reported at fair value, with unrealized gains and losses excluded from earnings and shown separately as a component of accumulated other comprehensive loss within stockholders’ equity. Realized gains and losses are reclassified from other comprehensive loss to other income on the condensed consolidated statements of operations when incurred. The Company may pay a premium or receive a discount upon the purchase of available-for-sale securities. Interest earned and gains realized on available-for-sale securities and amortization of discounts received and accretion of premiums paid on the purchase of available-for-sale securities are included in investment income.
The following table is a summary of amortized cost, unrealized gain and loss, and the fair value of available-for-sale securities as of March 31, 2020 and December 31, 2019 (in thousands):
March 31, 2020
 Amortized CostGross Unrealized
Gains
Gross Unrealized
Losses
Fair Value
Investments:    
Corporate debt$25,727  $  $(106) $25,621  
U.S. Treasury securities39,470  179    39,649  
Commercial paper4,471      4,471  
Total$69,668  $179  $(106) $69,741  
Reported as:    
Short-term investments$69,668  $179  $(106) $69,741  
Total$69,668  $179  $(106) $69,741  

December 31, 2019
 Amortized CostGross Unrealized
Gains
Gross Unrealized
Losses
Fair Value
Investments:    
Corporate debt$22,582  $3  $(9) $22,576  
U.S. Treasury securities37,789  22    37,811  
Commercial paper6,446      6,446  
Total$66,817  $25  $(9) $66,833  
Reported as:    
Short-term investments$66,817  $25  $(9) $66,833  
Total$66,817  $25  $(9) $66,833  
Short-term investments include accrued interest of $0.2 million and $0.4 million as of March 31, 2020 and December 31, 2019, respectively. The Company has not incurred any realized gains or losses on investments for the three months ended March 31, 2020 and 2019. Investments are classified as short-term or long-term depending on the underlying investment’s maturity date. The Company had no investments with a maturity date greater than 12 months as of March 31, 2020 and December 31, 2019. All investments with unrealized losses at March 31, 2020 have been in a loss position for less than twelve months or the loss is not material and were temporary in nature. The Company does not intend to sell the investments that are in an unrealized loss position before recovery of their amortized cost basis.
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5.     INVENTORY
If the Company identifies excess, obsolete or unsalable product, the Company will write down its inventory to net realizable value in the period it is identified. During the three months ended March 31, 2020, the Company recorded a $0.3 million provision for the write-down of inventory to cost of sales. Inventory consists of the following (in thousands):
March 31, 2020December 31, 2019
Raw materials$976  $1,057  
Work-in-process2,459  1,925  
Finished goods1,946  2,285  
Total inventory$5,381  $5,267  

6.     LICENSE AGREEMENTS
In November 2012, the Company granted Forest Laboratories Holdings Limited “Forest”, an indirect wholly-owned subsidiary of Allergan plc (collectively “Allergan”) an exclusive license, with right to sublicense, certain of the Company’s intellectual property rights relating to human therapeutics containing memantine in the United States. In connection with these rights, Allergan markets and sells Namzaric® and Namenda XR® for the treatment of moderate to severe dementia related to Alzheimer’s disease.
Pursuant to the agreement, Allergan made an upfront payment of $65.0 million. The Company earned and received additional cash payments totaling $95.0 million upon achievement by Allergan of certain development and regulatory milestones. Under the agreement, external costs incurred related to the prosecution and litigation of intellectual property rights are reimbursable. Reimbursable external costs are recorded as a reduction to selling, general and administrative, net. For the three months ended March 31, 2020 and 2019, there were no reimbursable external costs for prosecution or litigation of intellectual property rights.
