UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, ~~2018~~2019

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number001-31361

BioDelivery Sciences International, Inc.

(Exact name of registrant as specified in its charter)


Delaware		35-2089858
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

4131 ParkLake Ave., Suite 225, Raleigh, NC		27612
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number (including area code):919-582-9050

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange

on which registered

Common stock, par value $0.001

BDSI

The Nasdaq Capital 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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company”, or “emerging growth company” inRule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐ ~~(Do not check if a smaller reporting company)~~	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not 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 Rule12b-2 of the Exchange Act). Yes ☐ No ☒

As of August ~~9, 2018,~~8, 2019, there were ~~59,574,666~~89,538,523 shares of company Common Stock issued and ~~59,559,175~~89,523,032 shares of company Common Stock outstanding.

BioDelivery Sciences International, Inc. and Subsidiaries

Quarterly Report on Form10-Q

TABLE OF CONTENTS


		Page

Part I. Financial Information

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets as of June 30, ~~2018~~2019 and December 31, ~~2017~~2018		1

	Condensed Consolidated Statements of Operations for the three and six months ended June 30, ~~2018~~2019 and ~~2017~~2018		2

	Condensed Consolidated ~~Statement~~Statements of Stockholders’ Equity for the three and six months ended June 30, 2019 and 2018		3

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, ~~2018~~2019 and ~~2017~~2018		4

	~~Supplemental Cash Flow information for the six months ended June 30, 2018 and 2017~~		5

	Notes to Condensed Consolidated Financial Statements		65

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		2526

Item 4.	Controls and Procedures		2526

Cautionary Note on Forward Looking Statements			2527

Part II. Other Information

Item 1.	Legal Proceedings		2627

Item 1A.	Risk Factors		2827

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		2829

Item 3.	Defaults upon Senior Securities		2829

Item 4.	Mine Safety Disclosures		2829

Item 5.	Other Information		2830

Item 6.	Exhibits		2930

Signatures			S-1

Certifications

We own various trademark registrations and applications, and unregistered trademarks, including BioDelivery Sciences International, Inc., BEMA, BELBUCA, BUNAVAIL, ONSOLIS and our corporate logo. We have an exclusive license to use and display the Symproic registered trademark in order to commercialize Symproic in the United States. All other trade names, trademarks and service marks of other companies appearing in this prospectus are the property of their respective holders. Solely for convenience, the trademarks and trade names in this prospectus may be referred to without the ^® and^™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend to use or display other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

From time to time, we may use our website, our Facebook page atFacebook.com/BioDeliverySI and on Twitter at @BioDeliverySI to distribute material information. Our financial and other material information is routinely posted to and accessible on the Investors section of our website, available atwww.bdsi.com. Investors are encouraged to review the Investors section of our website because we may post material information on that site that is not otherwise disseminated by us. Information that is contained in and can be accessed through our website, our Facebook page and our Twitter posts are not incorporated into, and does not form a part of, this Quarterly Report.

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(U.S. DOLLARS, IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(Unaudited)


		June 30, 2018			December 31, 2017				June 30, 2019			December 31, 2018
ASSETS	ASSETS							ASSETS
Current assets:
Cash		$	55,724		$	21,195
Cash and cash equivalents									$	57,215		$	43,822
Accounts receivable, net			9,410			8,852				24,879			13,627
Inventory, net			6,168			6,091				9,974			5,406
Prepaid expenses and other current assets			2,156			3,610				3,298			3,188

Total current assets			73,458			39,748				95,366			66,043

Property and equipment, net			3,366			3,778				3,853			3,072
Goodwill			2,715			2,715				2,715			2,715
BELBUCA^® license and distribution rights, net			38,250			40,500
License and distribution rights, net										63,778			36,000
Other intangible assets, net			1,032			1,360				375			703

Total assets		$	118,821		$	88,101			$	166,087		$	108,533

LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY							LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	23,228		$	26,149			$	40,762		$	21,539

Total current liabilities			23,228			26,149				40,762			21,539

Notes payable, net			49,394			47,660				58,448			51,652
Other long-term liabilities			5,462			5,415				727			5,600

Total liabilities			78,084			79,224				99,937			78,791

Commitments and contingencies (Note 12)

Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred Stock, 5,000,000 shares authorized; Series ANon-Voting Convertible Preferred Stock. $.001 par value, 2,093,155 shares outstanding at both June 30, 2018 and December 31, 2017, respectively; Series BNon-Voting Convertible Preferred Stock, $.001 par value, 5,000 and 0 shares outstanding at June 30, 2018 and December 31, 2017, respectively;			2			2
Common Stock, $.001 par value; 75,000,000 shares authorized; 59,459,446 and 55,904,072 shares issued; 59,443,955 and 55,888,581 shares outstanding at June 30, 2018 and December 31, 2017, respectively			59			56
Preferred Stock, 5,000,000 shares authorized; Series ANon-Voting Convertible Preferred Stock. $.001 par value, 2,093,155 shares outstanding at both June 30, 2019 and December 31, 2018, respectively; Series BNon-Voting Convertible Preferred Stock, $.001 par value, 1,716 and 3,100 shares outstanding at June 30, 2019 and December 31, 2018, respectively.										2			2
Common Stock, $.001 par value; 125,000,000 shares authorized at June 30, 2019 and December 31, 2018, respectively; 89,535,024 and 75,793,725 shares issued;89,519,533 and 70,778,234 shares outstanding at June 30, 2019 and December 31, 2018, respectively.										88			71
Additionalpaid-in capital			366,123			313,922				432,358			381,004
Treasury stock, at cost, 15,491 shares			(47	)		(47	)			(47	)		(47	)
Accumulated deficit			(325,400	)		(305,056	)			(366,251	)		(351,288	)

Total stockholders’ equity			40,737			8,877				66,150			29,742

Total liabilities and stockholders’ equity		$	118,821		$	88,101			$	166,087		$	108,533

See notes to condensed consolidated financial statements

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(U.S. DOLLARS, IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Revenues:
Product sales	$	10,766		$	7,886		$	20,604		$	15,680		$	28,056		$	10,766		$	47,815		$	20,604
Product royalty revenues		1,386			613			1,826			2,273			1,461			1,386			1,471			1,826
Research and development reimbursements		—			245			—			267
Contract revenues		23			—			1,026			20,000			160			23			160			1,026

Total Revenues:		12,175			8,744			23,456			38,220			29,677			12,175			49,446			23,456

Cost of sales		4,566			4,171			7,981			9,816			4,923			4,566			8,975			7,981

Expenses:
Research and development		854			1,590			3,338			4,260			—			854			—			3,338
Selling, general and administrative		14,021			15,970			27,526			29,227			21,955			14,021			38,944			27,526

Total Expenses:		14,875			17,560			30,864			33,487			21,955			14,875			38,944			30,864

Loss from operations		(7,266	)		(12,987	)		(15,389	)		(5,083	)
Income (loss) from operations														2,799			(7,266	)		1,527			(15,389	)
Interest expense		(2,525	)		(1,878	)		(5,030	)		(4,764	)		(13,937	)		(2,525	)		(16,498	)		(5,030	)
Other expense, net		1			(14	)		(6	)		(15	)
Bargain purchase gain		—			—			—			27,336
Other (expense) income, net														8			1			8			(6	)

(Loss) income before income taxes	$	(9,790	)	$	(14,879	)	$	(20,425	)	$	17,474
Loss before income taxes													$	(11,130	)	$	(9,790	)	$	(14,963	)	$	(20,425	)
Income tax benefit (expense)		20			—			(54	)		15,972			—			20			—			(54	)

Net (loss) income attributable to common stockholders	$	(9,770	)	$	(14,879	)	$	(20,479	)	$	33,446
Net loss attributable to common stockholders													$	(11,130	)	$	(9,770	)	$	(14,963	)	$	(20,479	)

Basic
Basic (loss) income per share:	$	(0.16	)	$	(0.27	)	$	(0.35	)	$	0.61
Basic and diluted:
Weighted average common stock shares outstanding														83,821,811			59,400,317			77,571,003			58,735,351

Weighted average common stock shares outstanding:		59,400,317			55,388,774			58,735,351			54,949,901
Basic and diluted loss per share													$	(0.13	)	$	(0.16	)	$	(0.19	)	$	(0.35	)

Diluted
Diluted (loss) income per share:	$	(0.16	)	$	(0.27	)	$	(0.35	)	$	0.60

Diluted weighted average common stock shares outstanding:		59,400,317			55,388,774			58,735,351			55,836,769

See notes to condensed consolidated financial statements

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED ~~STATEMENT~~STATEMENTS OF STOCKHOLDERS’ EQUITY

(U.S. DOLLARS, IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(Unaudited)


																									Preferred Stock Series A				Preferred Stock Series B					Common Stock					Additional Paid-In Capital			Treasury Stock			Accumulated Deficit			Total Stockholders’ Equity
																									Shares		Amount		Shares			Amount		Shares		Amount			Additional Paid-In Capital			Treasury Stock			Accumulated Deficit			Total Stockholders’ Equity
Balances, March 31, 2019																										2,093,155	$	2		2,400		$	—		75,333,254	$	74		$	382,614		$	(47	)	$	(355,121	)	$	27,522

Stock-based compensation																										—		—		—			—		—		—			1,570			—			—			1,570
Stock option exercises																										—		—		—			—		210,104		—			598			—			—			598
Restricted stock awards																										—		—		—			—		191,666		—			—			—			—			—
Series B conversion to common stock																										—		—		(684	)		—		3,800,000		4			(4	)		—			—			—
Equity offering, net of finance costs																										—		—		—			—		10,000,000		10			47,580			—			—			47,590
Net loss																										—		—		—			—		—		—			—			—			(11,130	)		(11,130	)

Balances, June 30, 2019																										2,093,155	$	2		1,716		$	—		89,535,024	$	88		$	432,358		$	(47	)	$	(366,251	)	$	66,150


																									Preferred Stock Series A				Preferred Stock Series B					Common Stock					Additional Paid-In Capital			Treasury Stock			Accumulated Deficit			Total Stockholders’ Equity
																									Shares		Amount		Shares			Amount		Shares		Amount			Additional Paid-In Capital			Treasury Stock			Accumulated Deficit			Total Stockholders’ Equity
Balances, March 31, 2018																										2,093,155	$	2		—		$	—		55,646,522	$	59		$	316,970		$	(47	)	$	(315,630	)	$	1,354

Stock-based compensation																										—		—		—			—		—		—			1,083			—			—			1,083
Stock option exercises																										—		—		—			—		105,721		—			176			—			—			176
Restricted stock awards																										—		—		—			—		227,476		—			—			—			—			—
Common stock issuance upon retirement																										—		—		—			—		479,727		—			—			—			—			—
Series B conversion to common stock																										—		—		(684	)		—		—		—			47,894			—			—			47,894
Cumulative effect of accounting change																										—		—		—			—		—		—			—			—			135			135
Net loss																										—		—		—			—		—		—			—			—			(9,770	)		(9,770	)

Balances, June 30, 2018																										2,093,155	$	2		(684	)	$	—		59,459,446	$	59		$	366,123		$	(47	)	$	(325,400	)	$	40,737


																									Preferred Stock Series A				Preferred Stock Series B					Common Stock					Additional Paid-In Capital			Treasury Stock			Accumulated Deficit			Total Stockholders’ Equity
																									Shares		Amount		Shares			Amount		Shares		Amount			Additional Paid-In Capital			Treasury Stock			Accumulated Deficit			Total Stockholders’ Equity
Balances, January 1, 2019																										2,093,155	$	2		3,100		$	—		70,793,725	$	71		$	381,004		$	(47	)	$	(351,288	)	$	29,742

Stock-based compensation																										—		—		—			—		—		—			2,711			—			—			2,711
Stock option exercises																										—		—		—			—		360,379		—			1,070			—			—			1,070
Restricted stock awards																										—		—		—			—		692,032		(1	)		1			—			—			—
Series B conversion to common stock																										—		—		(1,384	)		—		7,688,888		8			(8	)		—			—			—
Equity offering, net of finance costs																										—		—		—			—		10,000,000		10			47,580			—			—			47,590
Net loss																										—		—		—			—		—		—			—			—			(14,963	)		(14,963	)

Balances, June 30, 2019																										2,093,155	$	2		1,716		$	—		89,535,024	$	88		$	432,358		$	(47	)	$	(366,251	)	$	66,150


	Preferred Stock Series A				Preferred Stock Series B				Common Stock				Additional Paid-In Capital			Treasury Stock			Accumulated Deficit			Total Stockholders’ Equity			Preferred Stock Series A				Preferred Stock Series B					Common Stock					Additional Paid-In Capital			Treasury Stock			Accumulated Deficit			Total Stockholders’ Equity
	Shares		Amount		Shares		Amount		Shares		Amount		Additional Paid-In Capital			Treasury Stock			Accumulated Deficit			Total Stockholders’ Equity			Shares		Amount		Shares			Amount		Shares		Amount			Additional Paid-In Capital			Treasury Stock			Accumulated Deficit			Total Stockholders’ Equity
Balances, January 1, 2018		2,093,155	$	2		—	$	—		55,904,072	$	56	$	313,922		$	(47	)	$	(305,056	)	$	8,877			2,093,155	$	2		—		$	—		55,904,072	$	56		$	313,922		$	(47	)	$	(305,056	)	$	8,877

Stock-based compensation		—		—		—		—		—		—		4,004			—			—			4,004			—		—		—			—		—		—			4,004			—			—			4,004
Stock option exercises		—		—		—		—		169,016		—		306			—			—			306			—		—		—			—		169,016		—			306			—			—			306
Restricted stock awards		—		—		—		—		1,266,433		1		(1	)		—			—			—			—		—		—			—		1,266,433		1			(1	)		—			—			—
Common stock issuance upon retirement		—		—		—		—		2,119,925		2		(2	)		—			—			—			—		—		—			—		2,119,925		2			(2	)		—			—			—
Series B issuance, net of issuance costs		—		—		5,000		—		—		—		47,894			—			—			47,894			—		—		5,000			—		—		—			47,894			—			—			47,894
Cumulative effect of accounting change		—		—		—		—		—		—		—			—			135			135			—		—		—			—		—		—			—			—			135			135
Net loss		—		—		—		—		—		—		—			—			(20,479	)		(20,479	)		—		—		—			—		—		—			—			—			(20,479	)		(20,479	)

Balances, June 30, 2018		2,093,155	$	2		5,000	$	—		59,459,446	$	59	$	366,123		$	(47	)	$	(325,400	)	$	40,737			2,093,155	$	2		5,000		$	—		59,459,446	$	59		$	366,123		$	(47	)	$	(325,400	)	$	40,737

See notes to condensed consolidated financial statements

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. DOLLARS, IN THOUSANDS)

(Unaudited)


	Six months ended June 30,						Six months ended June 30,
	2018			2017			2019			2018
Operating activities:
Net (loss) income	$	(20,479	)	$	33,446
Adjustments to reconcile net (loss) income to net cash flows from operating activities
Net loss							$	(14,963	)	$	(20,479	)
Adjustments to reconcile net loss to net cash flows from operating activities
Depreciation and amortization		456			226			168			456
Impairment loss on equipment		78			—			—			78
Accretion of debt discount and loan costs		1,782			1,491			11,374			1,782
Amortization of intangible assets		2,578			2,735			3,187			2,578
Provision for inventory obsolescence		412			21			149			412
Stock-based compensation expense		4,004			6,000			2,711			4,004
Deferred income taxes		—			(15,972	)
Bargain purchase gain		—			(27,336	)
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable		(423	)		(2,458	)		(11,252	)		(423	)
Inventories		(489	)		2,639			(4,716	)		(489	)
Prepaid expenses and other assets		1,454			1,034			(110	)		1,454
Accounts payable and accrued liabilities		(1,118	)		3,179			9,078			(1,118	)
Deferred revenue		—			(21,716	)

Net cash flows used in operating activities		(11,745	)		(16,711	)		(4,374	)		(11,745	)

Investing activities:
BELBUCA^® acquisition		(1,951	)		—
Purchase of equipment		(122	)		(2	)
Product acquisitions								(20,674	)		(1,951	)
Acquisitions of equipment								(79	)		(122	)

Net cash flows used in investing activities		(2,073	)		(2	)		(20,753	)		(2,073	)

Financing activities:
Proceeds from issuance of common stock								48,000			—
Proceeds from issuance of Series B preferred stock		50,000			—			—			50,000
Equity finance costs		(1,509	)		—
Equity issuance costs								(410	)		(1,509	)
Proceeds from notes payable		—			45,000			60,000			—
Proceeds from exercise of stock options		306			—			1,070			306
Payment on note payable		—			(30,000	)		(67,346	)		—
Loss on refinancing of former debt								(2,794	)		—
Payment of deferred financing fees		(450	)		(2,798	)		—			(450	)

Net cash flows provided by financing activities		48,347			12,202			38,520			48,347

Net change in cash and cash equivalents		34,529			(4,511	)		13,393			34,529
Cash and cash equivalents at beginning of period		21,195			32,019			43,822			21,195

Cash and cash equivalents at end of period	$	55,724		$	27,508		$	57,215		$	55,724

Cash paid for interest	$	3,249		$	2,373		$	3,831		$	3,249

See notes to condensed consolidated financial statements

~~BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES~~

~~SUPPLEMENTAL CASH FLOW INFORMATION~~

~~(U.S. DOLLARS IN THOUSANDS EXCEPT SHARE DATA)~~

~~Non-cash~~ ~~Operating, Financing and Investing Activities:~~

The Company recorded the fair value of an accumulated total of 2,119,925 shares of common stock issued to officers who retired from the Company during the six months ended June 30, 2018 totaling approximately $5.3 million to expense in accordance with accounting principles generally accepted in the United States (“GAAP”).

~~The Company recorded $0.6 million of accrued financing expenses related to the Series BNon-Voting~~ ~~Convertible offering during the six months ended June 30, 2018. Such expense is recorded as accounts payable and accrued liabilities in the condensed consolidated balance sheet.~~

~~The Company recorded the fair value of the bargain purchase price of the BELBUCA~~^® ~~acquisition totaling $27.3 million to income during the six months ended June 30, 2017 in accordance with GAAP.~~

~~See notes to consolidated financial statements~~

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(U.S. DOLLARS, IN ~~THOUSANDS)~~THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(Unaudited)

1. Organization, basis of presentation and summary of significant policies:

Overview

BioDelivery Sciences International, Inc., together with its subsidiaries (collectively, the “Company”) is a rapidly growing commercial-stage specialty pharmaceutical company ~~that~~dedicated to patients living with chronic conditions. The Company is ~~developing~~utilizing its novel and ~~commercializing, either on~~proprietary BioErodible MucoAdhesive (BEMA) drug-delivery technology and other drug delivery technologies to develop and commercialize new applications of proven therapies aimed at addressing important unmet medical needs. The Company commercializes in the United States using its own orsales force while working in ~~partnerships~~partnership with third parties ~~new applications~~to commercialize its products outside the United States.

In April 2019, the Company entered into an exclusive license agreement for the commercialization of ~~approved therapeutics to address important unmet medical needs using both proven and new drug delivery technologies. The Company is focusing on developing products to meet unmet patient needs~~Symproic (naldemedine tosylate) in the ~~areas of~~United States including Puerto Rico for the opioid-induced constipation in adult patients with chronicnon-cancer pain ~~management and addiction.~~(Note 7).

The accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of normal and recurring adjustments) necessary for a fair presentation of these financial statements. The condensed consolidated balance sheet at December 31, ~~2017~~2018 has been derived from the Company’s audited consolidated financial statements included in its annual report on Form10-K for the year ended December 31, ~~2017.~~2018. Certain footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the Securities and Exchange Commission rules and regulations. It is ~~suggested~~recommended that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report onForm 10-K for the year ended December 31, ~~2017.~~2018.

