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 borrowed $35.0 million and has the right to receive an additional $65.0 million upon FDA approval and receipt of Orphan Drug exclusivity of ADS-5102 (amantadine) extended-release capsules for the treatment of LID in patients with Parkinson’s disease if achieved prior to a specified date. Principal and interest will be payable quarterly from the proceeds of a 12.5% royalty on U.S. net sales of ADS-5102 and up to $15.0 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 ADS-5102 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 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 ADS-5102 and royalties from Allergan, the repayment term may be shortened depending on the actual sales of ADS-5102 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 earlier of the $65.0 million additional loan or October 2018. To the extent that royalties are insufficient to pay interest in full, any unpaid portion of the quarterly interest payment will be added to the principal amount of the loans. For the three months ended June 30, 2017, accrued interest in the amount of $0.7 million was added to the principal balance of the loan.

In connection with the Royalty-Backed Loan, 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 $0.7 million for the three months ended June 30, 2017. The effective interest rate on the amounts borrowed under the Royalty-Backed Loan, including the amortization of the debt discount was 16.6%.

The assumptions used in determining the expected repayment term of the loan and amortization period of the debt discount require that we 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.

The Company may be required to make mandatory prepayments of the borrowings under the Royalty-Backed Loan, subject to 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 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 embedded derivative is presented together with the debt instrument and the related debt discount on a combined basis. The valuation of the embedded derivative is described further in Note 3.

Long-term debt and unamortized debt discount balances are as follows (in thousands):



	June 30, 2017
Loans payable, gross	$	35,000
Less: Unamortized debt discount and issuance costs	(1,888		)
Plus: Unpaid portion of quarterly interest payment	656
Carrying value of loans payable	33,768
Less: Current portion of long-term debt	—
Non-current portion of long-term debt	$	33,768

The estimated fair value of the long-term debt, as measured using Level 3 inputs, approximates the carrying amounts as presented on the balance sheet as of June 30, 2017. The estimated fair value was calculated in the same manner 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 ADS-5102 and royalties from Allergan.