In addition, the Company may earn tiered royalty payments based on future net sales of Namzaric and Namenda XR. Beginning in May 2020, the Company will be entitled to receive royalties at rates in the low double digits to mid-teens from Allergan for sales of Namzaric in the United States. Based on 2019 net sales of Namzaric, the Company expects the tiered royalty to be in the low double digits through the term of the agreement. Allergan’s obligation to pay royalties with respect to fixed-dose memantine-donepezil products, including Namzaric, continues until the later of (i) 15 years after the commercial launch of the first fixed-dose memantine-donepezil product by Allergan in the United States or (ii) the expiration of the Orange Book listed patents for which Allergan obtained rights from the Company covering such product, but is eliminated in any quarter where there is significant competition from generics. Based on Allergan’s and the Company’s current settlement agreements with the Namzaric ANDA filers to date, the Company anticipates it will be entitled to royalties on Allergan’s sales of Namzaric to continue through December 31, 2024, or in the alternative, an option to launch an authorized generic version of Namzaric through December 31, 2025, or earlier in certain circumstances. For further discussion of Namzaric ANDA filers, see Litigation and Other Legal Proceedings in “Note 7 – Commitments and Contingencies”. Beginning in June 2018, the Company was entitled to receive royalties at rates in the low to mid-single digits for sales of Namenda XR in the United States. The Company does not expect to receive royalties on net sales of Namenda XR, due to the entry of generic versions of Namenda XR. Royalties under the license agreement will be recognized when the related sales occur, in accordance with the sales-based royalty exception.
7.     COMMITMENTS AND CONTINGENCIES
Purchase Commitments
The Company has entered into agreements for the supply of API and the manufacture of commercial supply of GOCOVRI, with Moehs Ibérica, S.L. and Catalent Pharma Solutions, LLC, respectively. Under the terms of the agreements, the Company will supply the vendors with non-cancelable firm commitment purchase orders. The Company has also entered into other agreements with certain vendors for the provision of services, including services related to data access and packaging, under which the Company is contractually obligated to make certain payments to the vendors.
The Company enters into contracts in the normal course of business that include, among others, arrangements
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with CROs for clinical trials, vendors for preclinical research, and vendors for manufacturing. These contracts generally provide for termination upon notice, and therefore the Company believes that its obligations under these agreements are not material.
Contingencies
In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown, because it involves claims that may be made against the Company in the future, but have not yet been made. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.
Indemnification 
In accordance with the Company’s amended and restated certificate of incorporation and amended and restated bylaws, the Company has indemnification obligations to its officers and directors for certain events or occurrences, subject to certain limits, while they are serving in such capacity. The Company has a directors and officers liability insurance policy that may enable it to recover a portion of any amounts paid for claims. In addition, in the normal course of business, the Company enters into contracts and agreements that may contain a variety of representations and warranties and provide for general indemnifications. For example, the Company provided certain indemnifications to its agents and underwriters as part of the Company’s January 2018 underwritten secondary public offering of common stock. Underwriters have now made a claim to such indemnifications in conjunction with the ongoing litigation involving that transaction.
Litigation and Other Legal Proceedings
In November 2012, the Company granted Forest an exclusive license to certain of the Company’s intellectual property rights relating to human therapeutics containing memantine in the United States. Under the terms of that license agreement, Forest has the right to enforce such intellectual property rights which are related to its right to market and sell Namzaric and Namenda XR for the treatment of moderate to severe dementia related to Alzheimer’s disease. The Company has a right to participate in, but not control, such enforcement actions by Forest.
In 2018 and as of the date of this filing, multiple generic companies have launched generic versions of Namenda XR.
As of the date of this filing, a number of companies have submitted ANDAs including one or more certifications pursuant to 21 U.S.C. § 355(j)(2)(A)(vii)(iv) to the FDA requesting approval to manufacture and market generic versions of Namzaric, on which the Company is entitled to receive royalties from Forest beginning in May 2020.
As of the date of this filing, the Company and Forest have settled with all such Namzaric ANDA filers, including all first filers on all the available dosage forms of Namzaric. Subject to those agreements, the earliest date on which any of these agreements grants a license to market generic version of Namzaric is January 1, 2025 or in the alternative, an option to launch an authorized generic version of Namzaric beginning on January 1, 2026, or earlier in certain circumstances. The Company and Forest intend to continue to enforce the patents associated with Namzaric.
On February 16, 2018, Osmotica Pharmaceuticals LLC and Vertical Pharmaceuticals LLC (“Osmotica”) filed an action against the Company in U.S. District Court for the state of Delaware, requesting a declaratory judgment that Osmotica’s newly-approved product Osmolex ER™ (amantadine) extended release tablets do not infringe certain of the Company’s patents. On September 20, 2018, the Company filed its first amended answer including infringement counterclaims against Osmotica asserting Osmotica has infringed nine Company patents under 35 U.S.C. §§ 271(a), (b), and/or (c) and 35 U.S.C. § 271(e)(2)(A) and seeking various forms of relief, including damages, treble damages, injunctive relief, and an order pursuant to 35 U.S.C. § 271(e)(4)(A) that the effective date of any approval of Osmotica’s NDA for Osmolex ER™ be a date that is not earlier than the latest expiration date of the Company patents involved in the lawsuit. This action is ongoing, but was stayed on May 23, 2019 at the parties’ joint request.