Operating results for the ~~three~~three- andsix-month periods ended June 30, ~~2018~~2019 are not necessarily indicative of results for the full year or any other future periods.

As used herein, the Company’s common stock, par value ~~$.001~~$0.001 per share, is referred to as the “Common ~~Stock.”~~Stock” and the Company’s preferred stock, par value $0.001 per share, is referred to as the “Preferred Stock”.

Principles of consolidation

The condensed consolidated financial statements include the accounts of the Company, Arius Pharmaceuticals, Inc. (“Arius”), Arius Two, Inc. (“Arius Two”) and Bioral Nutrient Delivery, LLC (“BND”). For each period presented, BND has been an inactive subsidiary. All significant inter-company balances and transactions have been eliminated.

Use of estimates in financial statements

The preparation of the accompanying ~~condensed~~ consolidated financial statements ~~in conformity with GAAP~~ requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The Company reviews all significant estimates affecting the consolidated financial statements on a recurring basis and records the effect of any necessary adjustments prior to their issuance. Significant estimates ofmade by the Company include: revenue recognition associated with sales allowances such as returns of product sold, government program rebates, customer coupon redemptions, wholesaler/pharmacy discounts, product service fees, rebates and ~~chargebacks,~~chargebacks; sales ~~bonuses,~~bonuses; stock-based ~~compensation,~~compensation; determination of fair values of assets and liabilities ~~in connection with~~relating to business ~~combinations,~~combinations; and deferred income taxes.

Cash and cash equivalents

Cash and cash equivalents consist of operating and money market accounts. Cash equivalents are carried at cost which approximates fair value due to their short-term nature. The Company considers all highly-liquid investments with an original maturity of 90 days or less to be cash equivalents.

The Company maintains cash equivalent balances with financial institutions that management believes are of high credit quality. The Company’s cash and cash equivalents accounts at times may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk from cash and cash equivalents.

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(U.S. DOLLARS, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(Unaudited)

Inventory

Inventories are stated at the lower of cost or net realizable value with costs determined for each batch under thefirst-in,first-out method and specifically allocated to remaining inventory. Inventory consists of raw materials, work in process and finished goods. Raw materials include amounts of active pharmaceutical ingredient for a product to be manufactured, work in process includes the bulk inventory of laminate (the Company’s drug delivery film) prior to being packaged for sale, and finished goods include pharmaceutical products ready for commercial sale.

On a quarterly basis, the Company analyzes its inventory levels and records allowances for inventory that has become obsolete, inventory that has a cost basis in excess of the expected net realizable value and inventory that is in excess of expected demand based upon projected product sales. The Company reserved ~~$0.7~~$0.3 million and $0.2 million for inventory obsolescence as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

~~BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. DOLLARS, IN THOUSANDS)~~

~~(Unaudited)~~

~~1. Organization, basis of presentation and summary of significant policies (continued):~~

Revenue recognition

~~Product sales~~The main types of revenue contracts are:

~~As discussed further below in Note 2, effective January 1, 2018, the Company adopted Accounting Standards Update (“ASU”)2014-09,~~ ~~“Revenue from Contracts with Customers” (“Topic 606”) and began recognizing revenue under the new accounting guidance on that date. Under the new accounting guidance,~~

•

Product sales-Product sales amounts relate to sales of BELBUCA, Symproic and BUNAVAIL. These sales are recognized as revenue when control is transferred to the wholesaler in an amount that reflects the consideration expected to be received.

•

Product royalty revenues-Product royalty revenue amounts are based on sales revenue of the PAINKYL product under the Company’s license agreement with TTY and the BREAKYL product under the Company’s license agreement with Meda AB, which was acquired by Mylan N.V. (which we refer to herein as Mylan). Product royalty revenues are recognized when control of the product is transferred to the license partner in an amount that reflects the consideration expected to be received. Supplemental sales-based product royalty revenue may also be earned upon the subsequent sale of the product at agreed upon contractual rates.

•

Contract revenue-Contract revenue amounts are related to milestone payments under the Company’s license agreements with its partners.

The Company recognizes revenue on product sales when control of the promised goods is transferred to its customers in an amount that reflects the consideration expected to be received in exchange for transferring those goods. The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. When determining whether the customer has obtained control of the goods, the Company considers any future performance obligations. Generally, there is no post-shipment obligations on product sold.

Performance obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the ~~customer and is the unit of account in Topic 606.~~customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of the Company’s product sales contracts have a single performance obligation as the promise to transfer the individual goods is not separately identifiable from other promises in the contracts and, therefore, not distinct. The Company’s performance obligations are satisfied at a point in time. The multiple performance obligations are not allocated based off of the obligations but based off of standard selling price.

Adjustments to product sales

The Company recognizes product sales net of estimated allowances for rebates, price adjustments, returns, chargebacks, vouchers and prompt payment discounts. A significant majority of the Company’s adjustments to gross product revenues are the result of accruals for its commercial contracts, retail consumer subsidy programs, and Medicaid rebates.

The Company establishes allowances for estimated rebates, chargebacks and product returns based on numerous qualitative and quantitative factors, including:

the number of and specific contractual terms of agreements with customers;

estimated levels of inventory in the distribution channel;

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(U.S. DOLLARS, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(Unaudited)

historical rebates, chargebacks and returns of products;

direct communication with customers;

anticipated introduction of competitive products or generics;

anticipated pricing strategy changes by the Company and/or its competitors;

analysis of prescription data gathered by a third-party prescription data provider;

the impact of changes in state and federal regulations; and

the estimated remaining shelf life of products.

~~In its analyses, the~~The Company uses prescription data purchased from a third-party data provider to develop estimates of historical inventory channel sell-through. The Company utilizes an internal analysis to compare historical net product shipments ~~(shipments less returns)~~ to estimated historical prescriptions written. Based on that analysis, management develops an estimate of the quantity of product in the channel which may be subject to various rebate, chargeback and product return exposures. To estimate months of ending inventory in the Company’s distribution channel, the Company divides estimated ending inventory in the distribution channel by the Company’s recent prescription data, not considering any future anticipated demand ~~growth.~~growth beyond the succeeding quarter. Monthly for each product line, the Company prepares an internal estimate of ending inventory units in the distribution channel by adding estimated inventory in the channel at the beginning of the period, plus net product shipments for the period, less estimated prescriptions written for the period. This is done for each product line by applying a rate of historical activity for rebates, chargebacks and product returns, adjusted for relevant quantitative and qualitative factors discussed above, to the potential exposed product estimated to be in the distribution channel. In addition, the Company receives daily information from the wholesalers regarding their sales and actual on hand inventory levels of the Company’s products. This enables the Company to execute accurate provisioning procedures.

~~BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. DOLLARS, IN THOUSANDS)~~

~~(Unaudited)~~

~~1. Organization, basis of presentation and summary of significant policies (continued):~~

Product returns-Consistent with industry practice, the Company offers contractual return rights that allow its customers to return the products within an18-month period that begins six months prior to and ends twelve months after expiration of the products.

Rebates- The ~~accrual to payment cycle~~liability for ~~returns is longer and can take several years depending on the expiration of the related products.~~

~~Rebates~~~~-The liability for~~government program rebates is calculated based on historical and current rebate redemption and utilization rates contractually submitted by each program’s administrator.

Price adjustments and ~~chargebacks~~chargebacks-~~-The~~The Company’s estimates of price adjustments and chargebacks are based on its estimated mix of sales to various third-party payers, which are entitled either contractually or statutorily to discounts from the Company’s listed prices of its products. If the sales mix to third-party payers is different from the Company’s estimates, the Company ~~will~~may be required to pay higher or lower total price adjustments and/or chargebacks than it had ~~estimated.~~estimated, and such differences may be significant.

The Company, from time to time, offers certain promotional product-related incentives to its customers. ~~These~~The Company has voucher programs ~~include certain product incentives to pharmacy customers~~for BELBUCA, Symproic and BUNAVAIL whereby the Company offers apoint-of-sale subsidy to retail consumers. The Company estimates its liabilities for these voucher programs based on the ~~actual~~current utilization and historical redemption rates as reported to the Company by a third-party claims processing organization. The Company accounts for the costs of these special promotional programs as price adjustments, which are a reduction of gross revenue.

Prompt payment discounts-The Company typically offers its wholesale customers a prompt payment discount of 2% as an incentive to remit payments within a ~~specified~~prescribed number of days after the invoice date depending on the ~~agreement~~customer and the products purchased.

Gross to net accruals-A significant majority of the Company’s gross to net adjustments to gross product revenues are the result of accruals for its voucher program and rebates related to Medicare Part D, Part D Coverage Gap, Medicaid and commercial contracts, with most of those programs having an accrual to payment cycle of anywhere from one to three months. In addition to this relatively short accrual to payment cycle, the Company receives daily information from the wholesalers regarding their sales of the Company’s products and actual on hand inventory levels of its products. This enables the Company to execute accurate provisioning procedures. Consistent with the ~~customer.~~pharmaceutical industry, the accrual to payment cycle for returns is longer and can take several years depending on the expiration of the related products.

Cost of sales

Cost of sales includes the direct costs attributable to the production of BELBUCA^®and ~~BUNAVAIL~~^®.BUNAVAIL. It includes raw materials, production costs at the Company’s three contract manufacturing sites, quality testing directly related to the products, and depreciation ~~on equipment that the Company has purchased to produce BELBUCA~~^® ~~and BUNAVAIL~~^®. It also includes any batches not meeting specifications and raw material yield losses which are expensed as incurred. Cost of sales also includes royalty expenses that the Company owes to third parties.

~~Reclassification~~

Certain amounts were reclassified between Provision for inventory obsolescence, Accounts receivable, Inventories and Accounts payable and accrued expenses in the Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2017 to conform to current year presentation. These reclassifications had no effect on the previously reported net cash flows from operations, activities or net losses.

~~Recent accounting pronouncements-issued, not yet adopted~~

~~ASU2016-02,~~ issued on February 25, 2016, is intended to improve financial reporting about leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment. The ASU will require organizations that lease assets referred to as “Lessees” to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. An organization is to provide disclosures designed to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements concerning additional information about the amounts recorded in the financial statements. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease.

However, unlike current GAAP which requires only capital leases to be recognized on the balance sheet, the new ASU will require both types of leases (i.e., operating and capital leases) to be recognized on the balance sheet. The FASB lessee accounting model will continue to account for both types of leases. The capital lease will be accounted for in substantially the same manner as capital leases are accounted for under existing GAAP. The operating lease will be accounted for in a manner similar to operating leases under existing GAAP, except that lessees will recognize a lease liability and a lease asset for all of those leases. The new standard requires a modified-retrospective approach to adoption and is effective for interim and annual periods beginning on January 1, 2019 but may be adopted earlier. The Company expects to adopt this standard beginning in 2019. The Company does not expect that this standard will have a material impact on its consolidated statements of operations, but the Company does expect that upon adoption, this standard will impact the carrying value of its assets and liabilities on its consolidated balance sheets as a result of the requirement to record

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(U.S. DOLLARS, IN ~~THOUSANDS)~~THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(Unaudited)

~~1. Organization, basis of presentation and summary of significant policies (continued):~~

~~right-of-use~~ ~~assets and corresponding lease obligations for current operating leases. In addition, the standard will require~~on equipment that the Company ~~update its systems, processes~~has purchased to produce BELBUCA and ~~controls it uses to track, record~~BUNAVAIL. It also includes any batches not meeting specifications and ~~account for its lease portfolio.~~

~~ASU2018-07,~~ ~~issued in June 2018, expands the scope~~raw material yield losses. Yield losses and batches not meeting specifications are expensed as incurred. Cost of ~~Topic 718, “Compensation – Stock Compensation”, to include share-based payment transactions for acquiring goods and services from nonemployees. The objective of the ASU~~sales is ~~to maintain or improve the usefulness of the information provided~~recognized when sold to the ~~users~~wholesaler from our distribution center.

Beginning in April 2019, cost of ~~financial statements while reducing~~sales also includes direct costs attributable to the production of Symproic.

For BREAKYL and PAINKYL (the Company’sout-licensed breakthrough cancer pain therapies), cost of sales includes all costs related to creating the product at the Company’s contract manufacturing location in Germany. The Company’s contract manufacturer bills the Company for the final product, which includes materials, direct labor costs, and ~~complexity by simplifying several aspects~~certain overhead costs as outlined in applicable supply agreements.

Cost of ~~existing guidance. The amendments are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within~~sales also includes royalty expenses that ~~fiscal year and early adoption is permitted.~~ the Company owes to third parties.

Fair Value of Financial Instruments

The Company ~~is currently assessing~~measures the ~~impact~~fair value of ~~adopting this ASU on its condensed consolidated financial statements.~~

~~2. Revenue from contracts with customers:~~

Effective January 1, 2018, the Company adopted Topic 606. The Company elected to apply the standard using the modified retrospective method beginning January 1, 2018. The Company applied this guidance only to those contracts that were not completed at the date of adoption. As a result of adoption, the cumulative impact to the Company’s retained earnings at January 1, 2018 was $0.135 million. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company expects the impact of the adoption of the new standard on its existing contracts to be immaterial to the Company’s net income on an ongoing basis, however additional disclosures have been addedinstruments in accordance with GAAP which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

GAAP defines fair value as the ~~ASU.~~exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company considers the carrying amount of its cash and cash equivalents to approximate fair value due to short-term nature of this instrument. GAAP describes three levels of inputs that may be used to measure fair value:

Level 1 – quoted prices in active markets for identical assets or liabilities

Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable

Level 3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions)

The following table summarizes the cash and cash equivalents measured at fair value on a recurring basis as of June 30, 2019:


	Level 1		Level 2		Level 3		Balance at June 30, 2019
Cash and cash equivalents	$	57,215	$	—	$	—		57,215

The cash and cash equivalent balance as of June 30, 2019 includes investments in various money market accounts and cash held in interest bearing accounts.

Research and development

As of January 1, 2019, the Company ~~does not anticipate any significant changes~~has focused entirely on commercialized products rather than research and development. As such, there were no expenses incurred in research and development during the ~~timing or amount of revenue recognized~~six months ended June 30, 2019. Research and development expense for ~~the Company’s product sales and relatedgross-to-net~~ ~~adjustments under Topic 606. The Company’s net product sales continue to be recognized when delivery has occurred, and itsgross-to-net~~ ~~adjustments are estimated and recorded in the accounting period related to when sales occur in the manner fundamentally consistent with the Company’s prior accounting methodology.~~

Under the new standard, timing for recognition of certain contract revenue may be accelerated such that a portion of revenue will be estimated and recognized in revenue earlier than the previous accounting standards. During the six months ended June 30, 2018 ~~the Company recorded financing revenue for two milestones that are not due until 2020 and 2023, respectively.~~was $3.3 million.

2. Leases:

The ~~main types~~components of ~~revenue contracts are:~~lease expense were as follows:

•

~~Product~~~~sales-~~~~Product sales amounts relate to sales of BELBUCA~~^® ~~and BUNAVAIL~~^®~~. These sales are recognized as revenue when control is transferred to the wholesaler in an amount that reflects the consideration expected to be received.~~

•

~~Product royalty~~~~revenues-~~~~Product royalty revenue amounts are based on sales revenue of BELBUCA~~^® ~~under the Company’s license agreement with Purdue Pharma, the PAINKYL~~^™ ~~product under the Company’s license agreement with TTY and the BREAKYL~~^™ product under the Company’s license agreement with Meda. Product royalty revenues are recognized when control of the product is transferred to the license partner in an amount that reflects the consideration expected to be received. Supplemental sales-based product royalty revenue may also be earned upon the subsequent sale of the product at agreed upon contractual rates.

•

~~Contract~~~~revenue-~~~~Contract revenue amounts are related to milestone payments under the Company’s license agreements with its partners including any associated financing component.~~

~~The impact of adoption of Topic 606 on the Company’s condensed consolidated balance sheet as of June 30, 2018 follows (in thousands):~~

   Condensed Consolidated Balance Sheet
   June 30, 2018
   As reported    Balances
without
adoption of
Topic 606    Effect of
Adoption
Accounts receivable, net
   $ 9,410    $ 9,062    $ 348
Accumulated deficit
   $ (325,400 )    $ (325,748 )    $ 348


	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018
*Lease Cost*
Operating lease cost
Operating lease	$	82	$	81	$	164	$	163
Variable lease costs		2		1		7		2

Total lease cost	$	84	$	82	$	171	$	165

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(U.S. DOLLARS, IN ~~THOUSANDS)~~THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(Unaudited)

~~2. Revenue from contracts with customers (continued):~~


	Six Months Ended June 30
	2019			2018
Other Information
Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases	$	173		$	165


	Six Months Ended June 30
	2019			2018
Lease Term and Discount Rate
Weighted-average remaining lease term Operating leases		3.0 years			4.0 years
Weighted-average discount rate Operating leases		11.8	%		11.8	%

Maturity of Lease Liabilities

Future minimum lease payments undernon-cancellable leases as of June 30, 2019 were as follows:


Maturity of Lease Liabilities
2019	$	177
2020		360
2021		370
2022		219

Total lease payments	$	1,126
Less: Interest		(179	)

Present value of lease liabilities	$	947

~~The impact~~Components of ~~adoption of Topic 606 on the Company’s condensed consolidated statement of operations for the three~~Lease Assets and ~~six months ended June 30, 2018 follows (in thousands):~~Liabilities

   Condensed Consolidated
Statement of Operations
Three months ended June 30, 2018    Condensed Consolidated
Statement of Operations
Six months ended June 30, 2018
   As
reported Balances
without
adoption of
Topic 606 Effect of
Adoption    As
reported Balances
without
adoption of
Topic 606 Effect of
Adoption
Product sales
   $ 10,766 $ 10,766 $ —      $ 20,604 $ 20,604 $ —
Product royalty revenues
   1,386 1,386 —      1,826 1,826 —
Contract revenues
   23 —   23    1,026 813 213




Total revenues
   $ 12,175 $ 12,152 $ 23    $ 23,456 $ 23,243 $ 213




Net loss attributable to common stockholders
   $ (9,770 ) $ (9,793 ) $ 23    $ (20,479 ) $ (20,692 ) $ 213


	June 30, 2019
Assets
Property and equipment, net Operating lease-right of use asset	$	883
Liabilities
Current liabilities Operating lease- current liability	$	260
Other long-term liabilities Operating lease- noncurrent liability	$	687

Total lease liabilities	$	947

3. Inventory:

The ~~beginning and ending balances~~following table represents the components of ~~the Company’s accounts receivables with customers from contracts during the periods presented is~~inventory as ~~follows (in thousands):~~of:

   Balance at
January 1,
2018    Six months
ended June 30,
2018    Balance at
June 30,
2018
Accounts receivable with customers
   $ 8,987    $ 423    $ 9,410

~~3. Liquidity and management’s plans:~~

At June 30, 2018, the Company had cash of approximately $55.7 million. The Company used $11.7 million of cash in operations during the six months ended June 30, 2018 and had stockholders’ equity of $40.7 million, versus stockholders’ equity of $8.9 million at December 31, 2017. The Company expects that it has sufficient cash to manage the business as currently planned into the second quarter of 2020 which would provide sufficient capital necessary to support the continued commercialization of BELBUCA^® ~~and BUNAVAIL~~^®.