On April 1, 2019, the Company was served with a complaint filed in the United States District Court for the Northern District of California (Case No. 3:18-cv-03018-JCS) against the Company and several Allergan entities alleging violations of Federal and state false claims acts (“FCA”) in connection with the commercialization of Namenda XR and Namzaric by Allergan. The lawsuit is a qui tam complaint brought by a named individual, Zachary Silbersher,
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asserting rights of the Federal government and various state governments. The lawsuit was originally filed in May 2018 under seal, and the Company became aware of the lawsuit when it was served. The complaint alleges that patents held by Allergan and the Company covering Namenda XR and Namzaric were procured through fraud on the United States Patent and Trademark Office and that these patents were asserted against potential generic manufacturers of Namenda XR and Namzaric to prevent the generic manufacturers from entering the market, thereby wrongfully excluding generic competition resulting in an artificially high price being charged to government payors. The Company’s patents in question were licensed exclusively to Forest. The complaint includes a claim for damages of “potentially more than $2.5 billion dollars,” treble damages “under the federal FCA and most of the State FCAs,” and “statutory penalties that can be assessed for each false claim.” This action is ongoing.
The federal and state governments have declined to intervene in this action. To the Company’s knowledge, the individual plaintiff is pursuing the lawsuit in his individual capacity. The Company believes it has strong factual and legal defenses and intends to defend itself vigorously. The Company is in the early stages of this litigation.
On May 13, 2019, a putative class action lawsuit alleging violations of the federal securities laws was filed in California Superior Court for the County of Alameda (Case No. RG1901875). The lawsuit alleges violations of the Securities Act of 1933 by the Company and certain of the Company’s current and former directors and officers for allegedly making false statements and omissions in the registration statement and prospectus filed by the Company in connection with our January 24, 2018, secondary public offering of common stock. On December 10, 2019, another putative class action lawsuit alleging violations of the federal securities laws was filed in federal court in the Northern District of California (Case No. 4:19-cv-08051). This lawsuit alleges violations of the Securities Act of 1934 by the Company and certain of the Company’s former officers. On March 16, 2020, a shareholder derivative lawsuit was filed in federal court in the Northern District of California (Case No. 4:20-cv-01815). This lawsuit alleges breaches of fiduciary duty and violations of the Securities Act of 1934 by certain of the Company’s current and former directors and officers. The Company is named as a nominal defendant only. On April 6, 2020, another, virtually identical, shareholder derivative lawsuit was filed in federal court in the Northern District of California (Case No. 4:20-cv-02320). This lawsuit contains the same allegations, claims, and defendants as the first derivative action. Other similar cases may be filed in the future. In all of these actions, Plaintiffs seek unspecified monetary damages and other relief. These actions are ongoing. The Company believes it has strong factual and legal defenses to all actions and intends to defend itself vigorously.
From time to time, the Company may be party to legal proceedings, investigations, and claims in the ordinary course of its business. Other than the matters described above, the Company is not currently party to any material legal proceedings.
8.     LONG-TERM DEBT
Royalty-Backed Loan Agreement
In May 2017, the Company, through a new wholly-owned subsidiary, Adamas Pharma, LLC, entered into a Royalty-Backed Loan with HCRP, whereby the Company initially borrowed $35 million, followed by an additional $65 million received in the fourth quarter 2017 upon FDA’s recognition in the Orange Book of seven-year orphan drug exclusivity, which GOCOVRI earned upon approval on August 24, 2017. Principal and interest will be payable quarterly from the proceeds of a 12.5% royalty on U.S. net sales of GOCOVRI and up to $15 million of the Company’s annual royalties from Allergan on U.S. net sales of Namzaric starting in May 2020, pursuant to the Company’s license agreement with Allergan. The royalty rate on net sales of GOCOVRI will drop to 6.25% after the principal amount of the loan has been repaid in full, until the Company has made total payments of 200% of the funded amounts. The Company may elect to voluntarily prepay the loan at any time, or may be required to prepay subject to specified prepayment trigger events as described below, in which case the amount due will be 200% of the funded amounts, less total payments made to date. Royalty rates are subject to increase to 17.5% and 22.5% if total principal and interest payments have not reached minimum specified levels at measurement dates on December 2021 and December 2022, respectively. Under the terms of the loan, HCRP has recourse to Adamas Pharma, LLC, not the Company. The loan agreement matures in December 2026 but as the repayment of the loan amount is contingent upon the sales volumes of GOCOVRI and royalties from Allergan, the repayment term may be shortened depending on the actual sales of GOCOVRI and actual royalties received from Allergan.