On May 17, 2018, the Company executed agreements relating to the Company’s registered direct offering, issuance and sale of an aggregate of 5,000 shares of the Company’s newly designated Series B~~Non-Voting Convertible~~ ~~Preferred Stock. On May 21, 2018, the Company closed the offering, which yielded net proceeds of $47.9 million to the Company.~~

The Company’s cash on hand estimation assumes the availability of the foregoing capital sources and further assumes that the Company does not otherwise face unexpected events, costs or contingencies, any of which could affect the Company’s cash requirements from time to time. Available resources may be consumed more rapidly than currently anticipated, potentially resulting in the need for additional funding. Additional funding, capital or loans (including, without limitation, milestone or other payments from commercialization agreements) may be unavailable on favorable terms, if at all, which could leave the Company without adequate capital resources.


	June 30, 2019			December 31, 2018
Raw materials & supplies	$	937		$	645
Work-in-process		5,966			2,093
Finished goods		3,407			2,855
Obsolescence reserve		(336	)		(187	)

Total inventories	$	9,974		$	5,406

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(U.S. DOLLARS, IN ~~THOUSANDS)~~THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(Unaudited)

4. ~~Inventory:~~

~~The following table represents the components of inventory as of:~~

   June 30,
2018    December 31,
2017
Raw materials & supplies
   $ 713    $ 1,338
Work-in-process
   3,100    3,135
Finished goods
   3,010    1,861
Obsolescence reserve
   (655 )    (243 )




Total inventories
   $ 6,168    $ 6,091

5. Accounts payable and accrued liabilities:

The following table represents the components of accounts payable and accrued liabilities as of:


	June 30, 2018		December 31, 2017		June 30, 2019		December 31, 2018
Accounts payable	$	10,056	$	12,236	$	4,167	$	3,166
Accrued rebates		7,056		5,648		19,584		12,261
Accrued compensation and benefits		1,757		3,472		3,443		3,814
Accrued acquisition costs		1,412		2,311		10,000		318
Accrued returns		1,293		915		830		715
Accrued royalties		503		488		464		159
Accrued clinical trial costs		317		234		—		464
Accrued legal		227		216		391		70
Accrued regulatory expenses						229		—
Accrued other		607		629		1,654		572

Total accounts payable and accrued liabilities	$	23,228	$	26,149	$	40,762	$	21,539

6.5. Property and equipment:

Property and equipment, summarized by major category, consist of the following as of:


	June 30, 2018			December 31, 2017			June 30, 2019			December 31, 2018
Machinery & equipment	$	5,623		$	5,428		$	5,635		$	5,635
Right of use, building lease								833			—
Computer equipment & software		413			399			437			406
Office furniture & equipment		169			169			161			155
Leasehold improvements		44			44			43			43
Idle equipment		679			766			679			679

Total		6,928			6,806			7,788			6,918

Less accumulated depreciation and amortization		(3,562	)		(3,028	)		(3,935	)		(3,846	)

Total property and equipment, net	$	3,366		$	3,778		$	3,853		$	3,072

Depreciation expense for the three-month periods ended June 30, 2019 and ~~amortization~~June 30, 2018, was approximately $0.08 million and $0.2 million, respectively. Depreciation expense for thesix-month periods ended June 30, ~~2018~~2019 and June 30, ~~2017, was approximately $0.5 million and $3.0 million, respectively. Depreciation expense for the three-month periods ended June 30,~~ 2018, ~~and June 30, 2017,~~ was approximately $0.2 million and ~~$1.5~~$0.5 million, respectively.

6. License agreements and acquired product rights:

Shionogi license and supply agreement

On April 4, 2019 (the “Effective Date”), the Company and Shionogi Inc. (“Shionogi”) entered into an exclusive license agreement (the “License Agreement”) for the commercialization of Symproic in the United States including Puerto Rico (the “Territory”) for opioid-induced constipation in adult patients withchronic non-cancer pain (the “Field”).

Pursuant to the terms of the License Agreement, the Company paid Shionogi a$20 million up-front payment on the Effective Date and will pay Shionogi a $10 million payment onthe six-month anniversary of the Effective Date (or earlier if the License Agreement is assigned or transferred), and quarterly, tiered royalty payments on potential sales of Symproic in the Territory that range from 8.5% to 17.5% (plus an additional 1% of net sales on a pass-through basis to a third party licensor of Shionogi) of net sales based on volume of net sales and whether Symproic is being sold as an authorized generic. Assets acquired as part of the License Agreement include: intellectual property, inventory, trademarks and tradenames.

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(U.S. DOLLARS, IN ~~THOUSANDS)~~THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(Unaudited)

7.The Company and Shionogi have made customary representations and warranties and have agreed to certain other customary covenants, including confidentiality, limitation of liability and indemnity provisions. Either party may terminate the License ~~agreements and acquired product rights:~~

~~Purdue license and supply agreement:~~

~~On July 12, 2017,~~Agreement for cause if the ~~Company, along with Purdue Pharma, an Ontario limited partnership (“Purdue”), announced that they had executed an exclusive agreement granting to Purdue~~other party materially breaches or defaults in the ~~licensing, distribution, marketing and sale rights related to BELBUCA~~^®performance of its obligations. Unless earlier terminated, the License Agreement will continue in ~~Canada. Financial terms~~effect until the expiration of the ~~Purdue~~Company’s royalty obligations, as defined. Upon expiration of the License Agreement, all licenses granted to Company for Symproic in the Field and in the Territory survive and become fully-paid, royalty-free, perpetual and irrevocable.

The Company and Shionogi have also entered into a customary supply agreement ~~include: (i) total upfront and other cash milestone payments (ii) a low double digit percent royalty payable quarterly by Purdue~~under which Shionogi will supply Symproic to the Company ~~based~~at cost plus an agreed upon markup for an initial term of up to two years. In the event the Company elects to source Symproic from a third party supplier, Shionogi would continue to supply the Company with naldemedine tosylate for use in Symproic at cost plus such agreed upon markup for the duration of the License Agreement. The Company and Shionogi also entered into a customary transition services and distribution agreement under which Shionogi will continue to perform certain sales, distribution and related activities and commercialization and administrative services on ~~Canadian~~the Company’s behalf until June 30, 2019 pursuant to the transition services and distribution agreement (the “Transition Date”) (during which time, in lieu of paying royalties and cost-plus supply, distribution and transitional services during this period, Shionogi will retain 35% of the net sales of ~~BELBUCA~~^® ~~(iii)~~Symproic in the Territory and remit the remaining 65% of net sales to the Company) and certain other customary transitional services (if so requested by the Company), initially at no cost and thereafter, at a specified hourly rate for a term not to exceed three months from the Transition Date or the term of the Agreement. The Company and Shionogi have also entered into a Pharmacovigilance agreement that required ongoing cooperation on adverse event reporting for the duration of License Agreement.

The Company accounted for the Symproic purchase as an ~~annual royalty fee commencing a period~~asset acquisition under ASC805-10-55-5b, which provides guidance for asset acquisitions. Under the guidance, if substantially all the acquisition is made up of ~~time after~~one asset or several similar assets, then the ~~commercial launch of BELBUCA~~^® ~~in Canada, which fee~~acquisition is ~~creditable against royalties payable by Purdue~~an asset acquisition. The Company believes that the licensing agreement and ~~subject~~other assets acquired from Shionogi are similar and consider them all to ~~reduction in certain circumstances; and (iv) payment by Purdue of certain costs incurred~~be intangible assets.

The total purchase price was allocated to ~~obtain and transfer~~ the ~~marketing authorization for BELBUCA~~^® ~~in Canada.~~acquired asset based on their relative estimated fair values, as follows:

~~On January 30, 2018,~~


Symproic license	$	30,000
Transaction expenses		636

Total value	$	30,636

Additionally, the Company also purchased from Shionogi $0.4 million of Symproic samples, which have been recorded in selling, general and ~~Purdue announced that BELBUCA~~^® ~~was now commercially available in Canada. The first commercial sale of BELBUCA~~^® ~~in Canada triggered a milestone payment to the Company from Purdue~~administrative expenses in the ~~amount~~accompanying condensed consolidated statement of ~~CAD 1 million (US $0.8 million),~~operations for the six months ended June 30, 2019.

The Company is amortizing the Symproic license over the life of the underlying patent, which the ~~Company received and recognized as revenue in March 2018.~~earliest date of generic entry for Symproic is November 2031 based on the expiration date of US patent # 9,108,975.

TTY license and supply agreement

The Company has a license and supply agreement with TTY Biopharm Co., Ltd. (“TTY”) for the exclusive rights to develop and commercialize BEMA^® Fentanyl in the Republic of China, Taiwan.

During the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, the Company received cumulative payments of ~~$0.9~~$0.3 million and ~~$0.4~~$0.9 million, respectively, from TTY, which related to royalties based on product purchased in Taiwan by TTY of PAINKYL^™ which is recorded in the accompanying condensed consolidated statement of operations.

~~8. Notes payable:~~

~~On February 21, 2017 (the “Closing Date”),~~ Also, during the six months ended June 30, 2019, the Company ~~entered into a term loan agreement (the “Term Loan Agreement”) with CRG, as administrative agent and collateral agent, and~~received the ~~lenders named in the Term Loan Agreement (the “Lenders”).~~

Pursuant to the Term Loan Agreement, the Company borrowed $45.0 million from the Lenders as of the Closing Date, and on December 26, 2017 borrowed an additional $15.0 million (the “Second Draw”) that was contingently available upon achievement of certain conditions. The Company may borrow up to an additional $15.0 million (the “Third Draw”) conditional upon satisfying both (a) certain minimum net revenue thresholds on or before June 30, 2018 or September 30, 2018 and (b) a certain minimum market capitalization threshold for a period of time prior to the funding of the Third Draw.

~~The original Term Loan Agreement hada six-year term~~ with three years of interest-only payments. On May 16, 2018, the Company entered into an amendment to its Term Loan Agreement with CRG. Pursuant to the amendment: (i) the interest only period of the Loan Agreement was extended by one year, and certain milestones previously required for the extended interest only period have been removed; (ii) the “PIK” period (under which a portion of the interest accrued under the Loan Agreement can be deferred to maturity) will also be extended for a year; (iii) amortization of the loan principal can be deferred until maturity (making thefinal milestone payment of ~~the loan a “balloon” payment) if the Company achieves and maintains a market capitalization~~$0.2 million ($0.16 million net of $200 million prior to the conclusion of the interest only period (provided that if the Company achieves, and thereafter falls below a $200 million market capitalization, amortization of the loan principal will resume); and (iv) certain Company revenue targets, the failure ofTaiwan tax) which would create an event of default under the loan, have been recalculated. Interest on the amounts borrowed under the Term Loan Agreement accrues at an annual fixed rate of 12.50%, 3.5% of which may be deferred during the interest-only period by adding such amount to the aggregate principal loan amount. On each borrowing date (including the Closing Date), the Company is ~~required to pay CRG a financing fee~~ based on ~~the loan drawn on that date. The Company is also required to pay the Lenders a final payment fee equivalent to 9%~~cumulative sales of ~~the original loan amount upon repayment of the loans in full, in addition to prepayment amounts described below.~~

The Company may prepay all or a portion of the outstanding principal and accrued unpaid interest under the Loan Agreement at any time upon prior notice to the Lenders subject to a certain prepayment fees during the first five years of the term (which fees are lowered over time) and no prepayment fee thereafter. In certain circumstances, including a change of control and certain asset sales or licensing transactions, the Company is required to prepay all or a portion of the loan, including the applicable prepayment premium of on the amount of the outstanding principal to be prepaid.PAINKYL by TTY exceeding $10 million.

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(U.S. DOLLARS, IN ~~THOUSANDS)~~THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(Unaudited)

7. Other intangible assets:

Other intangible assets, net, consisting of product rights and licenses are summarized as follows:


June 30, 2019	Gross Carrying Value		Accumulated Amortization			Intangible Assets, net
Product rights	$	6,050	$	(5,723	)	$	327
BELBUCA license and distribution rights		45,000		(11,250	)		33,750
Symproic license and distribution rights		30,636		(609	)		30,027
Licenses		1,900		(1,851	)		49

Total intangible assets	$	83,586	$	(19,433	)	$	64,153


December 31, 2018	Gross Carrying Value		Accumulated Amortization			Intangible Assets, net
Product rights	$	6,050	$	(5,442	)	$	608
BELBUCA license and distribution rights		45,000		(9,000	)		36,000
Licenses		1,900		(1,805	)		95

Total intangible assets	$	52,950	$	(16,247	)	$	36,703

8. Notes ~~payable (continued):~~payable:

On May 23, 2019, the Company entered into a Loan Agreement (the “Loan Agreement”) with Biopharma Credit plc (“Pharmakon”), for a senior secured credit facility consisting of a term loan of $60 million (the “Term Loan”), with the ability to draw an additional $20 million within twelve months of the closing date. The Loan Agreement replaced the Company’s existing Term Loan Agreement (the “Original Loan Agreement”) with CRG Servicing LLC, (“CRG”).

The Company utilized $60 million of the initial loan proceeds under the Loan Agreement, plus an additional $1.8 million to repay all of the outstanding loan balance owed by the Company under the Original Loan Agreement. The Company also used existing cash on hand to pay a $5.6 million backend facility fee to CRG. Upon the repayment of all amounts owed by the Company under the CRG Original Loan Agreement, all commitments to CRG were terminated and all security interests granted by the Company and its subsidiary guarantors under the CRG Original Loan Agreement were released.

During the six months ended June 30, 2019, the Company expensedone-time events of $5.2 million in unamortized deferred loan fees, $3.9 million in unamortized warrant discount costs and $2.8 million in loan prepayment fees and realized losses arising out of the CRG Term Loan and recorded as interest expense in the accompanying consolidated statement of operations.

The new facility carriesa 72-month term with interest only payments on the term loan for the first 36 months. The Term Loan will mature in May 2025 and bears an interest rate of 7.5% plus the LIBOR rate (LIBOR effective rate as of June 28, 2019 was 2.52%). The Term Loan is subject to mandatory prepayment provisions that require prepayment upon change of control.

The obligations under the Loan Agreement are guaranteed by the Company’s subsidiaries and are secured by a first priority security interest in and a lien on substantially all of the assets of the Company and the subsidiary guarantors, subject to certain exceptions.

The following table represents future maturities of the notes payable obligation as of June 30, ~~2018:~~2019:


Years ending December 31, 2018	$	—
2019		—			—
2020		—			—
2021		30,347			—
2022		30,347			13,846
2023					18,461
2024					18,462
2025					9,231

Total maturities	$	60,694		$	60,000
Unamortized discount and loan costs		(11,300	)		(1,552	)

Total notes payable obligation	$	49,394		$	58,448

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(U.S. DOLLARS, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(Unaudited)

9. Net sales by product:

The Company’s business is classified as a single reportable segment.

However, the following table presents net sales by product:

   Three months ended June 30,    Six months ended June 30,
   2018    2017    2018    2017
BELBUCA^®
   $ 9,746    $ 6,563    $ 17,770    $ 11,117
BUNAVAIL^®
   1,020    1,323    2,834    4,563








Net product sales
   $ 10,766    $ 7,886    $ 20,604    $ 15,680


	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018
BELBUCA	$	24,060	$	9,746	$	42,764	$	17,770
Symproic		3,175		—		3,175		—
BUNAVAIL		821		1,020		1,876		2,834

Net product sales	$	28,056	$	10,766	$	47,815	$	20,604

10. Stockholders’ equity:

Public Offering

On April 15, 2019 the Company completed an underwritten public offering by the Company and a selling stockholder of 12,000,000 shares of common stock at a public offering price of $5.00 per share. The gross proceeds from the Company’s portion of the offering (10,000,000 shares), before deducting the underwriter discounts and commission and other offering expenses, was $50.0 million. The net proceeds were $47.6 million. The gross proceeds to the selling stockholder were approximately $19.0 million, which includes shares sold pursuant to the underwriters’ exercise of their option to purchase an additional 1,800,000 shares of common stock at the public offering price.

Common Stock

On July 25, 2019, in connection with the Company’s 2019 Annual Meeting of Stockholders (“the Annual Meeting”), the Company’s stockholders approved, among other matters, an amendment to the Company’s Certificate of Incorporation to increase the number of authorized shares of Common Stock from 125,000,000 to 175,000,000. Shareholders also approved the Company’s 2019 Stock Option and Incentive Plan (the “2019 Plan”), which reserves 14,000,000 shares of stock for issuance under the 2019 Plan.

Stock-based compensation

During the six months ended June 30, ~~2018,~~2019, a total of ~~1,643,296~~2,134,956 options to purchase Common Stock, with an aggregate fair market value of approximately ~~$2.4~~$9.0 million, were granted to ~~Company employees.~~employees, officers and directors of the Company. Options ~~granted to employees~~ have a term of 10 years from the grant ~~date and~~date. Options granted to employees vest ratably over a three-year ~~period.~~period and options granted to members of the Board of Directors vest ratably through 2022. The fair value of each option is amortized as compensation expense evenly through the vesting period.

~~The Company’s stock-based compensation expense is allocated between research and development and selling, general and administrative as follows:~~

   Three months ended,    Six months ended,
Stock-based compensation expense
   June 30,
2018    June 30,
2017    June 30,
2018    June 30,
2017
Research and Development
   $ 0.03    $ 0.4    $ 1.1    $ 0.8
Selling, General and Administrative
   $ 1.1    $ 2.5    $ 2.9    $ 5.2

The fair value of each option award is estimated on the grant date using the Black-Scholes valuation model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. Expected volatilities are based on implied volatilities from historical volatility of the Common Stock, and other factors estimated over the expected term of the options.

Expected term of options granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus contract term. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term.

~~BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. DOLLARS, IN THOUSANDS)~~

~~(Unaudited)~~

~~10. Stockholders’ equity (continued):~~

The key assumptions used in determining the fair value of options granted during the six months ended June 30, ~~2018~~2019 follows:


Expected price volatility	~~60.34%-68.77%~~	61.83%-64.10%
Risk-free interest rate	~~2.05%-2.82%~~	2.36%-2.66%
Weighted average expected life in years		6 years
Dividend yield		—

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(U.S. DOLLARS, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(Unaudited)

Option activity during the six months ended June 30, ~~2018~~2019 was as follows:


	Number of shares			Weighted average exercise price per share		Aggregate intrinsic value		Number of shares			Weighted average exercise price per share		Aggregate intrinsic value
Outstanding at January 1, 2018		2,712,954		$	3.68	$	1,190
Outstanding at January 1, 2019									4,406,004		$	3.19	$	4,172

Granted in 2018:
Granted in 2019:
Officers and Directors		800,000			2.18				1,132,109			3.93
Employees		843,296			2.40				1,002,847			4.51
Exercised		(196,541	)		1.99				(360,379	)		4.60
Forfeitures		(327,428	)		3.57				(204,587	)		4.07

Outstanding at June 30, 2018		3,832,281		$	3.18	$	1,920
Outstanding at June 30, 2019									5,975,994		$	3.53	$	7,987

During the six months ended June 30, 2019, a cumulative total of 492,198 options were granted in excess of the Company’s 2011 Equity Incentive Plan, as amended (the “EIP”) available number of shares under the plan. These options were subject to shareholder approval at the Annual Meeting, which were subsequently approved.

As of June 30, ~~2018,~~2019, options exercisable totaled ~~1,767,831.~~1,992,349. There ~~was~~are approximately ~~$5.2~~$7.9 million of unrecognized compensation cost related tonon-vested share-based compensation awards, including options and restricted stock units (“RSUs”) granted. These costs will be expensed through ~~2021.~~2022.

Restricted stock units

During the six months ended June 30, ~~2018, 1,410,611~~2019, a cumulative total of 360,250 RSUs were granted to the Company’s executive officers, ~~employees~~members of senior management, a former officer and directors with a fair market value of approximately ~~$3.1~~$1.6 million. The fair value of restricted units is determined using quoted market prices of the Common Stock and the number of shares expected to vest. These RSUs were issued under the ~~Company’s 2011 Equity Incentive Plan, as amended (the “EIP”).~~EIP.

RSU grants are ~~either~~ time-based, ~~or performance-based,~~ all of which generally vest ~~over~~from a one to three-year period. ~~Performance-based RSUs vest if specified predetermined net revenue and operating income goals are achieved. Actual performance relative~~The RSU grant to the predetermined performance measures are evaluated independently at the end of each fiscal year and the number of awards that will vest will be based upon the percentage of the individual performance measure achieved relative to the predetermined target. This allows for partial vesting relative to separate performance measures.former officer vested on his retirement date April 30, 2019.

Restricted stock activity during the six months ended June 30, ~~2018~~2019 was as follows:


	Number of restricted shares			Weighted average fair market value per RSU		Number of restricted shares			Weighted average fair market value per RSU
Outstanding at January 1, 2018		4,706,895		$	5.20
Outstanding at January 1, 2019							2,166,102		$	2.59
Granted:
Executive officers		1,038,434			2.23		223,250			4.44
Directors		55,000			1.95		90,000			4.85
Employees		317,177			2.10		47,000			4.67
Vested		(1,266,433	)		2.38		(692,032	)		4.89
Forfeitures		(319,691	)		2.48		(76,632	)		3.10
Conversions		(2,119,925	)		2.72

Outstanding at June 30, 2018		2,411,457		$	8.02
Outstanding at June 30, 2019							1,757,688		$	3.31

Preferred Stock

During the six months ended June 30, 2019, 1,384 shares of Series B Preferred Stock (“Series B”) were converted into 7,688,888 shares of Common Stock. As of June 30, 2019, 1,716 shares of Series B are outstanding. As of June 30, 2019, 2,093,155 shares of Series A Preferred Stock (“Series A”) are outstanding. There were no conversions of Series A during the six months ended June 30, 2019.

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(U.S. DOLLARS, IN ~~THOUSANDS)~~

~~(Unaudited)~~

~~10. Stockholders’ equity (continued):~~

~~Series B Preferred Stock Financing~~

On May 17, 2018, the Company entered into a placement agency agreement with William Blair & Company, L.L.C., as placement agent, relating to the Company’s registered direct offering, issuance and sale of an aggregate of 5,000 shares of the Company’s authorized preferred stock that the Board of Directors of the Company has designated as~~Series B Non-Voting Convertible~~ Preferred Stock, par value $.001 per share (the “Series B Preferred Stock”). All of the shares were sold by the Company. The placement agency agreement contains customary representations, warranties and covenants of the Company and the Placement Agent. The closing of the offering was completed on May 21, 2018. The shares sold in the offering were issued pursuant to a shelf registration statement, as amended, that the Company filed with the SEC, which became effective on July 13, 2015.

Each share of Series B Preferred Stock is convertible into a number of shares of the Company’s common stock, par value $.001 per share determined by dividing $10,000 by a conversion price of $1.80 per share (subject to adjustment for stock splits and stock dividends as provided in the Certificate of Designation) at any time following stockholder approval, which occurred at the annual shareholder meeting on August 2, 2018. As of the closing, the aggregate outstanding shares of Series B Preferred Stock will be convertible (upon stockholder approval) into an aggregate 27,777,778 shares of Common Stock. The Series B Preferred Stock does not contain any price-based anti-dilution protection. The Series B Preferred Stock is convertible at any time after stockholder approval at the option of the holder, except that a holder will be prohibited from converting shares of Series B Preferred Stock into shares of Common Stock if, as a result of such conversion, such holder, together with its affiliates, would beneficially own more than 9.98% of the total number of shares of Common Stock then issued and outstanding, which percentage may be increased or decreased~~on sixty-one (61) days’~~ notice from the holder of Series B Preferred Stock to the Company provided that, until stockholder approval, such beneficial ownership limitation may only be increased to up to 19.99% of the total number of shares of Common Stock then issued and outstanding.

Within ten (10) days following the date of stockholder approval, the Company has the right to deliver a notice to the holders of the Series B Preferred Stock to require conversion of the Series B Preferred Stock into Common Stock, provided that certain conditions with respect to the Common Stock are satisfied. Such forced conversion shall be subject to a holder’s beneficial ownership limitation of 9.98% of the total number of shares of Common Stock then issued and outstanding. Following an initial forced conversion of the Series B Preferred Stock, every ninety (90) days thereafter, the Company has the right to require the forced conversion of the still outstanding shares of Series B Preferred Stock up to the beneficial ownership limitation of 9.98% of the total number of shares of Common Stock then issued and outstanding.

~~Warrants~~

~~The Company has granted warrants to purchase shares of Common Stock.~~

The fair value of each warrant grant is estimated on the grant date using the Black-Scholes valuation model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. Expected volatilities are based on implied volatilities from historical volatility of the Common Stock, and other factors estimated over the expected term of the warrants.

Expected term of warrants granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus contract term. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term. A cumulative total of 2,136,020 shares underlying warrants to purchase Common Stock are outstanding as of June 30, 2018 with a weighted average exercise price of $2.60 per share.

~~BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. DOLLARS, IN THOUSANDS)~~THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(Unaudited)

~~11.~~ Earnings ~~per common share:~~Per Share

~~The following table reconciles the numerators and denominators of the basic and diluted earnings per common share computations (in thousands, except share and per share data).~~

   Three Months Ended
June 30,    Six Months Ended
June 30,
   2018    2017    2018    2017
Basic:

Net (loss) income
   $ (9,770 )    $ (14,879 )    $ (20,479 )    $ 33,446
Weighted average common shares outstanding
   59,400,317    55,388,774    58,735,351    54,949,901








Basic (loss) income per common share
   $ (0.16 )    $ (0.27 )    $ (0.35 )    $ 0.61








Diluted:

Effect of dilutive securities:

Net (loss) income
   $ (9,770 )    $ (14,879 )    $ (20,479 )    $ 33,446








Weighted average common shares outstanding
   59,400,317    55,388,774    58,735,351    54,949,901
Effect of dilutive options and warrants
   —      —      —      886,868








Diluted weighted average common shares outstanding
   59,400,317    55,388,774    58,735,351    55,836,769








Diluted (loss) income per common share
   $ (0.16 )    $ (0.27 )    $ (0.35 )    $ 0.60

Basic earnings per common share is calculated using the weighted average shares of Common Stock outstanding during the period. In addition to the weighted average shares of Common Stock outstanding, common equivalent shares from stock options, RSUs, warrants and preferred shares using the treasury stock method, are included in the diluted per share calculations unless the effect of inclusion would be antidilutive. During the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, outstanding stock options, RSUs, warrants and preferred shares of ~~23,849,633~~18,131,489 and ~~10,037,017,~~23,849,633, respectively, were not included in the computation of diluted earnings per common share, because to do so would have had an antidilutive effect. During the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, outstanding stock options, RSUs, warrants and preferred shares of ~~17,334,492~~17,528,530 and ~~7,747,726,~~17,334,492, respectively, were not included in the computation of diluted earnings per common share, because to do so would have had an antidilutive effect. Included in the three and six months ended June 30, 2019 and 2018 are the Series B shares as converted to common stock.

~~12.~~11. Commitments and contingencies:

The Company is involved from time to time in routine legal matters incidental to our business. Based upon available information, the Company believes that the resolution of such matters will not have a material adverse effect on its condensed consolidated financial position or results of operations. Except as discussed below, the Company is not the subject of any pending legal proceedings and, to the knowledge of management, no proceedings are presently contemplated against the Company by any federal, state or local governmental agency.

Indivior (formerly RB Pharmaceuticals Ltd.) and Aquestive Therapeutics (formerly MonoSol Rx)

The following disclosure regarding the Company’s ongoing litigations with Aquestive Therapeutics, Inc. (formerly MonoSol Rx, “Aquestive”) and Indivior PLC (formerly RB Pharmaceuticals Limited, “Indivior”) is intended to provide some background and an update on the matter as required by the rules of the SEC. Additional details regarding the past procedural history of the matter can be found in the Company’s previously filed periodic filings with the SEC.

Litigation related to BUNAVAIL^®

On October 29, 2013, Reckitt Benckiser, Inc., Indivior, and Aquestive (collectively, the “RB Plaintiffs”) filed an action against the Company relating to its BUNAVAIL product in the United States District Court for the Eastern District of North Carolina (“EDNC”) for alleged patent infringement. BUNAVAIL is a drug approved for the maintenance treatment of opioid dependence. The RB Plaintiffs claim that the formulation for BUNAVAIL, which has never been disclosed publicly, infringes its US Patent No. 8,475,832 (the “‘832 Patent”). On May 21, 2014, the Court granted the Company’s motion to dismiss.

On January 22, 2014, Aquestive initiated an inter partes review (“IPR”) on U.S. Patent No. 7,579,019, the (“‘019 Patent”). The PTAB upheld all claims of the Company’s ‘019 Patent in 2015 and this decision was not appealed by Aquestive.

On September 20, 2014, the Company proactively filed a declaratory judgment action in the United States District Court for the EDNC requesting the Court to make a determination that the Company’s BUNAVAIL product does not infringe the ‘832 Patent, US Patent No. 7,897,080 (the “‘080 Patent”) and US Patent No. 8,652,378 (the “‘378 Patent”). The Company invalidated the “‘080 Patent” in its entirety in an inter partes reexamination proceeding. The Company invalidated all relevant claims of the ‘832 Patent in an IPR proceeding. And, in an IPR proceeding for the ‘378 Patent, in its decision not to institute the IPR proceeding, the PTAB construed the claims of the ‘378 Patent narrowly. Shortly thereafter, by joint motion of the parties, the ‘378 Patent was subsequently removed from the action.

On June 6, 2016, in an unrelated case in which Indivior and Aquestive asserted the ‘832 Patent against other parties, the Delaware District Court entered an order invalidating other claims in the ‘832 Patent. Indivior and Aquestive cross-appealed all adverse findings in that decision to the Court of Appeals for the Federal Circuit in CaseNo. 17-2587. The Company’s declaratory judgment action remains stayed pending the outcome of that cross-appeal by Indivior and Aquestive.

On September 22, 2014, ~~Reckitt Benckiser, Inc., RB Pharmaceuticals Limited, and Aquestive Therapeutics, Inc. (“Aquestive”) (collectively, the “RB Plaintiffs”)~~ the RB Plaintiffs filed an action against the Company (and the Company’s commercial partner) relating to the Company’s BUNAVAIL^®product in the United States District Court for the District of New Jersey for alleged patent infringement. The RB Plaintiffs claim that BUNAVAIL,^®, whose formulation and manufacturing processes have never been disclosed publicly, infringes its patent U.S. Patent No. 8,765,167 (the “‘167 Patent”). The Company believes this is an anticompetitive attempt by the RB Plaintiffs to distract the Company’s efforts from commercializing ~~BUNAVAIL~~^®.BUNAVAIL. On December 12, 2014, the Company filed a motion to transfer the case from New Jersey to North Carolina and a motion to dismiss the case against its commercial partner. The Court issued an opinion on July 21, 2015 granting the Company’s motion to transfer the venue to the United States District for the Eastern District of North Carolina (“EDNC”) but denying the Company’s motion to dismiss the case against the Company’s commercial partner as moot. The Company has also filed a Joint Motion to Stay the case in the EDNC at the end of April 2016, which was granted by the court on May 5, 2016. Thus, the case is now stayed until a final resolution of the ‘167 Patent~~inter partesreview (“IPR”) in the United States Patent and Trademark Office (“USPTO”).~~

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(U.S. DOLLARS, IN ~~THOUSANDS)~~THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(Unaudited)

~~12. Commitments and contingencies (continued):~~

~~In a related matter, on~~On October 28, 2014, the Company filed multiple IPR petitions on certain claims of the ‘167 Patent. The USPTO instituted three of the four IPR petitions. The PTAB upheld the claims and denied collateral estoppel applied to the PTAB decisions in March 2016. The Company appealed to Court of Appeals for the Federal Circuit. The USPTO intervened with respect to whether collateral estoppel applied to the PTAB. ~~The Federal Circuit did not issue an affirmance without opinion after the February 7, 2018 oral argument.~~ On June 19, 2018, the Company filed a motion to remand the case for further consideration by the PTAB in view of intervening authority. On July 31, 2018, the Federal Circuit vacated the decisions, and remanded the ‘167 Patent IPRs for further consideration on the merits. On February 7, 2019, the PTAB issued three decisions on remand purporting to deny institution of the three previously instituted IPRs of the ‘167 patent. On March 11, 2019, the Company timely appealed the PTAB decisions on remand to U.S. Court of Appeal for the Federal Circuit. On March 20, 2019, Aquestive and Indivior moved to dismiss the appeal, and the Company opposed that motion.

Litigation related to BELBUCA^®

On January 13, 2017, Aquestive filed a complaint in the United States District Court for the District of New Jersey alleging BELBUCA^® infringes the ‘167 Patent. In lieu of answering the complaint, the Company filed motions to dismiss the complaint and, in the alternative, to transfer the case to the EDNC. ~~Briefing on the motions was completed on June 21, 2017.~~ On July 25, 2017, the New Jersey Court administratively terminated the case pending the parties submission of a joint stipulation of transfer because the District of New Jersey was an inappropriate venue. This case was later transferred to the Delaware District Court. On October 31, 2017, the Company filed motions to dismiss the complaint and, in the alternative, to transfer the case to the EDNC. ~~Briefing on~~On October 16, 2018, denying the ~~motions was completed on December 8, 2017. The Company anticipates receiving a decision on the motions from~~motion to dismiss as moot, the Delaware District Court bygranted the ~~4th quarter of~~Company’s motion to transfer the case to the EDNC. On November 20, 2018, or the ~~1st quarter of 2019.~~Company moved the EDNC to dismiss the complaint for patent infringement for failure to state a claim for relief. On August 6, 2019, the EDNC granted the Company’s motion to dismiss, and dismissed the complaint without prejudice. The Company strongly refutes as without merit Aquestive’s assertion of patent infringement and will vigorously defend the lawsuit.

Teva Pharmaceuticals USA (formerly Actavis)

On February 8, 2016, the Company received a notice relating to a Paragraph IV certification from Teva Pharmaceuticals USA, or (formerly Actavis, “Teva”) seeking to find invalid three Orange Book listed patents relating specifically to BUNAVAIL. The Paragraph IV certification related to an ANDA filed by Teva with the FDA for a generic formulation of BUNAVAIL. The patents subject to Teva’s certification were the ‘019 Patent, U.S. Patent No. 8,147,866 (the “‘866 Patent”) and 8,703,177 (the “‘177 Patent”).

On March 18, 2016, the Company asserted three different patents against Teva, the ‘019 Patent, the ‘866 Patent, and the ‘177 Patent. Teva did not raisenon-infringement positions about the ‘019 and the ‘866 Patents in its Paragraph IV certification. Teva did raise anon-infringement position on the ‘177 Patent but the Company asserted in its complaint that Teva infringed the ‘177 Patent either literally or under the doctrine of equivalents.

On December 20, 2016 the USPTO issued U.S. Patent No. 9,522,188 (“the “‘188 Patent””), and this patent was properly listed in the Orange Book as covering the BUNAVAIL product. On February 23, 2017 Teva sent a Paragraph IV certification adding the 9,522,188 to its ANDA. An amended Complaint was filed, adding the ‘188 Patent to the litigation.

On January 31, 2017, the Company received a notice relating to a Paragraph IV certification from Teva relating to Teva’s ANDA on additional strengths of BUNAVAIL and on March 16, 2017, the Company brought suit against Teva and its parent company on these additional strengths. On June 20, 2017, the Court entered orders staying both BUNAVAIL suits at the request of the parties.

On May 23, 2017, the USPTO issued U.S. Patent 9,655,843 (the “‘843 Patent”) relating to the BEMA technology, and this patent was properly listed in the Orange Book as covering the BUNAVAIL product.

Finally, on October 12, 2017, the Company announced that it had entered into a settlement agreement with Teva that resolved the Company’s BUNAVAIL patent litigation against Teva pending in the U.S. District Court for the District of Delaware. As part of the Settlement Agreement, which is subject to review by the U.S. Federal Trade Commission and the U.S. Department of Justice, the Company has entered into anon-exclusive license agreement with Teva that permits Teva to first begin selling its generic version of BUNAVAIL in the U.S. on July 23, 2028 or earlier under certain circumstances. Other terms of the agreement are confidential.

The Company received notices regarding Paragraph IV certifications from Teva on November 8, 2016, November 10, 2016, and December 22, 2016, seeking to find invalid two Orange Book listed patents relating specifically to ~~BELBUCA~~^®.BELBUCA. The Paragraph IV certifications ~~related~~relate to three ANDAs filed by Teva with the FDA for a generic formulation of ~~BELBUCA~~^®.BELBUCA. The patents subject to Teva’s certification were ~~U.S.~~the ‘019 Patent ~~No. 7,579,019 (the “‘019 Patent”)~~ and ~~U.S. Patent No. 8,147,866 (the “‘866 Patent”) . Under~~ the Hatch-Waxman Amendments, after receipt of a valid Paragraph IV notice, the Company brought a patent infringement suit in federal district court against Teva USA within 45 days from the date of receipt of the certification notice.‘866 Patent. The Company filed complaints in Delaware against Teva on December 22, 2016 and February 3, 2017 ~~thus~~in which it asserted against Teva the ‘019 Patent and the ‘866 Patent. Teva did not contest infringement of the claims of the ‘019 Patent and did not contest infringement of the claims of the ‘866 Patent.

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(U.S. DOLLARS, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(Unaudited)

The ‘019 Patent had already been the subject of an unrelated IPR before the USPTO under which the Company prevailed, and all claims of the ‘019 Patent survived. Aquestive’s request for rehearing of the final IPR decision regarding the ‘019 Patent was ~~entitled to receive a 30 month stay on the FDA’s ability to give final approval to any proposed products that reference BELBUCA~~^®^. ~~The30-month~~ ~~stay was expected to preempt any final approval~~denied by the ~~FDA~~USPTO on ~~Teva’s ANDA Nos. 209704~~December 19, 2016. Aquestive did not file a timely appeal at the Federal Circuit.

On May 23, 2017, the USPTO issued U.S. Patent 9,655,843 (the “‘843 Patent”) relating to the BEMA technology, and ~~209772 until~~this patent was properly listed in the Orange Book as covering the BELBUCA product.

On August 28, 2017, the Court entered orders staying both BELBUCA suits at ~~least May~~the request of ~~2019 and for Teva’s ANDA No. 209807 until at least June of 2019.~~the parties.

In February 2018, the Company announced that it had entered into a settlement agreement with Teva that resolved the Company’s BELBUCA^® patent litigation against Teva pending in the U.S. District Court for the District of Delaware. As part of the settlement agreement, which is subject to review by the U.S. Federal Trade Commission and the U.S. Department of Justice, the Company has granted Teva anon-exclusive license (for which the Company will receive no current or future payments) that permits Teva to first begin selling the generic version of the Company’s BELBUCA^® product in the U.S. on January 23, 2027 or earlier under certain circumstances (including, for example, upon (i) the delisting of thepatents-in-suit from the U.S. FDA Orange Book, (ii) the granting of a license by us to a third party to launch another generic form of BELBUCA^® at a date prior to January 23, 2027, or (iii) the occurrence of certain conditions regarding BELBUCA market share). Other terms of the Agreement are confidential.