The loans bear interest at an annual rate of 11% on the outstanding principal amount and includes an interest-only period until the interest payment date following the ninth full calendar quarter after the $65 million additional loan
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received in the fourth quarter 2017. The interest-only period ended during the first quarter of 2020. To the extent that royalties were insufficient to pay interest in full during the first nine quarters of the loan, any unpaid portion of the quarterly interest payment was added to the principal amount of the loans.
In connection with the Royalty-Backed Loan, in 2017 the Company paid HCRP a lender expense amount of $0.4 million and incurred additional debt issuance costs totaling $0.8 million. The lender expense and additional debt issuance costs have been recorded as a debt discount and are being amortized and recorded as interest expense over the estimated term of the loan using the effective interest method. The Company recorded interest expense, including amortization of the debt discount, related to the Royalty-Backed Loan, of $3.6 million and $3.7 million for the three months ended March 31, 2020 and March 31, 2019, respectively. Interest expense over the life of the Royalty-Backed Loan includes an annual interest rate of 11% on the outstanding principal, a royalty rate of 6.25% on net sales of GOCOVRI after the principal amount is paid, and amortization of the debt discount. The effective interest rate as of March 31, 2020 on the amounts borrowed under the Royalty-Backed Loan, including the amortization of the debt discount, was 13.4%.
The assumptions used in determining the expected repayment term of the loan and amortization period of the debt discount require that the Company make estimates that could impact the short and long-term classification of these costs, as well as the period over which these costs will be amortized and the effective interest rate.
The Company may be required to make mandatory prepayments of the borrowings under the Royalty-Backed Loan upon the occurrence of specified prepayment trigger events, including: (1) the occurrence of any event of default or (2) the occurrence of a change in control. Upon the prepayment of all or any of the outstanding principal balance, the Company shall pay, in addition to such prepayment, a prepayment premium. As HCRP, as the holder of the loans, may exercise the option to require prepayment by the Company, the prepayment premium is considered to be an embedded derivative which is required to be bifurcated from its host contract and accounted for as a separate financial instrument. The valuation of the embedded derivative is described further in Note 3.
Payment obligations under the Royalty-Backed Loan are as follows (in thousands):
March 31, 2020December 31, 2019
Total repayment obligation$200,000  $200,000  
Less: Interest to be accreted in future periods(59,593) (63,217) 
Less: Payments made(11,110) (9,068) 
Carrying value of loans payable$129,297  $127,715  
Less: Current portion of long-term debt(3,232) (2,041) 
Non-current portion of long-term debt$126,065  $125,674  
The estimated fair value of the long-term debt, as measured using Level 3 inputs, approximates $97.6 million as of March 31, 2020. The estimated fair value was calculated in the same methodology as the valuation of the embedded derivative as described further in Note 3.
There are no contractual minimum principal payments due until the loan matures in December 2026 as the repayment of the loan amount is contingent upon the sales volumes of GOCOVRI and royalties from Allergan on U.S. net sales of Namzaric.
9.     STOCKHOLDERS’ EQUITY
Common Stock
The amended and restated certificate of incorporation authorizes the Company to issue 100,000,000 shares of common stock. Common stockholders are entitled to dividends as and when declared by the board of directors, subject to the rights of holders of all classes of stock outstanding having priority rights as to dividends. There have been no dividends declared to date. Each share of common stock is entitled to one vote.