Alvogen

On September 7, 2018, the Company filed a complaint for patent infringement in Delaware against Alvogen Pb Research & Development LLC, Alvogen Malta Operations Ltd., Alvogen Pine Brook LLC, Alvogen, Incorporated, and Alvogen Group, Incorporated (collectively, “Alvogen”), asserting that Alvogen infringes the Company’s Orange Book listed patents for BELBUCA^®, including U.S. Patent Nos. 8,147,866 and 9,655,843, both expiring in July of 2027, and U.S. Patent No. 9,901,539, expiring in December of 2032. This complaint follows receipt by the Company on July 30, 2018 of a Paragraph IV Patent Certification from Alvogen stating that Alvogen had filed an ANDA with the FDA for a generic version of BELBUCA^® ~~market share)~~Buccal Film (75 mcg, 150 mcg, 300 mcg, 450 mcg, 600 mcg, 750 mcg and 900 mcg). Because the Company initiated a patent infringement suit to defend the patents identified in the Paragraph IV notice within 45 days after receipt of the Paragraph IV Certification, the FDA is prevented from approving the ANDA until the earlier of 30 months or a decision in the case that each of the patents is not infringed or invalid. Alvogen’s notice letter also does not provide any information on the timing or approval status of its ANDA.

In its Paragraph IV Certification, Alvogen does not contest infringement of at least several independent claims of each of the ’866, ’843, and ’539 patents. Rather, Alvogen advances only invalidly arguments for these independent claims. The Company believes that it will be able to prevail on its claims of infringement of these patents, particularly as Alvogen does not contest infringement of certain claims of each patent. Additionally, as the Company has done in the past, it intends to vigorously defend its intellectual property against assertions of invalidity. Each of the three patents carry a presumption of validity, which can only be overcome by clear and convincing evidence.

2018 Arkansas Opioid Litigation

On March 15, 2018, the State of Arkansas, and certain counties and cities in that State, filed an action in the Circuit Court of Arkansas, Crittenden County against multiple manufacturers, distributors, retailers, and prescribers of opioid analgesics, including ~~our~~the Company. The Company was served with the complaint on April 27, 2018. The complaint specifically alleged that ~~the Company~~it licensed its branded fentanyl buccal soluble film ONSOLIS^®to Collegium, ~~Pharmaceutical Inc. (“Collegium”),~~ and Collegium is also named as a defendant in the lawsuit. ONSOLIS^® is not presently sold in the United States and the license agreement with Collegium was terminated prior to Collegium launching ONSOLIS^® in the United States. Therefore, on June 28, 2018, the Company moved to dismiss the case against ~~them~~it and most recently, on July 6, 2018, the plaintiffs filed a notice to voluntarily dismiss ~~the Company~~us from the Arkansas case, without prejudice.

Chemo Research, S.L

On March 1, 2019, the Company filed a complaint for patent infringement in Delaware against Chemo Research, S.L., Insud Pharma S.L., IntelGenx Corp., and IntelGenx Technologies Corp. (collectively, “Defendants”), asserting that the Defendants infringe its Orange Book listed patents for BELBUCA, including U.S. Patent Nos. 8,147,866 and 9,655,843, both expiring in July of 2027, and U.S. Patent No. 9,901,539 expiring December of 2032. This complaint follows a receipt by the Company on January 31, 2019, of a Notice Letter from Chemo Research S.L. stating that it has filed with the FDA an ANDA containing a Paragraph IV Patent Certification, for a generic version of BELBUA Buccal Film in strengths 75 mcg, 150 mcg, 300 mcg, 450 mcg, and 900 mcg. Because the Company initiated a patent infringement suit to defend the patents identified in the Notice Letter within 45 days after receipt, the FDA is prevented from approving the ANDA until the earlier of 30 months or a decision in the case that each of the patents is not

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(U.S. DOLLARS, IN ~~THOUSANDS)~~THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(Unaudited)

~~13. Subsequent events:~~

infringed or invalid. Chemo Research S.L.’s Notice Letter also does not provide any information on the timing or approval status of its ANDA. On ~~August 2, 2018,~~March 15, 2019, the Company filed a complaint against the Defendants in ~~connection with~~New Jersey asserting the ~~Company’s 2018 Annual Meeting of Stockholders (the “Meeting”),~~same claims for patent infringement made in the ~~Company’s stockholders approved, among other matters,~~Delaware lawsuit. On April 19, 2019, Defendants filed an answer to the ~~following;~~

~~The Company’s Certificate of Incorporation was amended to increase the number of authorized shares of Common Stock from 75,000,000 to 125,000,000; and~~

~~The ratification~~Delaware complaint wherein they denied infringement of the ~~issuance~~‘866, ‘843 and ~~sale~~‘539 patents and asserted counterclaims seeking declaratory relief concerning the alleged invalidity andnon-infringement of such patents. On April 25, 2019, the ~~Company’s Series B Preferred Stock, par value $.001 per share, and~~Company voluntarily dismissed the ~~issuance~~New Jersey lawsuit given Defendants’ consent to jurisdiction in Delaware.

The Company believes that it will be able to prevail in this lawsuit. As it has done in the past, the Company intends to vigorously defend its intellectual property against assertions of ~~Common Stock issuable upon the conversion of the Series B Preferred Stock as required by and in accordance with NASDAQ Marketplace Rule 5635(d).~~invalidity.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included elsewhere in this Quarterly Report. This discussion contains certain forward-looking statements that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those discussed in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth herein and elsewhere in this Quarterly Report and in our other filings with the SEC. See “Cautionary Note Regarding Forward Looking Statements” below.

Overview

Strategy

We are a specialty pharmaceutical company that is developing and commercializing, either on our own or in partnerships with third parties, new applications of approved therapeutics to address important unmet medical needs using both proven and new drug delivery technologies. We have developed and are continuing to develop pharmaceutical products aimed principally in the areas of pain management and addiction.

Our strategy is ~~to:~~

~~Focus~~evolving with the establishment of our commercial ~~and development efforts~~footprint in the ~~areas~~management of ~~pain management~~chronic conditions. We seek to build a well-balanced, diversified, high-growth specialty pharmaceutical company. Through our industry-leading commercialization infrastructure, we are executing the commercialization of our existing products. As part of our corporate growth strategy, we have licensed, and ~~addiction within the U.S. pharmaceutical marketplace;~~

~~Market our products through specialty sales teams by primarily focusing on high-prescribing U.S. physicians working with patients in the pain and addiction space; and~~

~~Identify and~~will continue to explore opportunities to acquire ~~rights to~~or license additional products that meet the needs of patients living with debilitating chronic conditions and treated primarily by therapeutic specialists. As we ~~believe have potential~~gain access to these drugs and technologies, we intend to employ our commercialization experience to bring them to the marketplace. With a strong commitment to patient access and a focused business-development approach for ~~near-term regulatory approval through the 505(b)(2) approval process of the U.S Food~~transformative acquisitions or licensing opportunities, we intend to leverage our experience and ~~Drug Administration (“FDA”) or are already FDA approved,~~

~~We believe this strategy will allow~~apply it to developing new partnerships that enable us to ~~increase our revenues, improve our margins as we seek profitability and enhance stockholder value.~~commercialize novel products that can change the lives of people suffering from debilitating chronic conditions.

Second Quarter and Recent Highlights

On ~~May 7, 2018,~~April 4, 2019, we ~~announced~~entered into an exclusive licensing agreement with Shionogi, Inc. to commercialize Symproic in the ~~appointment~~United States and Puerto Rico effective immediately, for the treatment of ~~Herm Cukier as~~opioid-induced constipation (“OIC”) in adults with chronicnon-cancer pain.

On April 15, 2019, we completed an underwritten public offering by us and a selling stockholder of 12,000,000 shares of common stock at a public offering price of $5.00 per share. The gross proceeds from our ~~new Chief Executive Officer~~portion of the offering (10,000,000 shares), before deducting the underwriter discounts and ~~member of our board of directors, effective as of May 8, 2018.~~commission and other offering expenses, was $50.0 million, or net $47.6 million. The gross proceeds to the selling stockholder was approximately $10.0 million.

On May ~~17, 2018,~~23, 2019, we ~~announced that we had entered into an~~refinanced our existing debt agreement with a new facility from BioPharma Credit plc (“Pharmakon”). The new facility consists of a $60.0 million term loan and will generate an ~~affiliate of Broadfin Capital LLC~~estimated $1.5 million in annual interest cost savings compared to the previous debt facility.

•

On July 1, 2019, we were added to the broad-market Russell 3000^® Index as well as the Russell 2000^® Index at the conclusion of the 2019 Russell indexes annual reconstitution.

On June 24, 2019, we shared how our scientific investments for BELBUCA throughout 2019, including clinical trials, publications, and medical education initiatives align with the recommendations regarding buprenorphine from the recently released Pain Management Best Practices Inter-Agency Task Force’s (“~~Broadfin”~~Task Force”)~~, a large BDSI stockholder, to reconstitute our Board of Directors~~ final report which proposes best practices for managing chronic and ~~to significantly strengthen our financial position. The closing of this agreement was subject to and effective upon the closing of our $50 million equity financing described below.~~acute pain.

On ~~May 17, 2018,~~July 9, 2019, we announced that ~~we had entered into definitive agreements~~several regional health care plans improved patient access to BELBUCA during the second quarter of this year. Several prominent regional U.S. insurance plans representing an additional six million covered lives enhanced BELBUCA’s coverage to preferred status or initiated coverage for BELBUCA. These six million covered lives brings the total number of commercial lives with ~~existing institutional and other accredited investors~~access to ~~purchase an aggregate of approximately $50~~BELBUCA to more than 165 million, ~~worth of our newly designated Series BNon-Voting~~ ~~Convertible Preferred Stock (“Series B Preferred Stock”) in a registered direct offering.~~

~~On May 22, 2018, we announced the closing~~representing more than 90% of the $50 million registered direct offering of newly designated Series B Stock. The offering closed on May 21, 2018, yielding net proceeds of $47.9 million to BDSI. As part of the financing closing, Broadfin Managing Partner Kevin Kotler joined our board, along with Todd Davis and Peter Greenleaf, who were selected by Broadfin. Furthermore, Peter Greenleaf has been named Chairman of our Board of Directors effective immediately.

On August 2, 2018, in connection with our 2018 Annual Meeting of Stockholders, our stockholders approved, among other matters, (i) to amend our Certificate of Incorporation to increase the number of authorized shares of Common Stock from 75,000,000 to 125,000,000; and (ii) to ratify the issuance and sale of our Series B Preferred Stock, par value $.001 per share, and to approve the issuance of Common Stock issuable upon the conversion of the Series B Preferred Stock as required by and in accordance with NASDAQ Marketplace Rule 5635(d).U.S. commercial insurance market.

Our Products and Related Trends

Our product portfolio currently consists of four ~~products. As of the date of this report, three~~ products that are approved by the ~~FDA and one is development.~~FDA. Three of ~~these four~~our products utilize our patented BEMA^® thin film drug delivery technology.

BELBUCA

•

~~BELBUCA~~^® ~~is indicated~~

BELBUCA (buprenorphine buccal film) is a buccal film that contains buprenorphine, a Schedule III opioid, and was approved by the FDA in October 2015 for use in patients with pain severe enough to require daily,around-the-clock, long-term opioid treatment for which alternative options are inadequate. BELBUCA is differentiated from other opioids and has the potential to address some of the most critical issues facing healthcare providers treating chronic pain with prescription opioids – abuse, misuse, addiction and the ~~management of chronic pain severe enough to require daily,around-the-clock,~~ long-term opioid treatment and for which alternative treatment options are inadequate. This product was originally licensed on a worldwide basis to Endo. On October 26, 2015, we announced with Endo that the FDA approved BELBUCA^®~~. BELBUCA~~^® ~~was launched by Endo in February 2016. On December 7, 2016, we entered into an agreement with Endo~~

~~terminating Endo’s licensing of rights for BELBUCA~~^®. This followed a strategic decision made by Endo to discontinue commercial efforts in the branded pain business. On January 6, 2017, we announced the closing of the transaction to reacquire the license to BELBUCA^® ~~from Endo. As a result, the worldwide rights to BELBUCA~~^® ~~were transferred back to us. Behind a revised commercialization plan, we are leveraging our existing sales force to capitalize on commercial synergies with BUNAVAIL~~^®~~. This effort is a focused commercial approach targeting identified healthcare providers which we believe create the potential to incrementally grow BELBUCA~~^® ~~sales without the requirement for significant resources. We also will explore other options for longer-term growth for BELBUCA~~^®~~. Inmid-February~~ ~~2017, we completed the expansion and training of our sales force, allowing for promotion of BELBUCA~~^® ~~to commence in full in late February. We further expanded our sales force beginning of January 2018 to support the commercialization efforts. BELBUCA~~^® ~~and BUNAVAIL~~^® are currently supported by a field force of approximately eighty-five sales representatives and nine regional sales managers. As previously disclosed, the launch has been more challenging because of the increased scrutiny over the prescribing of opioids that is driven by the Centers for Disease Control and Prevention guidelines issued in March 2016. The difference that BELBUCA^® offers over the Schedule II opioids, such as oxycodone, hydrocodone, morphine, etc., include less addiction and abuse potential along with a ceiling effect on respiratory depression. The approval of BELBUCA^® ~~carries a standard post-approval requirement by the FDA to conduct a study to determine the effect of BELBUCA~~^® ~~on QT prolongation (i.e. an abnormal lengthening of the heartbeat). Also required is a study assessing the safety and efficacy of BELBUCA~~^® in pediatric patients and participation in a consortium with other holders of NDAs for long-acting opioids to assess and better understand the risk of abuse, misuse, addiction and overdose with opioids. Prescription sales of BELBUCA have significantly increased since promotion began.

risk of overdose. Compared to currently marketed products and products under development, we believe that BELBUCA is differentiated based on the following features:

•

~~BUNAVAIL~~^® ~~was approved by the FDA in June 2014 and is indicated for the treatment of opioid dependence. BUNAVAIL~~^® ~~uses our BEMA~~^® ~~technology combined with buprenorphine in tandem with naloxone, an opioid antagonist. We are commercializing BUNAVAIL~~^® ~~ourselves and launched the product during the fourth quarter of 2014. We have been actively engaged in efforts to optimize our commercialization of BUNAVAIL~~^® ~~with particular emphasis in 2016 on better aligning costs with revenue and reducing spending. We will seek to continue to manage our BUNAVAIL~~^® business by focusing sales efforts on those healthcare providers who have been prescribers of BUNAVAIL. And we will continue to use published data evidencing “diversion” (i.e., the illicit use of a legally prescribed controlled substance) associated with the market leader’s product and highlight the other attributes of BUNAVAIL^® ~~as we seek to win additional managed care contracts. We also believe there will be an opportunity to introduce more patients to BUNAVAIL~~^® with the lifting of the long-standing limit from 100 to 275 (as outlined in the final ruling by HHS and effective on August 8, 2016), the number of patients per physician that can be treated at any given time with buprenorphine and more recent legislation allowing nurse practitioners and physician assistants to prescribe buprenorphine for opioid dependence. We will continue to closely monitor commercial efforts and seek to increase revenue and profitability, as well as evaluate all options available to preserve the long-term prospects for and maximize the value of BUNAVAIL^®~~. Separately, as with all other buprenorphine containing products for opioid dependence, the approval of BUNAVAIL~~^® ~~carries a standard post-approval requirement by the FDA to conduct a study to determine the effect of BUNAVAIL~~^® ~~on QT prolongation.~~

•

~~ONSOLIS~~^® ~~is approved in the U.S., the EU (where it is marketed as BREAKYL~~^™~~) and Taiwan (where it is marketed as PAINKYL™), for the management of breakthrough pain in opioid tolerant adult patients with cancer. ONSOLIS~~^® ~~utilizes our BEMA~~^® ~~thin film drug delivery technology in combination with fentanyl. The commercial rights to ONSOLIS~~^® were originally licensed to Meda, a subsidiary of Mylan N.V., in 2006 and 2007 for all territories worldwide except for Taiwan (where it is licensed to TTY) and South Korea. The marketing authorization for ONSOLIS^® was returned to us in early 2015 as part of an assignment and revenue sharing agreement with Meda for the United States, Canada and Mexico. Such agreement also facilitated the approval of a new formulation of ONSOLIS^® ~~in the U.S. We are currently assessing our commercial options for ONSOLIS~~^®.

~~Buprenorphine Extended Release Injection~~strong and durable efficacy in both opioid naïve and opioid experienced patients;

Schedule III designation by DEA, which indicates less abuse and addiction potential compared to Schedule II opioids, which include oxycodone, hydrocodone and morphine;

in published studies, investigators observed that respiratory depression from buprenorphine administration reached a plateau, and we believe this ceiling effect may result in a lower risk of overdose related respiratory depression;

favorable tolerability with a low incidence of constipation and low discontinuation rate;

flexible dosing options with seven available strengths; and

buccal administration to optimize buprenorphine delivery.

We believe that there are long-term growth opportunities for BELBUCA and we focus our commercial efforts primarily on BELBUCA. Our sales force is focused on current BELBUCA prescribers and clinicians we believe have the greatest opportunity to be adopters of BELBUCA. As of January 2019, BELBUCA had formulary coverage for more than 88% of commercial lives.

The risks to our company associated with BELBUCA include: (i) inability to manufacture adequate supplies for commercial use; (ii) unexpected product safety issues; (iii) failure of our sales force to effectively sell the product and, (iv) inadequate reimbursement. A technical or commercial failure of BELBUCA would have a material adverse effect on our future revenue potential and would negatively affect investor confidence in ~~development as an injectable, extended release, microparticle formulation of buprenorphine~~our company and our public stock price.

SYMPROIC

Symproic is a peripherallyacting mu-opioid receptor antagonist, or PAMORA, and was approved by the FDA on March 23, 2017 for the treatment of opioid-induced constipation in adult patients withchronic non-cancer pain, including patients with chronic pain related to prior cancer or its treatment who do not require frequent (e.g., weekly) opioid dosage escalation. OIC occurs primarily via activation of entericmu-receptors in the small intestine and proximal colon, which results in harder stool and less frequent and less effective defecation. Because OIC results from the specific effects of opioids, it differs mechanistically from other forms of constipation, and deserves dedicated medical management. Compared to currently marketed products and products under development for OIC, we believe that Symproic is differentiated based on the following features:

strong and durable efficacy observed in randomized, double-blind, placebo controlled clinical trials of 12 week and 52 week duration in OIC patients;

OIC relief that was more frequent, more complete, with less straining than patients taking placebo

recommended by the American Gastroenterological Association for patients with laxative refractory OIC;

adverse event profile comparable to placebo, with low rates of abdominal pain observed across the phase III program; and

the only prescription OIC medication with the convenience of once daily dosing, with only a tablet strength, and that can be taken with or without food and with or without laxatives.

Because of the durable efficacy, tolerability and convenience benefits, we believe that Symproic isa best-in-class PAMORA that reliably provides durable relief of OIC, which frees both the patient and the healthcare provider to focus on treating the patient’s chronic pain.

We believe that there are long-term growth opportunities for Symproic. In 2018, according to data from Symphony Health, the market for PAMORAs included over 550,000 prescriptions dispensed. This represents a 1% growth in prescription volume from 2017. The growth rate of the PAMORAs has slowed since 2017, driven by a decline in opioid prescription rates.

The risks to our company associated with Symproic include: (i) unexpected product safety issues; (ii) inability to continue to supply product in adequate quantities to meet the commercial demand; (iii) inability to continue to reduce Symproic manufacturing costs; (iv) failure of our sales force to effectively sell the product and, (v) inadequate reimbursement.

BUNAVAIL

In June 2014, BUNAVAIL (buprenorphine and naloxone buccal film) was approved by the FDA for the maintenance treatment of opioid dependence as part of a complete treatment plan to include counseling and ~~chronic pain,~~psychosocial support. BUNAVAIL contains the ~~rights~~

partial opioid agonist buprenorphine, which binds to ~~which we secured~~the same receptors as opiate drugs but has a higher affinity, and naloxone, an opioid antagonist and an abuse deterrent.

BUNAVAIL provides an alternative treatment utilizing the advanced BEMA drug delivery technology. BUNAVAIL has approximately twice the bioavailability of sublingual buprenorphine-containing products for opioid dependence, allowing for effective treatment with half the dose when ~~we entered into~~compared to Suboxone film. Additionally, BUNAVAIL offers convenient and discrete buccal administration and avoids the need for patients to avoid talking and swallowing during administration. BUNAVAIL has demonstrated an excellent tolerability profile, with a ~~definitive development and exclusive license option agreement~~68% reduction in the incidence of constipation at the end of 12 weeks in a Phase 3 trial in patients converted from ~~Evonik in October 2014. In 2015, we completed initial development work and preclinical studies which have~~Suboxone sublingual tablets or film to BUNAVAIL. The impact of a growing generic Suboxone market has resulted in ~~the identification of~~declining market conditions, and as such, BUNAVAIL is no longer a ~~formulation we believe~~core strategic asset for our Company.

Our BUNAVAIL efforts are focused on current BUNAVAIL prescribers and on increasing prescriptions related to current, upcoming and future managed care contracts where BUNAVAIL is ~~capable of providing 30 days of continuous buprenorphine treatment. We submitted an Investigational New Drug application (“IND”) for this~~placed in a favorable formulary position.

The risks to our company associated with BUNAVAIL include: (i) unexpected product ~~candidate to the FDA in December 2016.~~

~~We expect~~safety issues; (ii) inability to continue to supply product in adequate quantities to meet the commercial demand; (iii) inability to continue to reduce BUNAVAIL manufacturing costs; (iv) failure of our ~~research~~sales force to effectively sell the product and, ~~development~~(v) inadequate reimbursement.

ONSOLIS

In July 2009, ONSOLIS (fentanyl buccal soluble film) was approved for the management of ~~pharmaceutical products~~pain that “breaks through” the effects of other medications being used to control persistent pain, or breakthrough pain, in cancer patients 18 years of age and ~~related drug delivery technologies, some~~older who are already receiving and who are tolerant to opioid therapy for their underlying persistent cancer pain. We refer to breakthrough pain in opioid tolerant patients with cancer as BTCP. ONSOLIS provides significant reduction in pain for patients suffering from BTCP in a convenient formulation with a range of ~~which will be funded by our~~doses to allow patients to titrate to an adequate level of pain control. We are not currently assessing options for U.S. commercialization ~~agreements.~~ of ONSOLIS. Given current declining market conditions, we have no plans to reintroduce the product in the US at this time. The product is no longer strategic for the Company.

We will continue to seek additional license ~~agreements, which may include upfront payments.~~agreements. We anticipate that funding for the next several years will come primarily from earnings from sales of BELBUCA,^® Symproic and BUNAVAIL,^®, milestone payments and royalties from ~~Meda~~Mylan and ~~TTY, potential sales of securities and collaborative research agreements, including those with pharmaceutical companies.~~

~~Update on Activities in the U.S. for ONSOLIS~~^®

~~On January 27, 2015, we announced that we had entered into an assignment and revenue sharing agreement with Meda to return to us the marketing authorizations for ONSOLIS~~^® ~~for the U.S. and the right to seek marketing authorizations for ONSOLIS~~^® ~~in Canada and Mexico.~~

~~On May 11, 2016, we announced the signing of a licensing agreement under which we granted the exclusive rights to commercialize ONSOLIS~~^® ~~in the U.S. to Collegium. Under terms of the agreement, Collegium was responsible for the manufacturing, distribution, marketing and sales of ONSOLIS~~^® ~~in the U.S. Meda continues to commercialize ONSOLIS~~^® ~~under the brand name BREAKYL~~^™ ~~in the E.U. However, on December 8, 2017, Collegium provided us the required90-day~~ ~~notice regarding termination of the license and development agreement for ONSOLIS~~^® ~~between us and Collegium. The license and development agreement for ONSOLIS~~^® ~~between us and Collegium formally ended on March 8, 2018.~~

~~Previous efforts to extend our supply agreement with our original ONSOLIS~~^® manufacturer Aveva, who was subsequently acquired by Apotex, were unsuccessful and the agreement expired. However, an alternate supplier was identified and data to support qualification of the new manufacturer was submitted to the FDA in June 2018. We are currently assessing options to commercialize ONSOLIS^® ~~including partnership or introducing ONSOLIS~~^® ~~utilizing the company’s existing pain sales force.~~TTY.

Results of Operations

Comparison of the three months ended June 30, ~~2018~~2019 and ~~2017~~2018

Product Sales. We recognized ~~$10.8~~$28.1 million and ~~$7.9~~$10.8 million in product sales during the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. The increase in 2019 is principally due to increased BELBUCA^® product sales from the utilization of managed care wins and the ~~expansion~~acquisition of ~~our salesforce in 2018.~~Symproic.

Product Royalty Revenues. We recognized ~~$1.4~~$1.5 million and ~~$0.6~~$1.4 million in product royalty revenue during the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. Of the aforementioned amounts, ~~$0.9~~$1.0 million and ~~$0.4~~$0.9 million, respectively, can be attributed to royalties on net sales of BREAKYL^™ under our license agreement with Meda. We recognized $0.5 million and ~~$0.2~~$0.5 million in PAINKYL^™ royalty revenue during the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, under our license agreement with TTY. ~~The revenue increase is principally due to higher BREAKYL~~^™ ~~royalty~~

Contract Revenues. We recognized $0.16 million in PAINKYL contract revenue during the three months ended June 30, ~~2018 as compared to June 30, 2017 as a result of increased sales of BREAKYL~~^™ ~~in the EU and PAINKYL~~^™ ~~in Taiwan.~~

~~Research and Development Reimbursements~~~~. We recognized $0.2 million of reimbursable revenue related to~~2019 under our license agreement with Collegium Pharmaceutical Inc. (“Collegium”) during the three months ended June 30, 2017. There was no such revenue recognized during the same period ended June 30, 2018, as Collegium terminated their agreement December 2017, which was effective March 2018.

~~Contract Revenues~~.TTY. We recognized $0.02 million in contract revenue during the three months ended June 30, ~~2017~~2018 related to our former license agreement with ~~Purdue. There was no such contract revenue during the three months ended June 30, 2017.~~Purdue for BELBUCA in Canada.

Cost of ~~Sales~~Sales.. We incurred ~~$4.6~~$4.9 million and ~~$4.2~~$4.6 million in cost of sales during the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. Cost of sales ~~during the three months ended June 30, 2018 was related primarily to BELBUCA~~^® ~~and BUNAVAIL~~^®~~, which included $3.6 million of~~includes product cost, royalties paid, depreciation, yield adjustments and ~~depreciation. Additionally, we paid a total of $0.4 million in~~ quarterly minimum royalty payments to CDC IV, LLC (“CDC”). ~~Cost of sales during the three months ended June 30, 2018 also included $0.5 million and $0.1 million related to BREAKYL~~^™ ~~and PAINKYL~~^™~~, respectively. Cost of sales during the three months ended June 30, 2017 was related primarily to BELBUCA~~^® ~~and BUNAVAIL~~^®~~, which included $2.4 million of product cost, royalties paid and depreciation, and $1.1 million of fair value of the inventory purchased related to the BELBUCA~~^® reacquisition. Additionally, we paid a total of $0.4 million in quarterly minimum royalty payments to CDC. Cost of sales during the three months ended June 30, 2017 also included $0.2 million and $0.02 million related to BREAKYL^™ ~~and PAINKYL~~^™~~, respectively.~~

Selling, General and Administrative ~~Expenses~~Expenses.. During the three months ended June 30, 2019 and 2018, ~~and 2017,~~selling, general and administrative expenses totaled ~~$14.0~~$22.0 million and ~~$16.0~~$14.0 million, respectively. Selling, general and administrative costs include commercialization costs for BELBUCA,^® BUNAVAIL and ~~BUNAVAIL~~^®,Symproic, legal, accounting and management wages, ~~and~~ consulting and professional fees, travel costs, stock based compensation and amortization. The increase in selling, general and administrative expenses during the three months ended June 30, 2019 is due to the increase in compensation expense related to our expansion efforts, increased marketing efforts and expenses related to the acquisition of Symproic.

Research and Development. We recognized $0.9 million of research and development expense during the three months ended June 30, 2018 related to allocated wages and compensation to approved products and product candidates. There was no such research and development expense during the three months ended June 30, 2019 due to the Company focusing entirely on commercialized products beginning in 2019.

Interest expense, net. During the three months ended June 30, 2019, we had net interest expense of $13.9 million. During the three months ended June 30, 2019, we had interest expense of $14.2 million, consisting of $11.9 million ofone-time costs associated with the refinancing, $1.9 million of scheduled interest payments relating to both loans, $0.3 million of related amortization of discount and ~~stock~~loan costs for both the old and new debt arrangements, and $0.1 million of warrant interest expense associated with the former CRG loan.

Theone-time expenses related to the payoff of the CRG loan consisted of $5.2 million in unamortized deferred loan fees, $3.9 million in unamortized warrant discount costs and $2.8 million in loan prepayment fees and realized losses, for a cumulative total of $11.9 million inone-time costs.

During the three months ended June 30, 2019, we also had interest income of $0.3 million.

During the three months ended June 30, 2018, we had net interest expense of $2.5 million, consisting of $1.4 million of scheduled interest payments, $0.8 million of related amortization of discount and loan costs and $0.3 million of warrant interest expense, all related to the former CRG loan.

Comparison of the six months ended June 30, 2018 and 2017

Product Sales. We recognized $47.8 million and $20.6 million in product sales during the six months ended June 30, 2019 and 2018, respectively. The increase in 2019 is principally due to increased BELBUCA product sales from the utilization of managed care wins and the acquisition of Symproic.

Product Royalty Revenues. We recognized $1.5 million and $1.8 million in product royalty revenue during the six months ended June 30, 2019 and 2018, respectively. Of the aforementioned amounts, $1.0 million and $0.9 million, respectively, can be attributed to royalty revenue from BREAKYL under our license agreement with Meda. We recognized $0.5 million and $0.9 million during the six months ended June 30, 2019 and 2018, respectively, in PAINKYL royalty revenue under our license agreement with TTY.

Contract Revenues.We recognized $0.16 million in PAINKYL contract revenue during the six months ended June 30, 2019 under our license agreement with TTY. We recognized $1.0 million in contract revenue during the six months ended June 30, 2018 related to our former license agreement with Purdue, which was for the Canadian commercial launch and related milestones.

Cost of Sales. We incurred $9.0 million and $8.0 million in cost of sales during the six months ended June 30, 2019 and 2018, respectively. Cost of sales includes product cost, royalties paid, depreciation, yield adjustments and quarterly minimum royalty payments to CDC.

Selling,GeneralandAdministrativeExpenses. During the six months ended June 30, 2019 and 2018, selling, general and administrative expenses totaled $38.9 million and $27.5 million, respectively. Selling, general and administrative costs include commercialization costs for BELBUCA, BUNAVAIL and Symproic, management wages and stock-based compensation, ~~expenses.~~legal, accounting and other professional fees, travel costs, and the amortization of our intangible assets including the license and distribution rights from the reacquisition of BELBUCA and the acquisition of Symproic. During the normal course of business, we accrue additional expenses for certain legal matters from time to time, including legal matters related to the protection and enforcement of our intellectual property. The amounts accrued for such legal matters are recorded within accrued expenses on the balance sheet. The ~~decrease~~increase in selling, general and administrative expenses during ~~2018 can be primarily attributed~~2019 is due to the ~~settlement of the Teva lawsuit which reduced legal costs~~increase in compensation expense related to our expansion efforts, increased marketing efforts and ~~the retirement of company executives which reduced stock compensation expenses.~~

~~During the three months ended June 30, 2018 and 2017, selling, general and administrative~~ expenses included $1.1 million and $2.5 million of stock compensation expenses, respectively. This is primarily composed of restricted stock unit expense for our executive management and board of directors. Also included in each of the three months ended June 30, 2018 and 2017 is amortization expense of $1.1 million for the intangible related to the ~~BELBUCA~~^® ~~reacquisition.~~

~~Interest expense~~. ~~During the three months ended June 30, 2018, we had net interest expense~~acquisition of $2.5 million, consisting of $1.4 million of scheduled interest payments, $0.8 million of related amortization of discount and loan costs and $0.3 million of warrant interest expense. During the three months ended June 30, 2017, we had net interest expense of $1.9 million, consisting of $1.4 million of scheduled interest payments, $0.3 million of related amortization of discount and loan costs and $0.2 million of warrant interest expense.

~~Comparison of the six months ended June 30, 2018 and 2017~~

~~Product Sales~~~~. We recognized $20.6 million and $15.7 million in product sales during the six months ended June 30, 2018 and 2017, respectively. The increase is principally due to increased BELBUCA~~^® product sales from the utilization of managed care wins and the expansion of our salesforce in 2018. Also included in the aforementioned product sales during the six months ended June 30, 2017 is $1.7 million of revenue recorded as a result of changing to the~~sell-in~~ ~~method as of January 1, 2017.~~

~~Product Royalty Revenues~~. We recognized $1.8 million and $2.3 million in product royalty revenue during the six months ended June 30, 2018 and 2017, respectively. Of the aforementioned amounts, $0.9 million and $1.2 million, respectively, can be attributed to royalty revenue from BREAKYL^™ ~~under our license agreement with Meda. We recognized $0.9 million and $0.4 million during the six months ended June 30, 2018 and 2017, respectively, in PAINKYL~~^™ ~~royalty revenue under our license agreement with TTY. We recognized $0.7 million in milestones related to our agreement with Endo for BELBUCA~~^® ~~during the six months ended June 30, 2017. The royalty revenue decrease results are primarily related to our former agreement with Endo, which revenues associated with BELBUCA~~^® ~~are now in Product Sales after the reacquisition.~~Symproic.

Research and ~~Development Reimbursements~~Development.. We recognized ~~$0.3~~$3.3 million of reimbursable revenue related to our agreement with Collegium during the six months ended June 30, 2017. There was no such revenue recognized during the same period ended June 30, 2018, as Collegium terminated their agreement December 2017, which was effective March 2018.

~~Contract Revenues~~.~~We recognized $1.0 million in contract revenue~~research and development expense during the six months ended June 30, 2018 related to ~~our license agreement with Purdue, which~~allocated wages and compensation to approved products and product candidates. There was ~~for the Canadian commercial launch~~no such research and ~~related milestones. We recognized $20.0 million of deferred revenue~~development expense during the six months ended June 30, ~~2017. The $20.0 million recognized~~2019 due to the Company focusing entirely on commercialized products beginning in ~~2017 was received in November 2015 as partial payment from Endo for the BELBUCA~~^® NDA approval. This amount was deferred upon receipt because it was contingently refundable to Endo if a third party generic product was introduced in the U.S. during the patent extension period from 2020 to 2027. However, we entered into a Termination Agreement with Endo on December 7, 2016 which terminated the BELBUCA^® ~~license to Endo effective January 6, 2017 and such deferred revenue was recognized.~~2019.

~~Cost of Sales~~Interest expense, net. We incurred $8.0 million and $9.8 million in cost of sales during the six months ended June 30, 2018 and 2017, respectively. Cost of sales during the six months ended June 30, 2018 was $6.7 million for both BELBUCA^® ~~and BUNAVAIL~~^®. Additionally, we paid a total of $0.75 million in quarterly minimum and royalty payments to CDC. Cost of sales during the six months ended June 30, 2018 also includes $0.4 million and $0.2 million related to BREAKYL^™ ~~and PAINKYL~~^™~~, respectively. Cost of sales during the six months ended June 30, 2017 was $8.5 million for both BELBUCA~~^® ~~and BUNAVAIL~~^®^. ~~Such product costs include manufacturing, royalties and depreciation and $2.0 million of fair value of the inventory purchased related to the BELBUCA~~^® reacquisition. Additionally, we paid a total of $0.75 million in quarterly minimum and royalty payments to CDC. Cost of sales during the six months ended June 30, 2017 also includes $0.4 million and $0.05 million related to BREAKYL^™ ~~and PAINKYL~~^™~~, respectively.~~

~~Selling,~~~~General~~~~and~~~~Administrative~~~~Expenses~~. During the six months ended June 30, ~~2018~~2019, we had interest expense of $16.8 million, consisting of $11.9 million ofone-time costs associated with the refinancing, $3.9 million of scheduled interest payments relating to both loans, $0.7

million of related amortization of discount and ~~2017, general and administrative expenses totaled $27.5 million and $29.2 million, respectively. Selling, general and administrative costs include commercialization~~loan costs for ~~BELBUCA~~^®both the old and ~~BUNAVAIL~~^®~~, management wages~~new debt arrangements, and ~~stock-based compensation, legal, accounting and other professional fees, travel costs, and~~$0.4 million of warrant interest expense associated with the ~~amortization of our intangible assets including the license and distribution rights from the reacquisition of BELBUCA~~^®as~~noted above. During the normal course of business, we accrue additional~~former CRG loan.

Theone-time expenses ~~for certain legal matters from time to time, including legal matters~~ related to the protection and enforcement of our intellectual property. The amounts accrued for such legal matters are recorded within accrued expenses on the balance sheet. The decrease in selling, general and administrative expenses during 2018 can be primarily attributed to the settlementpayoff of the ~~Teva lawsuit which reduced legal~~CRG loan consisted of $5.2 million in unamortized deferred loan fees, $3.9 million in unamortized warrant discount costs and ~~the retirement~~$2.8 million in loan prepayment fees and realized losses, for a cumulative total of ~~company executives which reduced stock compensation expenses.~~$11.9 million inone-time costs.

During the six months ended June 30, ~~2018 and 2017, selling, general and administrative expenses included $2.9 million and $5.2 million~~2019, we also had interest income of ~~stock compensation expenses, respectively. This is primarily composed of restricted stock unit expense for our executive management and board of directors.~~$0.3 million.

~~Interest expense.~~During the six months ended June 30, 2018, we had net interest expense of $5.0 million, consisting of $1.3 million of scheduled interest payments, $1.8 million of related amortization of discount and loan costs and $0.5 million of warrant interest expense. During the six months ended June 30, 2017, we had net interest expense of $4.8 million, consisting of $1.4 million of scheduled interest payments and $0.5 million of related amortization of discount and loan costs and $0.3 million of warrant interest expense. In addition, we had remaining $0.9 million of scheduled interest payments and $1.4 million of related amortization of discount, loan costs and loan pay off and $0.2 million of warrant interest expense, all related to the ~~secured loan facility which was paid off in full during the six months ended June 30, 2017.~~former CRG loan.

Revenues

The following table summarizes net product sales for the ~~three~~three- andsix-month periods ended June 30 in thousands:


	Three months ended June 30,						Six months ended June 30,						Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
BELBUCA^®	$	9,746		$	6,563		$	17,770		$	11,117
BELBUCA													$	24,060		$	9,746		$	42,764		$	17,770
% of net product sales		91	%		83	%		86	%		71	%		86	%		91	%		89	%		86	%
BUNAVAIL^®		1,020			1,323			2,834			4,563
Symproic														3,175			—			3,175			—
% of net product sales														11	%		—			7	%		—
BUNAVAIL														821			1,020			1,876			2,834
% of net product sales		9	%		17	%		14	%		29	%		3	%		9	%		4	%		14	%

Net product sales	$	10,766		$	7,886		$	20,604		$	15,680		$	28,056		$	10,766		$	47,815		$	20,604

~~Expenditures for Research and Development Programs~~Non-GAAP Financial Information:

~~Our research~~We report our condensed consolidated financial results in accordance with GAAP; however, we believe that earnings before interest, taxes, depreciation and ~~development expenditures~~amortization (“EBITDA”) and other non-GAAP results should be considered in isolation of or as an alternative for, earnings measures prepared in accordance with GAAP. Management uses these non-GAAP measures internally to measure the ongoing operating performance of our Company along with other metrics, and for planning and forecasting purposes. In addition, when evaluating non-GAAP results, we exclude certain items that are considered to be non-cash and if applicable, non-recurring, in nature.