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Sales Agreement
In November 2019, the Company entered into a sales agreement (“Sales Agreement”) with Cowen and Company, LLC (“Cowen”), as sales agent, pursuant to which the Company may, from time to time, issue and sell at its option, shares of the Company’s common stock for an aggregate offering price of up to $50.0 million under an at-the-market offering (“ATM Offering”). Sales of the common stock, if any, will be made pursuant to a shelf registration statement that was declared effective by the Securities and Exchange Commission (“SEC”) on December 2, 2019. Cowen is acting as sole sales agent for any sales made under the Sales Agreement and the Company will pay Cowen a commission of up to 3% of the gross proceeds. The Company’s common stock will be sold at prevailing market prices at the time of the sale, and, as a result, prices may vary.
The Company is not obligated to make any sales of shares of common stock under the Sales Agreement. Unless otherwise terminated earlier, the Sales Agreement continues until all shares available under the Sales Agreement have been sold. As of March 31, 2020, no shares have been sold under the Sales Agreement.
Shares Reserved for Future Issuance
Shares of the Company’s common stock reserved for future issuance are as follows:
 March 31, 2020December 31, 2019
Common stock awards issued and outstanding7,453,298  6,874,633  
Authorized for future issuance under 2014 Equity Incentive Plan2,793,564  2,376,613  
Authorized for future issuance under 2016 Inducement Plan615,817  236,269  
Employee stock purchase plan1,206,591  926,943  
Total12,069,270  10,414,458  

10.     STOCK-BASED COMPENSATION
Stock Compensation Plans
In January 2020, the common stock available for issuance under the 2014 Equity Incentive Plan (the “2014 Plan”) automatically increased by 4% of the total number of shares of the Company’s capital stock outstanding on December 31, 2019, or 1,118,591 shares.
In February 2020, the Company’s board of directors approved an amendment to the 2016 Inducement Plan (the “Inducement Plan”) to increase the number of shares available for issuance by an additional 450,000.
Employee Stock Purchase Plan
In January 2020, the common stock available for issuance under the 2014 Employee Stock Purchase Plan (the “ESPP”) automatically increased by 1% of the total number of shares of the Company’s capital stock outstanding on December 31, 2019, or 279,648 shares.
Stock-Based Compensation Expense
The following table reflects stock-based compensation expense recognized for the three months ended March 31, 2020 and 2019 (in thousands):
 Three Months Ended
 March 31,
 20202019
Research and development$86  $590  
Selling, general and administrative1,395  2,794  
Total stock-based compensation expense$1,481  $3,384  
Stock-based compensation of $108,000 was capitalized into inventory for the three months ended March 31, 2020, and $26,000 for the three months ended March 31, 2019. Stock-based compensation capitalized into inventory is recognized as cost of sales when the related product is sold.
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11.     NET LOSS PER SHARE
For all periods presented, there is no difference in the number of shares used to compute basic and diluted shares outstanding due to the Company’s net loss position. The following total outstanding shares of potentially dilutive securities were excluded from the computation of diluted net loss per share for the periods presented, because including them would have been anti-dilutive (in thousands):
Three Months Ended
 March 31,
 20202019
Options to purchase common stock5,789  5,741  
Restricted stock units1,664  808  
Total7,453  6,549  

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and related notes included elsewhere in this report. This discussion and other parts of this report contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations and intentions, and the expected impact that the COVID-19 pandemic will continue to have on our business. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this report titled “Risk factors.”
Overview
At Adamas Pharmaceuticals, Inc., our purpose is to make everyday life significantly better for people affected by neurological diseases. We are turning this purpose into reality by combining our proven expertise in discovery, development and commercialization with our passion for improving lives. We believe our medicines should be clinically differentiated and provide a meaningful benefit to patients. With one partnered product and a commercial medicine, we are focused on growing a portfolio of therapies to reduce the burden of neurological diseases on patients, caregivers, and society.
Our portfolio includes:
Approved Product:
GOCOVRI® (amantadine) extended release capsules, is the first and only FDA-approved medication indicated for the treatment of dyskinesia in patients with Parkinson’s disease receiving levodopa-based therapy, with or without concomitant dopaminergic medications. It is also the only medicine clinically proven to reduce both dyskinesia and OFF in that population. GOCOVRI was approved for marketing by the U.S. Food and Drug Administration, or FDA, on August 24, 2017, with seven years of orphan exclusivity and additional patent protections out to 2034. On January 2, 2020, we announced we had granted Sandoz Inc. a license for its generic version of GOCOVRI as of March 4, 2030, or earlier in certain circumstances typical for such agreements.