EBITDA and Non-GAAP Income/(Loss):

We have presented EBITDA because it is a key measure used by our management and board of directors to understand and evaluate our operating performance and to develop operational goals for managing our business. We believe this financial measure helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude. In particular, we believe that the exclusion of the expenses eliminated in calculating EBITDA can provide a useful measure for period-to-period comparisons of our core operating performance. Accordingly, we believe that EBITDA provides useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to key financial metrics used by our management in its financial and operational decision-making.

EBITDA is not prepared in accordance with GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of adjusted EBITDA rather than net income/(loss), which is the nearest GAAP equivalent. Some of these limitations are:

EBITDA excludes depreciation and amortization and, although these are non-cash expenses, the assets being depreciated or amortized may have to be replaced in the future, the cash requirements for which are not reflected in EBITDA;

EBITDA does not reflect provision for (benefit from) income taxes or the cash requirements to pay taxes; and

EBITDA excludes net interest, including both interest expense and interest income.

Non-GAAP net income/(loss) is an alternative view of our performance that we are providing because management believes this information enhances investors’ understanding of our results as it permits investors to better understand the ongoing operations of the business, the impact of any non-recurring one time events, the cash results of the organization and is an additional measure used by management to assess performance.

Non-GAAP net income/(loss) is not prepared in accordance with GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of non-GAAP net income/(loss) rather than net income/(loss), which is the nearest GAAP equivalent. Some of these limitations are:

Non-GAAP income/(loss) excludes certain one-time items because of the nature of the items and the impact that those have on the analysis of underlying business performance and trends. Specifically, in the presentation of non-GAAP income/(loss) for the three and six months periods ended June 30, 2019, we have excluded the financial impact of our debt refinancing which closed in May 2019, as it is non-recurring. This excluded item is a significant component in understanding and assessing ongoing financial performance. The one-time expenses related to the dissolution of the CRG loan consisted of $5.2 million in unamortized deferred loan fees, $3.9 million in unamortized warrant discount costs and $2.8 million in loan prepayment fees and realized losses, for a cumulative total of $11.9 million in one-time costs;

The expenses and other items that we exclude in our calculation of non-GAAP net income/(loss) may differ from the expenses and other items, if any, that other companies may exclude from non-GAAP net income/(loss) when they report their operating results since non-GAAP income/(loss) is not a measure determined in accordance with GAAP, and it has no standardized meaning prescribed by GAAP;

We exclude stock-based compensation expense from non-GAAP net income/(loss) although (a) it has been, and will continue to be for the foreseeable future, a significant recurring expense for our ~~approved products~~business and ~~product candidates as~~an important part of ~~June 30~~our compensation strategy and (b) if we did not pay out a portion of our compensation in the form of stock-based compensation, the cash salary expense included in operating expenses would be higher, which would affect our cash position;

We exclude amortization of intangible assets from non-GAAP net income/(loss) due to the non-cash nature of this expense and although it has been and will continue to be for the foreseeable future a recurring expense for our business, these expenses do not affect our cash position; and

Amortization of warrant discount costs associated with the CRG loan which was dissolved in May 2019 are ~~as follows in thousands:~~excluded given these expenses did not affect our cash position;

Reconciliations of non-GAAP metrics to most directly comparable U.S. GAAP financial measures:

The following tables reconcile net income/(loss)earnings and computations (in thousands) under GAAP to a Non-GAAP basis.

   Three Months Ended
June 30, Six Months Ended
June 30,    Cumulative
through
June 30,
       2018            2017         2018            2017            2018
BELBUCA^®
   $ 638    $ 424 $ 2,414    $ 606    $ 125,111
BUNAVAIL^®
   95    620 277    1,772    41,162
ONSOLIS^®
   97    559 491    626    3,545
Buprenorphine Depot Injection
   22    (109 ) 145    1,021    9,930
Clonidine Topical Gel*
   2    96 11    235    27,530


	Three Months Ended June 30,						Six Months Ended June 30,
*Reconciliation of GAAP net income/(loss) to EBITDA(non-GAAP)***	2019			2018			2019			2018
GAAPnetincome/(loss)	$	(11,130	)	$	(9,770	)	$	(14,963	)	$	(20,479	)
Add back:
Provision for income taxes		—			(20	)		—			53
Net interest expense		13,929			2,525			16,490			5,037
Depreciation and amortization		1,981			1,679			3,356			3,199

EBITDA	$	4,780		$	(5,586	)	$	4,883		$	(12,190	)

Reconciliation of GAAP net income/(loss) to Non-GAAP net income/(loss)	$	(11,130	)	$	(9,770	)	$	(14,963	)	$	(20,479	)
Non-GAAP adjustments:
Stock-based compensation expense		1,569			1,084			2,712			4,005
Amortization of intangible assets		1,898			1,289			3,187			2,578
Amortization of warrant discount		179			269			448			538
Non-recurring financial impact of debt refinance		11,866			—			11,866			—

Non-GAAP net income/(loss)	$	4,382		$	(7,128	)	$	3,250		$	(13,358	)

*	~~Clonidine Topical Gel product candidate was discontinued in December 2016. Expenses thereafter consist of the winding down of the product candidate which includes allocated wages and compensation.~~

Liquidity and Capital Resources

Since inception, we have financed our operations principally from the sale of equity securities, proceeds from ~~short-term~~ borrowings, or convertible notes, and notes payable, funded research arrangements, ~~and~~ revenue generated as a result of our worldwide license and development ~~agreements.~~agreements and the commercialization of our BELBUCA, Symproic and BUNAVAIL products. We intend to finance our commercialization ~~research and development~~ and working capital needs from existing cash, ~~royalty revenue,~~ earnings from the ~~continued~~ commercialization of BELBUCA,^® Symproic and BUNAVAIL,^®~~, our term loan with CRG (assuming we achieve the conditions for additional funding under such loan), potential~~ royalty revenue, new sources of debt and equity financing, existing and new licensing and commercial partnership agreements and, potentially, through the exercise of outstanding common stock options and warrants to purchase common stock.

At June 30, ~~2018,~~2019, we had cash of approximately ~~$55.7~~$57.2 million. We used ~~$11.7~~$4.4 million of cash in operations during the six months ended June 30, ~~2018 and had stockholders’ equity of $40.7 million, versus stockholders’ equity of $8.9 million at December 31, 2017.~~2019. We ~~expect~~believe that we have sufficient cash to manage the business as currently ~~planned into the second quarter of 2020, which would provide sufficient capital necessary to support the continued commercialization of BELBUCA~~^® ~~and BUNAVAIL~~^®.planned.

~~On May 17, 2018, we executed agreements relating to our registered direct offering, issuance and sale of an aggregate of 5,000 shares of our newly designated Series BNon-Voting Convertible~~ ~~Preferred Stock. On May 21, 2018, we closed the offering, which yielded net proceeds of $47.9 million to us.~~

Additional capital ~~will~~may be required to support the continued commercialization of our BELBUCA,^® Symproic and BUNAVAIL^® products, ~~the reformulation project for and the anticipated commercial relaunch of ONSOLIS~~^®~~, the potential continued development of Buprenorphine Extended Release Injection or~~as well as other products which may be acquired or licensed by us, and for general working capital requirements. Based on product development timelines and agreements with our partners, the ability to scale up or reduce personnel and associated costs are factors considered throughout the product life cycle. Available resources may be consumed more rapidly than currently anticipated, potentially resulting in the need for additional funding. Additional funding, capital or loans (including, without limitation, milestone or other payments from commercialization agreements) may be unavailable on favorable terms, if at ~~all, which could leave our company without adequate capital resources.~~

Also, product development timelines and agreements with our development partners, the ability to scale up or reduce personnel and associated costs are factors considered throughout the product development life cycle. Available resources may be consumed more rapidly than currently anticipated, resulting in the need for additional funding.all.

Accordingly, we anticipate that we ~~will~~may be required to raise additional capital, which may be available to us through a variety of sources, including:

public equity markets;

private equity financings;

commercialization agreements and collaborative arrangements;

sale of product royalty;

grants and new license revenues;

bank loans;

equipment financing;

public or private debt; and

exercise of existing warrants and options.

Readers are cautioned that additional funding, capital or loans (including, without limitation, milestone or other payments from commercialization agreements) may be unavailable on favorable terms, if at all. If adequate funds are not available, we may be required to significantly reduce or refocus our operations or to obtain funds through arrangements that may require us to relinquish rights to certain technologies and drug formulations or potential markets, either of which could have a material adverse effect on us, our financial condition and our results of ~~operations.~~operations in 2019 and beyond. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities would result in ownership dilution to existing stockholders.

Contractual Obligations and Commercial Commitments

Our contractual obligations as of June 30, ~~2018~~2019 are as follows in thousands:

   Payments Due by Period
   Total
Less than
1 year
   1-3 years    3-5 years
More than
5 years

Operating lease obligations
   $ 1,472    $ 346    $ 720    $ 406    $ —
Secured loan facility*
   66,315    —      —      66,315    —
Interest on secured loan facility*
   26,555    5,612    5,830    15,113    —
Minimum royalty expenses**
   13,500    1,500    3,000    3,000    6,000
Purchase obligations***
   1,508    493    1,015    —      —










Total contractual cash obligations
   $ 109,350    $ 7,951    $ 10,565    $ 84,834    $ 6,000


	Payments Due by Period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Lease obligations	$	1,126	$	355	$	740	$	31	$	—
Secured loan facility		60,000		—		4,615		55,385		—
Interest on secured loan facility		28,100		6,747		12,192		9,161		—
Minimum royalty expenses*		12,000		1,500		3,000		3,000		4,500
Purchase obligations**		1,015		493		522		—		—

Total contractual cash obligations	$	102,241	$	9,095	$	21,069	$	67,577	$	4,500

*	~~Assumes no events of default have occurred and the we elect to defer 3.5% of the scheduled quarterly interest payments through December 31, 2020 aspaid-in-kind~~ ~~interest as provided for in the amendments to the loan agreement with CRG.~~

**	Minimum royalty expenses represent a contractual floor that we are obligated to pay CDC and NB Athyrium LLC regardless of actual sales. The minimum payment is $0.4 million per quarter or $1.5 million per year until patent expiry on July 23, 2027.

***	Purchase obligations represent an agreement for the supply of active pharmaceutical ingredient for use in production.

Off-Balance Sheet Arrangements

As of June 30, ~~2018,~~2019, we had nooff-balance sheet arrangements.

Effects of Inflation

We do not believe that inflation has had a material effect on our financial position or results of operations. However, there can be no assurance that our business will not be affected by inflation in the future.

Critical Accounting Policies

For information regarding our critical accounting policies and estimates, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” contained in our annual report on Form10-K for the year ended December 31, ~~2017~~2018 (the ~~“2017~~“2018 Annual Report”) ~~and Note 1 of the accompanying condensed consolidated financial statements in revenue recognition to recognize revenue on thesell-in~~ ~~method.~~.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Foreign currency exchange risk

We currently have, and may in the future have increased, ~~clinical~~commercial, manufacturing and ~~commercial manufacturing~~clinical agreements which are denominated in Euros ~~CAD~~ or other foreign currencies. ~~Such amounts are currently immaterial to our financial position or results of operations.~~ As a result, our financial results could be affected by factors such as a change in the foreign currency exchange rate between the U.S. dollar or Euro ~~CAD~~ or other applicable currencies, or by weak economic conditions in Europe ~~Canada~~ or elsewhere in the world. Such amounts are currently immaterial to our financial position or results of operations. We are not currently engaged in any foreign currency hedging activities.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report, our management, with the participation of our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer) (the “Certifying Officers”), conducted evaluations of our disclosure controls and procedures. As defined under Sections13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or

submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosures.

Readers are cautioned that our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our control have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any control design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

Based on this evaluation, the Certifying Officers have concluded that our disclosure controls and procedures were effective as of June 30, ~~2018.~~2019.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during our second quarter of ~~2018~~2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS

Certain information set forth in this Quarterly Report on Form10-Q, including in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (and the “Liquidity and Capital Resources” section thereof) and elsewhere may address or relate to future events and expectations and as such constitutes “forward-looking statements” within the meaning of the Private Securities Litigation Act of 1995. Such forward-looking statements involve significant risks and uncertainties. Such statements may include, without limitation, statements with respect to our plans, objectives, projections, expectations and intentions and other statements identified by words such as “projects,” “may,” “could,” “would,” “should,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans” or similar expressions. These statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties, including those detailed in our filings with the SEC. Actual results, including, without limitation: (i) actual sales results (including the results of our continuing commercial efforts with BELBUCA,^® Symproic and ~~BUNAVAIL~~^®)BUNAVAIL), (ii) the application and availability of corporate funds and our need for future funds, (iii) the timing for completion, and results of, scheduled or additional clinical trials and the FDA’s review and/or approval and commercial activities for our products and product candidates and regulatory filings related to the same or (iv) the results of our ongoing intellectual property litigations and patent office proceedings, may differ significantly from those set forth or anticipated in the forward-looking statements. Such forward-looking statements also involve other factors which may cause our actual results, performance or achievements to materially differ

from any future results, performance, or achievements expressed or implied by such forward-looking statements and to vary significantly from reporting period to reporting period. Such factors include, among others, those listed under Item 1A of our ~~2017~~2018 Annual Report and other factors detailed from time to time in our other filings with the SEC. Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual future results will not be different from the expectations expressed in this Quarterly Report. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings.

~~We are involved from time~~See Note 11, Commitments and Contingencies, to ~~time in routine legal matters incidental to our business. Based upon available information, we believe that the resolution of such matters will not have a material adverse effect on~~ our condensed consolidated financial ~~position or results~~statements included in Part I, Item I of operations. Except as discussed below, we are not the subject of any pending legal proceedings and, to the knowledge of management, no proceedings are presently contemplated against us by any federal, state or local governmental agency.

~~Indivior (formerly RB Pharmaceuticals Ltd.) and Aquestive Therapeutics (formerly MonoSol Rx)~~

~~Litigation related to BUNAVAIL~~^®

~~On October 29, 2013, Reckitt Benckiser, Inc., RB Pharmaceuticals Limited, and Aquestive (collectively, the RB Plaintiffs) filed an action against us relating to our BUNAVAIL~~^® ~~product in the United States District Court for the Eastern District of North Carolina (“EDNC”) for alleged patent infringement. BUNAVAIL~~^® ~~is a drug approved for the maintenance treatment of opioid dependence. The RB Plaintiffs claim that the formulation for BUNAVAIL~~^®~~, which has never been disclosed publicly, infringes its US Patent No. 8,475,832 (the ‘832 Patent). On May 21, 2014, the Court granted our motion to dismiss.~~

~~On January 22, 2014, Aquestive initiated an~~~~inter partes~~~~review (“IPR”) IPR~~this Quarterly Report on ~~the ‘019 Patent, which was instituted. The PTAB upheld all claims of our ‘019 Patent in 2015 and this decision was not appealed by Aquestive.~~

~~On September 20, 2014, we proactively filed a declaratory judgment action in the United States District Court for the EDNC requesting the Court to make a determination that our BUNAVAIL~~^® product does not infringe the ‘832 Patent, US Patent No. 7,897,080 (the “‘080 Patent”) and US Patent No. 8,652,378 (the “‘378 Patent”). We invalidated the “‘080 Patent” in its entirety in an~~inter partesreexamination proceeding. We invalidated all relevant claims of the ‘832 Patent in an~~~~inter partes~~review (IPR) proceeding. And, in an IPR proceeding for the ‘378 Patent, in its decision not to institute the IPR proceeding the PTAB construed the claims of the ‘378 Patent narrowly. Shortly thereafter, by joint motion of the parties, the ‘378 Patent was subsequently removed from the action.

On June 6, 2016, in an unrelated case in which Indivior and Aquestive asserted the ‘832 Patent against other parties, the Delaware District Court entered an order invalidating other claims in the ‘832 Patent. Indivior and Aquestive cross-appealed all adverse findings in that decision to the Court of Appeals for the Federal Circuit in CaseForm~~No. 17-2587.~~10-Q, ~~Our declaratory judgment action remains stayed pending the outcome of that cross-appeal by Indivior and Aquestive.~~

~~On September 22, 2014, the RB Plaintiffs filed an action against us (and our commercial partner) relating to our BUNAVAIL~~^® ~~product in the United States District Court for the District of New Jersey for alleged patent infringement. The RB Plaintiffs claim that BUNAVAIL~~^®, whose formulation and manufacturing processes have never been disclosed publicly, infringes its patent U.S. Patent No. 8,765,167 (the ‘167 Patent. As with prior actions by the RB Plaintiffs, we believe this is another anticompetitive attempt by the RB Plaintiffs to distract our efforts from commercializing BUNAVAIL^®. We strongly refute as without merit the RB Plaintiffs’ assertion of patent infringement and will vigorously defend the lawsuit. On our motion, this case was transferred to the Eastern District of North Carolina. A Joint Motion to Stay the case was granted and the case is now stayed until a final resolution of the ‘167 IPRs discussed directly below. We will continue to vigorously defend this case.

On October 28, 2014, we filed multiple IPR petitions on certain claims of the ‘167 Patent. The USPTO instituted three of the four IPR petitions. The PTAB upheld the claims and denied collateral estoppel applied to the PTAB decisions in March 2016. We appealed to Court of Appeals for the Federal Circuit. The USPTO intervened with respect to whether collateral estoppel applied to the PTAB. The Federal Circuit did not issue an affirmance without opinion after the February 7, 2018 oral argument. On June 19, 2018, we filed a motion to remand the case for further consideration by the PTAB in view of intervening authority. On July 31, 2018, the Federal Circuit vacated the decisions, and remanded the ‘167 Patent IPRs for further consideration on the merits.

~~Litigation related to BELBUCA~~^®

~~On January 13, 2017, Aquestive filed a complaint in the United States District Court for the District of New Jersey alleging BELBUCA~~^® infringes the ‘167 Patent. In lieu of answering the complaint, we filed motions to dismiss the complaint and, in the alternative, to transfer the case to the EDNC. Briefing on the motions was completed on June 21, 2017. On July 25, 2017, the New Jersey Court administratively terminated the case pending the parties submission of a joint stipulation of transfer because the District of New Jersey was an inappropriate venue. This case was later transferred to the Delaware District Court. On October 31, 2017 we filed motions to dismiss the complaint and, in the alternative, to transfer the case to the EDNC. Briefing on the motions was completed on December 8, 2017. We anticipate receiving a decision on the motions from the Delaware District Court by the 4th quarter of 2018 or the 1st quarter of 2019. We strongly refute as without merit Aquestive’s assertion of patent infringement and will vigorously defend the lawsuit.

~~Teva Pharmaceuticals USA (formerly Actavis)~~

On February 8, 2016, we received a notice relating to a Paragraph IV certification from Teva Pharmaceuticals USA (“Teva”) (formerly Actavis) seeking to find invalid three Orange Book listed patents relating specifically to BUNAVAIL^®. The Paragraph IV certification related to an Abbreviated New Drug Application (the “ANDA”) filed by Teva with the U.S Food and Drug Administration (“FDA”) for a generic formulation of BUNAVAIL^®. The patents subject to Teva’s certification were U.S. Patent No. 7,579,019 (the “‘019 Patent”) , U.S. Patent No. 8,147,866 (the “‘866 Patent”) and 8,703,177 (the “‘177 Patent”).

~~On March 18, 2016, we asserted three different patents against Teva, the ‘019 Patent, the ‘866 Patent, and the ‘177 Patent. Teva did not raisenon-infringement~~ ~~positions about the ‘019 and the ‘866 Patents in its Paragraph IV certification. Teva did raise anon-infringement~~ ~~position on the ‘177 Patent but we asserted in our complaint that Teva infringed the ‘177 Patent either literally or under the doctrine of equivalents.~~

~~On December 20, 2016 the USPTO issued U.S. Patent No. 9,522,188 (“the ‘188 Patent”), and this patent was properly listed in the Orange Book as covering the BUNAVAIL~~^® ~~product. On February 23, 2017 Teva sent a Paragraph IV certification adding the 9,522,188 to its ANDA. An amended Complaint was filed, adding the ‘188 Patent to the litigation.~~

~~On January 31, 2017, we received a notice relating to a Paragraph IV certification from Teva relating to Teva’s ANDA on additional strengths of BUNAVAIL~~^® ~~and on March 16, 2017, we brought suit against Teva and its parent company on these additional strengths. On June 20, 2017, the Court entered orders staying both BUNAVAIL~~^® ~~suits at the request of the parties.~~

~~On May 23, 2017, the USPTO issued U.S. Patent 9,655,843 (the “‘843 Patent”) relating to the BEMA~~^® ~~technology, and this patent was properly listed in the Orange Book as covering the BUNAVAIL~~^® ~~product.~~

~~Finally, on October 12, 2017, we announced that we had entered into a settlement agreement with Teva that resolved our BUNAVAIL~~^® ~~patent litigation against Teva pending in the U.S. District Court for the District of Delaware. As part of the Settlement Agreement,~~ which is ~~subject to review~~incorporated into this item by ~~the U.S. Federal Trade Commission and the U.S. Department of Justice, we have entered into anon-exclusive~~ ~~license agreement with Teva that permits Teva to first begin selling its generic version of BUNAVAIL~~^® ~~in the U.S. on July 23, 2028 or earlier under certain circumstances. Other terms of the agreement are confidential.~~

We received notices regarding Paragraph IV certifications from Teva on November 8, 2016, November 10, 2016, and December 22, 2016, seeking to find invalid two Orange Book listed patents relating specifically to BELBUCA^®~~. The Paragraph IV certifications relate to three ANDAs filed by Teva with the FDA for a generic formulation of BELBUCA~~^®. The patents subject to Teva’s certification were the ‘019 Patent and the ‘866 Patent. We filed complaints in Delaware against Teva on December 22, 2016 and February 3, 2017 in which we asserted against Teva the ‘019 Patent and the ‘866 Patent. Teva did not contest infringement of the claims of the ‘019 Patent and did not contest infringement of the claims of the ‘866 Patent.

The ‘019 Patent had already been the subject of an unrelated IPR before the USPTO under which we prevailed, and all claims of the ‘019 Patent survived. Aquestive’s request for rehearing of the final IPR decision regarding the ‘019 Patent was denied by the USPTO on December 19, 2016. Aquestive did not file a timely appeal at the Federal Circuit.

~~On August 28, 2017, the Court entered orders staying both BELBUCA~~^® ~~suits at the request of the parties.~~

~~In February 2018, we announced that we had entered into a settlement agreement with Teva that resolved our BELBUCA~~^® patent litigation against Teva pending in the U.S. District Court for the District of Delaware. As part of the settlement agreement, which is subject to review by the U.S. Federal Trade Commission and the U.S. Department of Justice, we have granted Teva a~~non-exclusive~~ ~~license (for which we will receive no current or future payments) that permits Teva to first begin selling the generic version of our BELBUCA~~^® ~~product in the U.S. on January 23, 2027 or earlier under certain circumstances (including, for example, upon (i) the delisting of thepatents-in-suit~~ ~~from the U.S. FDA Orange Book, (ii) the granting of a license by us to a third party to launch another generic form of BELBUCA~~^® ~~at a date prior to January 23, 2027, or (iii) the occurrence of certain conditions regarding BELBUCA~~^® ~~market share). Other terms of the Agreement are confidential.~~

~~2018 Arkansas Opioid Litigation~~

On March 15, 2018, the State of Arkansas, and certain counties and cities in that State, filed an action in the Circuit Court of Arkansas, Crittenden County against multiple manufacturers, distributors, retailers, and prescribers of opioid analgesics, including our company. We were served with the complaint on April 27, 2018. The complaint specifically alleged that we licensed our branded fentanyl buccal soluble film ONSOLIS^® ~~to Collegium, and Collegium is also named as a defendant in the lawsuit. ONSOLIS~~^® ~~is not presently sold in the United States and the license agreement with Collegium was terminated prior to Collegium launching ONSOLIS~~^® in the United States. Therefore, on June 28, 2018, we moved to dismiss the case against us and most recently, on July 6, 2018, the plaintiffs filed a notice to voluntarily dismiss us from the Arkansas case, without prejudice.reference.

Item 1A.

Risk Factors.

~~No update.~~We are dependent on third party suppliers for key components of our delivery technologies, products and product candidates.

Key components of our drug delivery technologies, products and product candidates, including for BELBUCA, Symproic and BUNAVAIL, may be provided by sole or limited numbers of suppliers, and supply shortages or loss of these suppliers could result in interruptions in supply or increased costs. Certain components used in our development activities, such as the active pharmaceutical ingredients, or API, of our products, are currently purchased from a single or a limited number of outside sources. The reliance on a sole or limited number of suppliers could result in:

delays associated withdevelopment and non-clinical and clinical trials due to an inability to timely obtain a single or limited source component;

inability to timely obtain a sufficient quantities of API and an adequate supply of required components; and

reduced control over pricing, quality and timely delivery.

Our relationships with our manufacturers and suppliers are particularly important to us and any loss of or material diminution of their capabilities due to factors such as regulatory issues, accidents, acts of God or any other factor would have a material adverse effect on our company. Any loss of or interruption in the supply of components from our suppliers or other third-party suppliers would require us to seek alternative sources of supply or require us to manufacture these components internally, which we are currently not able to do.

If the supply of any components is lost or interrupted, API, product or components from alternative suppliers may not be available in sufficient quality or in volumes within required time frames, if at all, to meet our or our partners’ needs. This could delay our ability to complete clinical trials, obtain approval for commercialization or commence marketing or cause us to lose sales, force us into breach of other agreements, incur additional costs, delay new product introductions or harm our reputation. Furthermore, product or components from a new supplier may not be identical to those provided by the original supplier. Such differences could have material effects on our overall business plan and timing, could fall outside of regulatory requirements, affect product formulations or the safety and effectiveness of our products that are being developed.

If our competitors are successful in obtaining approval for Abbreviated New Drug Applications for products that have the same active ingredients as BELBUCA, Symproic or BUNAVAIL, sales of BELBUCA, Symproic or BUNAVAIL may be adversely affected.

Our competitors may submit for approval certain Abbreviated New Drug Applications, or ANDAs, which provide for the marketing of a drug product that has the same active ingredients in the same strengths and dosage form as a drug product already listed with the FDA, and which has been shown to be bioequivalentto such FDA-listed drug. Drugs approved in this way are commonly referred to as generic versions of a listed drug and can often be substituted by pharmacists under prescriptions written for an original listed drug. Any applicant filing an ANDA is required to make patent certifications to the FDA, such as certification to the FDA that the new product subject to the ANDA will not infringe an already approved product’s listed patents or that such patents are invalid (otherwise known as a Paragraph IV Certification).

In February 2016, we announced that a generic competitor, Teva Pharmaceutical Industries Ltd., or Teva, had filed a Paragraph IV Certification challenging certain of our BUNAVAIL-related patents and we received notices regarding Paragraph IV certifications from Teva in November and December 2016, seeking to find invalid two Orange Book listed patents relating specifically to BELBUCA. The filing of this certification required us to initiate costly litigation against Teva. In addition, a number of our competitor companies have filed Paragraph IV Certifications challenging the patent for Suboxone^® film, the market leader in the field in which we are seeking to generate sales of BUNAVAIL. To the extent that any company is successful in challenging the validity of certain patents covering BUNAVAIL or Suboxone^® film under a Paragraph IV Certification, it could result in FDA approval of a drug that is lower in price to BUNAVAIL or Suboxone^® film. Such a new drug could make it more difficult for BUNAVAIL to gain any significant market share in an increasingly generic marketplace, which would have a material adverse effect on our results of operations, cash flow, reputation and stock price.

In October 2017, we announced that we had entered into a settlement agreement with Teva that resolved our BUNAVAIL patent litigation against Teva pending in the U.S. District Court for the District of Delaware. As part of the Settlement Agreement, which is subject to review by the U.S. Federal Trade Commission and the U.S. Department of Justice, we enteredinto a non-exclusive license agreement with Teva that permits Teva to first begin selling its generic version of BUNAVAIL in the U.S. on July 23, 2028 or earlier under certain circumstances. Other terms of the agreement are confidential.

In February 2018, we announced that we had entered into a Settlement Agreement with Teva that resolves our previously reported BELBUCA, patent litigation against Teva pending in the United States District Court for the District of Delaware. As part of the settlement agreement, which is subject to review by the U.S. Federal Trade Commission and the U.S. Department of Justice, we enteredinto a non-exclusive license agreement with Teva that permits Teva to first begin selling its generic version of BELBUCA in the U.S. on January 23, 2027 or earlier under certain circumstances. Other terms of the agreement are confidential.

As such, we have been and may continue to be subject to ANDA-related litigation, which is costly and distracting and has the potential to impair the long-term value of our products.

We are presently a party to lawsuits by third parties who claim that our products, methods of manufacture or methods of use infringe on their intellectual property rights, and we may be exposed to these types of claims in the future.

We are presently, and may continue to be, exposed to litigation by third parties based on claims that our technologies, processes, formulations, methods, or products infringe the intellectual property rights of others or that we have misappropriated the trade secrets of others. This risk is exacerbated by the fact that the validity and breadth of claims covered in pharmaceutical patents is, in most instances, uncertain and highly complex. Any litigation or claims against us, whether or not valid, would result in substantial costs, could place a significant strain on our financial and human resources and could harm our reputation. Such a situation may force us to do one or more of the following:

incur significant costs in legal expenses for defending against an intellectual property infringement suit;

delay the launch of, or cease selling, making, importing, incorporating or using one or more or all of our technologies and/or formulations or products that incorporate the challenged intellectual property, which would adversely affect our revenue;

obtain a license from the holder of the infringed intellectual property right, which license may be costly or may not be available on reasonable terms, if at all; or

redesign our formulations or products, which would be costly and time-consuming.

With respect to our BEMA delivery technology, the thin film drug delivery technology space is highly competitive. There is a risk that a court of law in the United States or elsewhere could determine that one or more of our BEMA based products conflicts with or covered by external patents. This risk presently exists in our litigation with Reckitt Benckiser, Inc., RB Pharmaceuticals Limited, and Aquestive Therapeutics, Inc. (formerly known as MonoSol Rx LLC, or Aquestive) relating to our BUNAVAIL product which was filed in September 2014 and in our litigation with Aquestive relating to our BELBUCA product which was filed in January 2017. If the courts in these cases were to rule against us and our partner in these cases, we could be forced to license technology from Aquestive or be prevented from marketing BUNAVAIL or BELBUCA, or otherwise incur liability for damages, which could have a material adverse effect on our ability for us or our partners to market and sell BUNAVAIL or BELBUCA.

We have beengranted non-exclusive license rights to European Patent No. 949 925, which is controlled by LTS to market BELBUCA and ONSOLIS within the countries of the European Union. We are required to pay a low single digit royalty on sales of products that are covered by this patent in the European Union. We have not conducted freedom to operate searches and analyses for our other proposed products. Moreover, the possibility exists that a patent could issue that would cover one or more of our products, requiring us to defend a patent infringement suit or necessitating a patent validity challenge that would be costly, time consuming and possibly unsuccessful.

Our lawsuits with Aquestive and RB Pharmaceuticals have caused us to incur significant legal costs to defend ourselves, and we would be subject to similar costs if we are a party to similar lawsuits in the future Furthermore, if a court were to determine that we infringe any other patents and that such patents are valid, we might be required to seek one or more licenses to commercialize our BEMA products. We may be unable to obtain such licenses from the patent holders, which could materially and adversely impact our business.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.

Defaults upon Senior Securities.

None.

Item 4.

Mine Safety Disclosures.

Not applicable.

Item 5.

Other Information.

None.

Item 6.

Exhibits.


Number		Description

3.1		Amended and Restated Bylaws of the Company *

10.1		~~Employment~~Exclusive License Agreement dated ~~May 2, 2018, by and~~April 4, 2019 between the Company and ~~Herm Cukier.~~Shionogi Inc. (1)

10.2		~~Indemnification~~Loan Agreement dated May ~~2, 2018, by and~~23, 2019 between the Company and ~~Herm Cukier. (1)~~Biopharma Credit PLC *†

10.3		~~Confidentiality, Intellectual Property~~2019 Stock Option and~~Non-Competition~~ ~~Agreement, dated May 2, 2018, by and between the Company and Herm Cukier. (1)~~ Incentive Plan (2)

10.4		Form of ~~Certificate of Designation of Series BNon-Voting~~ ~~Convertible Preferred~~Incentive Stock ~~(2)~~Option Agreement under the 2019 Stock Option and Incentive Plan.*

10.5		~~Placement Agency~~Form of Nonqualified Stock Option Agreement ~~dated May 17, 2018, between~~for Company Employees under the ~~Company~~2019 Stock Option and ~~William Blair & Company, L.L.C. (2)~~Incentive Plan.*

10.6		Form of ~~Securities Purchase~~Nonqualified Stock Option Agreement ~~dated May 17, 208, between~~forNon-Employee Directors under the ~~Company~~2019 Stock Option and ~~the investors named therein. (2)~~Incentive Plan.*

10.7		~~Registration Rights~~Form of Restricted Stock Unit Award Agreement ~~dated May 17, 2018, between~~for Company Employees under the ~~Company~~2019 Stock Option and ~~Broadfin Healthcare Master Fund, Ltd. (2)~~Incentive Plan.*

10.8		~~Agreement, dated May 17, 2018, between the Company and Broadfin Healthcare Master Fund, Ltd. (2)~~

~~10.9~~		~~Amendment No. 2 to Term Loan Agreement, dated May 16, 2018, among the Company, CRG Servicing LLC, as administrative agent and collateral agent, and the lenders named therein. (2)~~

~~10.10~~		Form of ~~Retirement~~Restricted Stock Unit Award Agreement ~~dated May 17, 2018, between~~forNon-Employee Directors under the ~~Company, the retiring directors named therein~~2019 Stock Option and ~~Broadfin Healthcare Master Fund, Ltd. (2)~~

~~10.11~~		~~Amendment to the Agreement dated May 17, 2018, dated May 20, 2018, by and between the Company and Broadfin Healthcare Master Fund, Ltd. (3)~~Incentive Plan.*

31.1		Certification of Principal Executive Officer Pursuant To Sarbanes-Oxley Section 302. ~~()~~

31.2		Certification of Principal Financial Officer Pursuant To Sarbanes-Oxley Section 302. ~~()~~

32.1		Certification Pursuant To 18 U.S.C. Section 1350. ~~(*)~~#

32.2		Certification Pursuant To 18 U.S.C. Section 1350. ~~(*)~~#

101.ins		XBRL Instance Document.

101.sch		XBRL Taxonomy Extension Schema Document.

101.cal		XBRL Taxonomy Calculation Linkbase Document.

101.def		XBRL Taxonomy Definition Linkbase Document.

101.lab		XBRL Taxonomy Label Linkbase Document.

101.pre		XBRL Taxonomy Presentation Linkbase Document.

+(1)	~~Confidential treatment is being requested for certain portions~~Incorporated by reference to the Company’s Form8-K filed on April 10, 2019.

(2)	Incorporated by reference to Appendix A of ~~this exhibit pursuant to~~the Company’s Form DEF 14A filed on June 17, ~~C.F.R. Sections 200.8(b)(4) and240.24b-2.~~2019

*	AFiled herewith, a signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

~~(1)~~†

~~Previously filed as an~~Portions of this exhibit to(indicated by asterisks) have been omitted in accordance with the ~~Company’s Current Report on Form8-K~~ ~~filed on May 8, 2018.~~rules of the Securities and Exchange Commission.

~~(2)~~#

~~Previously filed~~This certification will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as ~~an exhibit~~amended (the “Exchange Act”), or otherwise subject to the ~~Company’s Current Report on Form8-K~~ ~~filed on May 17, 2018.~~liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent specifically incorporated by reference into such filing.

~~(3)~~

~~Previously filed as an exhibit to the Company’s Current Report on Form8-K~~ ~~filed on May 21, 2018.~~

SIGNATURES

Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		BIODELIVERY SCIENCES INTERNATIONAL, INC.

Date: August ~~9, 2018~~

	8, 2019	By:	/s/ Herm Cukier
			Herm Cukier
			Chief Executive Officer and Director ~~(Principal Executive Officer)~~


~~Date: August 9, 2018~~

		(Principal Executive Officer)

Date: August 8, 2019	By:	/s/ ~~Ernest R. De Paolantonio~~Mary Theresa Coelho
			~~Ernest R. De Paolantonio~~Mary Theresa Coelho
			~~Secretary,~~ Treasurer and Chief Financial Officer
		(Principal Financial and Accounting Officer)

S-1


	Condensed Consolidated Balance Sheet
	June 30, 2018
	As reported			Balances without adoption of Topic 606			Effect of Adoption
Accounts receivable, net	$	9,410		$	9,062		$	348
Accumulated deficit	$	(325,400	)	$	(325,748	)	$	348


	Condensed Consolidated Statement of Operations Three months ended June 30, 2018								Condensed Consolidated Statement of Operations Six months ended June 30, 2018
	As reported			Balances without adoption of Topic 606			Effect of Adoption		As reported			Balances without adoption of Topic 606			Effect of Adoption
Product sales	$	10,766		$	10,766		$	—	$	20,604		$	20,604		$	—
Product royalty revenues		1,386			1,386			—		1,826			1,826			—
Contract revenues		23			—			23		1,026			813			213

Total revenues	$	12,175		$	12,152		$	23	$	23,456		$	23,243		$	213

Net loss attributable to common stockholders	$	(9,770	)	$	(9,793	)	$	23	$	(20,479	)	$	(20,692	)	$	213


	Balance at January 1, 2018		Six months ended June 30, 2018		Balance at June 30, 2018
Accounts receivable with customers	$	8,987	$	423	$	9,410


	Three months ended,				Six months ended,
Stock-based compensation expense	June 30, 2018		June 30, 2017		June 30, 2018		June 30, 2017
Research and Development	$	0.03	$	0.4	$	1.1	$	0.8
Selling, General and Administrative	$	1.1	$	2.5	$	2.9	$	5.2


	Three Months Ended June 30,					Six Months Ended June 30,				Cumulative through June 30,
	2018		2017			2018		2017		2018
BELBUCA^®	$	638	$	424		$	2,414	$	606	$	125,111
BUNAVAIL^®		95		620			277		1,772		41,162
ONSOLIS^®		97		559			491		626		3,545
Buprenorphine Depot Injection		22		(109	)		145		1,021		9,930
Clonidine Topical Gel*		2		96			11		235		27,530