Potential Additional Indication for GOCOVRI (amantadine) Extended Release Capsules (ADS-5102):
ADS-5102 in development for the treatment of walking impairment in patients with multiple sclerosis (“MSW”). We announced the topline results from INROADS Phase III trial of ADS-5102 on December 17, 2019. The study met its primary endpoint, showing a potential benefit for patients with walking impairment. We are conducting market research, further analyzing the INROADS Phase III data, including evaluating the ongoing, open-label extension study, and engaging with the FDA to determine a potential path forward for the program by the end of the second quarter of 2020.
Product Candidate:
ADS-4101 (lacosamide) modified release capsules in development for the treatment of partial onset seizures in patients with epilepsy. In 2019, we placed the development program on hold to focus on other priorities and are currently evaluating the potential value and options for a path forward.
Partnered Product:
Namzaric® (memantine hydrochloride extended release and donepezil hydrochloride) capsules for the treatment of moderate to severe dementia of an Alzheimer’s type, marketed in the United States by Allergan plc under an exclusive license agreement between us and Forest Laboratories Holdings Limited (“Forest”), an indirect, wholly-owned subsidiary of Allergan plc (collectively, “Allergan”).
Products in our wholly-owned, non-partnered portfolio, potential additional indications for these products, and our product candidate, are protected by an array of intellectual property, including robust and diversified patent claims, and regulatory exclusivities.
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Impact of the COVID-19 pandemic on our company
The outbreak of the novel Coronavirus (“COVID-19”), which is understood to have begun in December 2019, continues to grow both within the U.S. and globally. The World Health Organization has declared the outbreak of COVID-19 to be a pandemic, and the U.S. federal government has declared it a national emergency.
How we are operating in the current COVID-19 shutdown
We are committed to the health and safety of our employees and their families and doing our part to slow the community spread of COVID-19. In mid-March, we implemented a number of actions, including a work-from-home policy for all our employees, allowing for flexible work schedules, and restrictions on in-person meetings. We are very proud of our entire team as we transitioned swiftly to working remotely. We are following the guidelines of the Centers for Disease Control and other federal, state and local authorities and will continue to assess when it is appropriate for our team to return to normal work practices.
Impact on our ability to sell GOCOVRI
We continue to see stable GOCOVRI prescription refill rates due to our continued strong patient persistence, adequate supply of GOCOVRI, and patient access to GOCOVRI through distribution from our specialty pharmacy directly to a patient’s home. However, we have seen that new prescription rates have slowed due to several factors, including: many healthcare providers have temporarily closed their offices or are restricting patient visits; patients are postponing visits to healthcare provider facilities; and our sales force has moved to conducting activities virtually with healthcare providers. While we believe this decline in new prescriptions to be temporary, the duration and severity is dependent on future developments, which are highly uncertain and cannot be predicted with confidence.
Impact on our supply chain
Our GOCOVRI supply chain remains robust and thus far we have observed no disruptions to our inventory on hand or our planned manufacturing schedule. We have an adequate supply of GOCOVRI to address patients’ needs into late 2021 with our recently completed manufacturing campaign. Based on current information, we believe that our partners in our supply chain have been and will continue to operate during the current COVID-19 outbreak.
Impact on our financial condition and capital resources
The extent of the impact of COVID-19 on our business, financial results, liquidity and cash flows will depend largely on future developments, including new information that may emerge concerning the severity and duration of actions taken to contain or prevent further spread. With already imposed shelter-at-home orders in place, we have observed widespread closure of clinics, and cancellation or rescheduling of patient appointments have been combined with restriction of access to sales representatives in some institutions and a marked increase in telemedicine consultations that may result in further sales reductions. As of March 31, 2020, we had cash, cash equivalents, and investments of $115.3 million, and $50.0 million of availability to sell common stock under our sales agreement with Cowen and Company, LLC.
Financial operations overview
Summary
As of March 31, 2020, we had cash, cash equivalents, and available-for-sale securities of $115.3 million. We are commercializing GOCOVRI through our deployed sales force targeting neurologists and movement disorder specialists in the United States. As of March 31, 2020, we had an accumulated deficit of $464.5 million.
In November 2019, we entered into a sales agreement with Cowen and Company, LLC, pursuant to which we may, from time to time, issue and sell shares of common stock having an aggregate offering value of up to $50.0 million. As of March 31, 2020, we have not sold any shares under the sales agreement.
Revenue
Product sales consist of sales of GOCOVRI, which was approved by the FDA on August 24, 2017. We began commercial sales of GOCOVRI in the fourth quarter of 2017, and initiated the full commercial launch via the deployment of our sales team in January 2018.
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Prior to the generation of product sales from GOCOVRI, our revenue had been generated primarily from payments under our license agreement with Allergan for non-refundable upfront license payments, milestone payments and reimbursements for research and development expenses for full-time equivalent employees assigned to the license agreement. There are no further milestone payments to be earned under our license agreement with Allergan, and we expect reimbursements for full-time equivalents assigned to the license agreement to be inconsequential in future periods. Beginning in May 2020, we are entitled to receive tiered royalties from Allergan in the low double digits to mid-teens, as a percent of net sales of Namzaric in the United States. Based on 2019 net sales of Namzaric, we expect the tiered royalty to be in the low double digits through the term of the agreement, but is eliminated in any quarter where there is significant competition from generics. Based on Allergan’s and our current settlement agreements with the Namzaric ANDA filers to date, we anticipate we will be entitled to royalties on Allergan’s sales of Namzaric to continue through December 31, 2024, or in the alternative, an option to launch an authorized generic version of Namzaric through December 31, 2025, or earlier in certain circumstances. For further discussion of Namzaric ANDA filers, see Litigation and Other Legal Proceedings in “Note 7 – Commitments and Contingencies”.
Cost of product sales
Cost of product sales consists primarily of direct and indirect costs related to the manufacturing of GOCOVRI products sold, including third-party manufacturing costs, packaging services, freight, allocation of overhead costs, and inventory adjustment charges. We began capitalizing inventory manufactured at the FDA approved locations upon FDA approval of GOCOVRI and upon FDA approval of a supplemental NDA for a second manufacturing site with our current third-party manufacturer. We recorded inventory acquired prior to the regulatory approvals as research and development expense.
Research and development expenses
Research and development expenses represent costs incurred to conduct research, such as the discovery and development of our wholly-owned product candidates. We recognize all research and development costs as they are incurred.
Research and development expenses consist of:
fees paid to clinical investigators, clinical trial sites, consultants, and vendors, including contract research organizations, or CROs, in conjunction with implementing, conducting, and monitoring our clinical trials and acquiring and evaluating clinical trial data, including all related fees, such as for investigator grants, patient screening fees, laboratory work, and statistical compilation and analysis;
expenses related to production of clinical supplies, including fees paid to contract manufacturing organizations, or CMOs;
expenses related to establishment and validation of manufacturing capabilities for commercial supply;
expenses related to the buildup of commercial supply to support commercial launch, prior to FDA approval;
expenses related to compliance with regulatory requirements;
other consulting fees paid to third parties; and
employee-related expenses, which include salaries, benefits, and stock-based compensation.
The following table summarizes our research and development expenses incurred during the three months ended March 31, 2020 and 2019 (in thousands):
 Three Months Ended
 March 31,
Increase
(Decrease)
 20202019
GOCOVRI(1)
$1,985  $7,042  $(5,057) 
ADS-4101(2)
—  1,458  (1,458) 
Other research and development expenses480  1,714  (1,234) 
Total research and development expenses$2,465  $10,214  $(7,749) 
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(1)Includes program costs we incurred for GOCOVRI (formerly referred to as ADS-5102) for the treatment of dyskinesia in patients with Parkinson’s disease, and ADS-5102 (GOCOVRI) for additional potential CNS indications, including for the treatment of walking impairment in patients with multiple sclerosis.
(2)We reduced investments in ADS-4101 in the quarter ended June 30, 2019.
The program-specific expenses summarized in the table above include costs directly attributable to our product candidates. Other research and development expenses include costs for early stage programs and costs not allocated to a specific program. We allocate benefits, stock-based compensation, and indirect costs to our product candidates on a program-specific basis, and we include these costs in the program-specific expenses. We begin to track and report program-specific expenses for early stage programs once they have been nominated and selected for further development and clinical-stage work has commenced.
Our investment in research and development activities, including the clinical development of our product candidates, has historically represented a significant portion of our total operating expenses. We have concluded the two-year Phase 3 open-label study of GOCOVRI and suspended investment in the development of ADS-4101. Our research and development efforts are focused on completing activities for ADS-5102 for MSW, including additional analyses of the data from the INROADS trial and continuing the open-label extension study through the end of 2020. As a result, we expect research and development costs to decrease from 2019 levels for the foreseeable future, based on this focused strategy.
The process of conducting the necessary clinical research to obtain FDA approval is costly and time consuming. The actual probability of success for each product candidate and clinical program may be affected by a variety of factors, including but not limited to, the quality of the product candidate, early clinical data, investment in the program, competition, manufacturing capability, and commercial viability. Furthermore, in the past we have entered into licensing arrangements with other pharmaceutical companies to develop and commercialize our product candidates, and we may enter into additional licensing arrangements or collaborations in the future. In situations in which third parties have control over the clinical development of a product candidate, the estimated completion dates are largely under the control of such third parties and not under our control. We cannot forecast with any degree of certainty which of our product candidates, if any, will be subject to future licensing or collaboration arrangements or how such arrangements would affect our development plans or capital requirements. As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.
Selling, general and administrative expenses, net
Selling, general and administrative expenses, net, consist primarily of personnel and related benefit costs, including stock-based compensation, facilities, professional services, insurance, public company related expenses, charitable contribution expenses, as well as the costs associated with supporting the commercialization of GOCOVRI, reduced to a small degree by reimbursement from Allergan for external costs related to supporting prosecution and litigation of intellectual property rights under our license agreement. We anticipate our selling, general and administrative expenses will remain significant and may increase as we continue to support the commercialization of GOCOVRI.
Interest and other income, net
Interest and other income, net, consists of changes in fair value of the embedded derivative liability related to our royalty-backed loan agreement (“Royalty-Backed Loan”) with HealthCare Royalty Partners III, L.P., (“HCRP”), in addition to interest received on our investments.
Interest expense
Interest expense consists of accrued interest pursuant to our Royalty-Backed Loan and amortization of debt issuance costs. Interest expense accrues using the effective interest rate method over the estimated period the debt is expected to be repaid. Interest expense over the life of the Royalty-Backed Loan includes an annual interest rate of 11% on the outstanding principal, a royalty rate of 6.25% on net sales of GOCOVRI after the principal amount is paid, and amortization of the debt discount, until a maximum aggregate repayment amount has been reached.
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Critical accounting policies and significant judgments and estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. We base our estimates on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no significant and material changes in our critical accounting policies from those as reflected in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2019.
Results of operations
Fluctuations in Operating Results
Our results of operations have fluctuated from period to period in the past and, especially in light of the COVID-19 pandemic, are likely to continue to do so in the future. We anticipate that our quarterly and annual results of operations will be impacted for the foreseeable future by several factors, including the impact on our operations as a result of the COVID-19 pandemic, fluctuations in product sales due to variances in the number of paid prescriptions from period to period, conversions from our free drug trial program to paid prescriptions, and fluctuations in our Medicare Part D Coverage Gap liability and the volume of purchases eligible for government mandated discounts and rebates, as well as changes in discount percentages that may be impacted by potential future price increases and other factors. Further, we expect the timing of expenditures related to our commercial activities associated with GOCOVRI to vary from period to period, as well our development of ADS-5102 in additional indications and potential development of additional product candidates. Due to these fluctuations, we believe that the period to period comparisons of our operating results are not necessarily a good indication of our future performance.
Comparison of the three months ended March 31, 2020 and 2019 
The following table summarizes our results of operations for the three months ended March 31, 2020 and 2019 (in thousands, except percentages):
 Three Months Ended
 March 31,
Increase
(Decrease)
% Increase
(Decrease)
 20202019
Product sales$14,481  $11,665  $2,816  24 %
Cost of product sales572  413  159  38 %
Research and development expenses2,465  10,214  (7,749) (76)%
Selling, general and administrative expenses, net24,552  27,688  (3,136) (11)%
Interest and other income, net
84  723  (639) (88)%
Interest expense
3,624  3,731  (107) (3)%
The following table summarizes the approximate number of total GOCOVRI paid prescriptions for the three months ended March 31, 2020 and 2019: