UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

~~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, 2019~~

March 31, 2020

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

For the transition period fromto

Commission file number001-31361

BioDelivery Sciences International, Inc.

(Exact name of registrant as specified in its charter)

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~~Global Select 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 every Interactive Data File required to be submitted 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 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

☐

Accelerated Filer

~~Accelerated filer~~

☒

~~Non-accelerated filer~~

Non-Accelerated Filer

☐

Smaller Reporting Company

~~Smaller reporting company~~

☐

Emerging Growth 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 8, 2019,~~May 7, 2020, there were ~~89,538,523~~99,904,302 shares of company Common Stock issued and ~~89,523,032~~99,888,811 shares of company Common Stock outstanding.

Table of contents

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, 2019~~March 3 1 , 20 20 and December 31, ~~2018~~201 9					1

	Condensed Consolidated Statements of Operations for the three ~~and six~~ months ended ~~June 30, 2019~~March 3 1 , 20 20 and ~~2018~~201 9					2

	Condensed Consolidated Statements of Stockholders’ Equity for the three ~~and six~~ months ended ~~June 30, 2019~~March 3 1 , 20 20 and ~~2018~~201 9					3

	Condensed Consolidated Statements of Cash Flows for the ~~six~~three months ended ~~June 30, 2019~~March 3 1 , 20 20 and ~~2018~~201 9					4

	Notes to Condensed Consolidated Financial Statements					5

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

Item 3.			Quantitative and Qualitative Disclosures about Market Risk				26	25

Item 4.			Controls and Procedures				26	25

Cautionary Note on Forward -Looking Statements							27	25

Part II. Other Information								26

Item 1.			Legal Proceedings				27	26

Item 1A.			Risk Factors				27	26

Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds				29	27

Item 3.			Defaults upon Senior Securities				29	27

Item 4.			Mine Safety Disclosures				29	27

Item 5.			Other Information				30	27
Item 6.		Exhibits			27
Signatures
~~Item 6.~~	~~Exhibits~~S-			30

~~Signatures~~1				~~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 and on LinkedIn at linkedin.com/company/biodeliverysciencesinternational 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.

Table of contents

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(Unaudited)

   June 30,
2019 December 31,
2018
ASSETS

Current assets:

Cash and cash equivalents
   $ 57,215 $ 43,822
Accounts receivable, net
   24,879 13,627
Inventory, net
   9,974 5,406
Prepaid expenses and other current assets
   3,298 3,188


Total current assets
   95,366 66,043
Property and equipment, net
   3,853 3,072
Goodwill
   2,715 2,715
License and distribution rights, net
   63,778 36,000
Other intangible assets, net
   375 703


Total assets
   $ 166,087 $ 108,533


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable and accrued liabilities
   $ 40,762 $ 21,539


Total current liabilities
   40,762 21,539
Notes payable, net
   58,448 51,652
Other long-term liabilities
   727 5,600


Total liabilities
   99,937 78,791
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, 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
   432,358 381,004
Treasury stock, at cost, 15,491 shares
   (47 ) (47 )
Accumulated deficit
   (366,251 ) (351,288 )


Total stockholders’ equity
   66,150 29,742


Total liabilities and stockholders’ equity
   $ 166,087 $ 108,533


	March 31, 2020		December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	70,613	$	63,888
Accounts receivable, net	45,114		38,790
Inventory, net	15,003		11,312
Prepaid expenses and other current assets	2,600		3,769
Total current assets	133,330		117,759
Property and equipment, net	1,995		2,075
Goodwill	2,715		2,715
License and distribution rights, net	58,576		60,309
Other intangible assets, net	—		47
Total assets	$	196,616	$	182,905
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	60,931	$	53,993
Total current liabilities	60,931		53,993
Notes payable, net	58,634		58,568
Other long-term liabilities	463		580
Total liabilities	120,028		113,141
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred Stock, 5,000,000 shares authorized; Series A Non-Voting Convertible Preferred Stock. $0.001 par value, 0 and 2,093,155 shares outstanding at March 31, 2020 and December 31, 2019, respectively; Series B Non-Voting Convertible Preferred Stock, $0.001 par value, 443 and 618 shares outstanding at March 31, 2020 and December 31, 2019, respectively.	—		2
Common Stock, $0.001 par value; 175,000,000 shares authorized at March 31, 2020 and December 31, 2019, respectively; 99,821,408 and 96,189,074 shares issued; 99,805,917 and 96,173,583 shares outstanding at March 31, 2020 and December 31, 2019, respectively.	99		96
Additional paid-in capital	438,163		436,306
Treasury stock, at cost,15,491 shares, as of March 31, 2020 and December 31, 2019.	(47)		(47)
Accumulated deficit	(361,627)		(366,593)
Total stockholders’ equity	76,588		69,764
Total liabilities and stockholders’ equity	$	196,616	$	182,905

See notes to condensed consolidated financial statements

Table of contents

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,
   2019 2018 2019 2018
Revenues:

Product sales
   $ 28,056 $ 10,766 $ 47,815 $ 20,604
Product royalty revenues
   1,461 1,386 1,471 1,826
Contract revenues
   160 23 160 1,026


Total Revenues:
   29,677 12,175 49,446 23,456


Cost of sales
   4,923 4,566 8,975 7,981


Expenses:

Research and development
   —   854 —   3,338
Selling, general and administrative
   21,955 14,021 38,944 27,526


Total Expenses:
   21,955 14,875 38,944 30,864


Income (loss) from operations
   2,799 (7,266 ) 1,527 (15,389 )
Interest expense
   (13,937 ) (2,525 ) (16,498 ) (5,030 )
Other (expense) income, net
   8 1 8 (6 )


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


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


Basic and diluted:

Weighted average common stock shares outstanding
   83,821,811 59,400,317 77,571,003 58,735,351


Basic and diluted loss per share
   $ (0.13 ) $ (0.16 ) $ (0.19 ) $ (0.35 )


	Three months ended March 31,
	2020		2019
Revenues:
Product sales	$	37,715	$	19,759
Product royalty revenues	563		2
Contract revenues	—		8
Total Revenues:	38,278		19,769
Cost of sales	5,560		4,052
Expenses:
Selling, general and administrative	26,736		16,989
Total Expenses:	26,736		16,989
Income (loss) from operations	5,982		(1,272)
Interest expense	(1,293)		(2,561)
Other expense, net	(1)		—
Income (loss) before income taxes	$	4,688	$	(3,833)
Income tax benefit	278		—
Net income (loss) attributable to common stockholders	$	4,966	$	(3,833)
Basic
Weighted average common stock shares outstanding	97,118,267		71,344,831
Basic earnings (loss) per share	$	0.05	$	(0.05)
Diluted
Weighted average common stock shares outstanding	106,965,762		71,344,831
Diluted earnings (loss) per share	$	0.05	$	(0.05)

See notes to condensed consolidated financial statements

Table of contents

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED 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
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
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
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
   Shares    Amount    Shares Amount    Shares    Amount
Balances, January 1, 2018
   2,093,155    $ 2    —   $ —      55,904,072    $ 56 $ 313,922 $ (47 ) $ (305,056 ) $ 8,877










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


	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
Balances, January 1, 2020	2,093,155	$	2	618	$	—	96,189,074	$	96	$	436,306	$	(47)	$	(366,593)	$	69,764
Stock-based compensation	—	—		—	—		—	—		1,520		—		—		1,520
Stock option exercises	—	—		—	—		107,287	—		338		—		—		338
Restricted stock awards	—	—		—	—		459,670	—		—		—		—		—
Series A conversion to common stock	(2,093,155)	(2)		—	—		2,093,155	2		(1)		—		—		(1)
Series B conversion to common stock	—	—		(175)	—		972,222	1		—		—		—		1
Net loss	—	—		—	—		—	—		—		—		4,966		4,966
Balances, March 31, 2020	—	$	—	443	$	—	99,821,408	$	99	$	438,163	$	(47)	$	(361,627)	$	76,588


	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
Balances, January 1, 2019	2,093,155	$	2	3,100	$	—	70,793,725	$	71	$	381,004	$	(47)	$	(351,288)	$	29,742
Stock-based compensation	—	—		—	—		—	—		1,141		—		—		1,141
Stock option exercises	—	—		—	—		150,275	—		472		—		—		472
Restricted stock awards	—	—		—	—		500,366	(1)		1		—		—		—
Series B conversion to Common Stock	—	—		(700)	—		3,888,888	4		(4)		—		—		—
Net loss	—	—		—	—		—	—		—		—		(3,833)		(3,833)
Balances, March 31, 2019	2,093,155	$	2	2,400	$	—	75,333,254	$	74	$	382,614	$	(47)	$	(355,121)	$	27,522

See notes to condensed consolidated financial statements

Table of contents

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. DOLLARS, IN THOUSANDS)

(Unaudited)

   Six months ended
June 30,
   2019 2018
Operating activities:

Net loss
   $ (14,963 ) $ (20,479 )
Adjustments to reconcile net loss to net cash flows from operating activities

Depreciation and amortization
   168 456
Impairment loss on equipment
   —   78
Accretion of debt discount and loan costs
   11,374 1,782
Amortization of intangible assets
   3,187 2,578
Provision for inventory obsolescence
   149 412
Stock-based compensation expense
   2,711 4,004
Changes in assets and liabilities, net of effect of acquisition:

Accounts receivable
   (11,252 ) (423 )
Inventories
   (4,716 ) (489 )
Prepaid expenses and other assets
   (110 ) 1,454
Accounts payable and accrued liabilities
   9,078 (1,118 )


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


Investing activities:

Product acquisitions
   (20,674 ) (1,951 )
Acquisitions of equipment
   (79 ) (122 )


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


Financing activities:

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


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


Net change in cash and cash equivalents
   13,393 34,529
Cash and cash equivalents at beginning of period
   43,822 21,195


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


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


	Three months ended March 31,
	2020		2019
Operating activities:
Net income (loss)	$	4,966	$	(3,833)
Adjustments to reconcile net loss to net cash flows from operating activities
Depreciation	21		85
Accretion of debt discount and loan costs	65		634
Amortization of intangible assets	1,781		1,289
Provision for inventory obsolescence	405		149
Stock-based compensation expense	1,520		1,141
Changes in assets and liabilities:
Accounts receivable	(6,324)		(2,381)
Inventories	(4,096)		(2,002)
Prepaid expenses and other assets	1,169		218
Accounts payable and accrued liabilities	6,920		1,814
Taxes payable	(40)		—
Net cash flows provided by (used in) operating activities	6,387		(2,886)
Investing activities:
Disposal of property and equipment	—		(79)
Net cash flows used in investing activities	—		(79)
Financing activities:
Proceeds from exercise of stock options	338		472
Net cash flows provided by financing activities	338		472
Net change in cash and cash equivalents	6,725		(2,493)
Cash and cash equivalents at beginning of period	63,888		43,822
Cash and cash equivalents at end of period	$	70,613	$	41,329
Cash paid for interest	$	1,442	$	1,931

See notes to condensed consolidated financial statements

Table of Contents

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(U.S. DOLLARS, IN 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 dedicated to patients living with serious and complex chronic conditions. The Company ishas built a portfolio of products that includes utilizing its novel and proprietary BioErodible MucoAdhesive ~~(BEMA)~~("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~~U.S. using its own sales force while working in partnership with third parties to commercialize its products outside the ~~United States.~~

In April 2019, the Company entered into an exclusive license agreement for the commercialization of Symproic (naldemedine tosylate) in the United States including Puerto Rico for the opioid-induced constipation in adult patients with chronic~~non-cancer~~ ~~pain (Note 7).~~

U.S.

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, ~~2018~~2019 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, ~~2018.~~2019. 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 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, ~~2018.~~

2019.

Operating results for the ~~three- andsix-month~~ ~~periods~~three month period ended ~~June 30, 2019~~March 31, 2020 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 $0.001 per share, is referred to as the “Common 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”), and 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 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 condensed 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 condensed consolidated financial statements on a recurring basis and records the effect of any necessary adjustments prior to their issuance. Significant estimates made 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; sales bonuses; stock-based compensation; ~~determination of fair values of assets and liabilities relating to business 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.

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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 $0.3 million and $0.2 million for inventory~~Inventory obsolescence ~~as of June 30, 2019~~reserves at March 31, 2020 and December 31, ~~2018,~~2019 were $0.8 million and $0.4 million, respectively.

Revenue recognition

The main types of revenue contracts are:

•

~~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.~~

•Product sales-Product sales amounts relate to sales of BELBUCA, Symproic and BUNAVAIL. In March 2020 the Company announced it will discontinue marketing of BUNAVAIL in 2020. 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~~obligation on product sold.

•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.

Performance obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the 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~~

Transaction price, including variable consideration

Revenue from product sales is recorded at the net sales price, which includes estimates of ~~estimated~~variable consideration for which reserves are established. Components of variable consideration include trade discounts and allowances, product returns, government chargebacks, discounts and rebates, and other incentives, such as voucher programs, and other fee for ~~rebates, price adjustments, returns, chargebacks, vouchers~~service amounts that are detailed within contracts between the Company and ~~prompt payment discounts. A significant majority of~~its customers relating to the Company’s ~~adjustments to gross product revenues are the result~~sale of ~~accruals for~~ its ~~commercial contracts, retail consumer subsidy programs, and Medicaid rebates.~~

products.

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;~~

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

•estimated levels of inventory in the distribution channel;

•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.

~~The Company uses prescription data purchased~~

Revenue 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 to estimated historical prescriptions written. Based on that analysis, management develops an estimate~~sales is recorded after considering the impact 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 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 channelfollowing variable consideration amounts at the ~~beginning~~time 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.

revenue recognition:

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-~~

Government rebates and chargebacks- Government rebates and chargebacks include mandated discounts under Medicaid, Medicare, U.S Department of Veterans Affairs and other government agencies ("Government Payors"). The Company estimates the rebates and chargebacks to Government Payors based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. These reserves are recorded in the same period the revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability, which is included in accrued expenses and other current liabilities on the condensed consolidated balance sheets. For Medicare, the Company also estimates the number of patients in the prescription drug coverage gap for whom the Company will owe an additional liability under the Medicare Part D program. The Company estimates the rebates and chargebacks that it will provide to Government Payors based upon (i) the government-mandated discounts applicable to government-funded programs, (ii) information obtained from its customers and (iii) information obtained from other third parties regarding the payor mix for its products. The Company’s liability for ~~government program~~these rebates ~~is calculated based on historical~~consists of estimates of claims for the current quarter and ~~current rebate redemption and utilization rates contractually submitted by~~estimated future claims that will be made for product shipments that have been recognized as revenue, but remain in the distribution channel inventories at the end of each ~~program’s administrator.~~

~~Price adjustments and chargebacks-~~reporting period.

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

estimated.

Voucher program: The Company, from time to time, offers certain promotional product-related incentives to ~~its customers.~~eligible patients. The Company has voucher programs 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 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~~

Trade discounts~~-The Company typically offers its wholesale customers a~~ and distribution fees: Trade discounts relate to prompt ~~payment discount of 2% as an incentive~~settlement discounts provided to ~~remit payments within a prescribed number of days after the invoice date depending on the 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.customers. In addition, ~~to this relatively short accrual to payment cycle,~~ the Company ~~receives daily information from the wholesalers regarding their sales~~compensates its customers for distribution of ~~the Company’s~~its products and ~~actual~~data. The Company has determined that such services received to date are not distinct from its sale of products and may not reasonably represent fair value for these services. Therefore, estimates of these payments are recorded as a reduction of revenue based on hand inventory levels of its products. This enables the Company to execute accurate provisioning procedures. Consistent with the pharmaceutical industry, the accrual to payment cycle for returns is longer and can take several years depending on the expiration of the related products.

contractual terms.

Cost of sales

Cost of sales includes the direct costs attributable to the production of BELBUCA, Symproic and BUNAVAIL. It includes raw materials, production costs at the Company’s ~~three~~ contract manufacturing sites, quality testing directly related to the products, and depreciation

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

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(Unaudited)~~

on equipment that the Company has purchased to produce BELBUCA, Symproic and BUNAVAIL. It also

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BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

includes the costs for any batches not meeting specifications and raw material yield losses. Yield losses and batches not meeting specifications are expensed as incurred. Cost of sales is recognized when sold to the wholesaler from our distribution center.

~~Beginning in April 2019, cost of 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 certain overhead costs as outlined in applicable supply agreements.

Cost of sales also includes royalty expenses that the Company owes to third parties.

Recent accounting pronouncements-adopted

Measurement of Credit Losses of Financial Instruments

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments; in November 2018 the FASB issued a subsequent amendment ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses; in April 2019 the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. In May 2019 the FASB issued ASU No. 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief; and in November 2019 the FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. The new guidance changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. In November 2019 the FASB issued ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326). The Company adopted Topic 326 during the three months ended March 31, 2020 and determined that the new guidance has no material impact on its condensed consolidated financial statements.

The Company is exposed to credit losses primarily through its product sales. The Company assesses each counterparty’s ability to pay for the products it sells by conducting a credit review. The credit review considers the Company's expected billing exposure and timing for payment and the counterparty’s established credit rating or the Company's assessment of the counterparty’s creditworthiness based on the Company's analysis of their financial statements when a credit rating is not available. The Company also considers contract terms and conditions, and business strategy in its evaluation. A credit limit is established for each counterparty based on the outcome of this review.

The Company monitors its ongoing credit exposure through active review of counterparty balances against contract terms and due dates. The Company's activities include timely account reconciliations, dispute resolution and payment confirmations. The Company may employ collection agencies and legal counsel to pursue recovery of defaulted receivables.

As of March 31, 2020, the Company reported $44.8 million of trade receivables within accounts receivable. Based on an aging analysis at March 31, 2020, 98% of the Company's accounts receivable were outstanding less than 30 days. There was no change to the allowance for doubtful accounts and credit losses between March 31, 2020 or December 31, 2019. The Company writes off accounts receivable when management determines they are uncollectible and credits payments subsequently received on such receivables to bad debt expense in the period received.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 and early adoption is permitted. The new guidance does not have a material impact on its consolidated financial statements.

In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, which amends ASC 808 to clarify ASC 606 should apply in entirety to certain transactions between collaborative arrangement participants. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company has determined that the new guidance does not have a material impact on its consolidated financial statements.

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BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)

Recent accounting pronouncements-not yet adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes, which is intended to simplify accounting for income taxes. It removes certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 and early adoption is permitted. The Company is currently evaluating but does not expect the new guidance to have a material impact on its consolidated financial statements.

Fair Value of Financial Instruments

The Company measures the fair value of instruments 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 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

March 31, 2020:


	Level 1		Level 2	Level 3	Balance at March 31, 2020
Cash and cash equivalents	$	70,613	—	—	$	70,613

The cash and cash equivalent balance as of ~~June 30, 2019~~March 31, 2020 includes investments in various money market accounts and cash held in interest bearing accounts.

~~Research and development~~

As of January 1, 2019, the Company has focused entirely on commercialized products rather than research and development. As such, there were no expenses incurred in research and development during the six months ended June 30, 2019. Research and development expense for the six months ended June 30, 2018 was $3.3 million.

2. ~~Leases:~~

~~The components of lease expense were as follows:~~

   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








Inventory:

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

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(Unaudited)~~

   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

~~Components of Lease Assets and Liabilities~~

   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 following table represents the components of inventory as of:

   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

March 31,
2020 December 31,
2019
Raw materials & supplies $ 1,794 $ 624
Work-in-process 7,255 6,198
Finished goods 6,743 4,874
Obsolescence reserve (789) (384)
Total inventories $ 15,003 $ 11,312

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BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

3. Accounts payable and accrued liabilities:

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

   June 30,
2019    December 31,
2018
Accounts payable
   $ 4,167    $ 3,166
Accrued rebates
   19,584    12,261
Accrued compensation and benefits
   3,443    3,814
Accrued acquisition costs
   10,000    318
Accrued returns
   830    715
Accrued royalties
   464    159
Accrued clinical trial costs
   —      464
Accrued legal
   391    70
Accrued regulatory expenses
   229    —
Accrued other
   1,654    572




Total accounts payable and accrued liabilities
   $ 40,762    $ 21,539


	March 31, 2020		December 31, 2019
Accounts payable	$	17,699	$	11,704
Accrued rebates	29,172		28,528
Accrued compensation and benefits	3,768		5,545
Accrued returns	6,248		4,438
Accrued royalties	733		535
Accrued legal	1,554		1,484
Accrued regulatory expenses	547		331
Accrued other	1,210		1,428
Total accounts payable and accrued liabilities	$	60,931	$	53,993

4. Property and equipment:

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

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




Total
   7,788    6,918




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




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


	March 31, 2020		December 31, 2019
Machinery & equipment	$	5,635	$	5,635
Right of use, building lease	661		720
Computer equipment & software	437		437
Office furniture & equipment	174		174
Leasehold improvements	43		43
Idle equipment	679		679
Total	7,629		7,688
Less accumulated depreciation and amortization	(5,634)		(5,613)
Total property and equipment, net	$	1,995	$	2,075

Depreciation expense for the three-month periods ended ~~June 30,~~March 31, 2020 and March 31, 2019, ~~and June 30, 2018,~~ was approximately ~~$0.08~~$0.02 million and ~~$0.2~~$0.1 million, respectively. ~~Depreciation expense for thesix-month~~ ~~periods ended June 30, 2019 and June 30, 2018, was approximately $0.2 million and $0.5 million, respectively.~~

5. 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~~ $20 million up-front payment on the Effective Date and ~~will pay~~paid Shionogi a $10 million payment onthe six-month anniversary of the Effective Date ~~(or earlier if the License Agreement is assigned or transferred), and~~on October 4, 2019. The Company also pays quarterly tiered royalty payments on ~~potential~~net 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, EXCEPT PER SHARE AMOUNTS)~~

~~(Unaudited)~~

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 Agreement for cause if the other party materially breaches or defaults in the performance of its obligations. Unless earlier terminated, the License Agreement will continue in effect until the expiration of the 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 under which Shionogi will supply Symproic to the Company 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 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 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 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 one asset or several similar assets, then the acquisition is an asset acquisition. The Company believes that the licensing agreement and other assets acquired from Shionogi are similar and consider them all to be intangible assets.

The total purchase price was allocated to the acquired asset based on their relative estimated fair values, as follows:

Symproic license
   $ 30,000
Transaction expenses
   636


Total value
   $ 30,636

~~Additionally, the Company also purchased from Shionogi $0.4 million~~

Table of ~~Symproic samples, which have been recorded in selling, general and administrative expenses in the accompanying condensed consolidated statement of 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 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, 2019 and 2018, the Company received cumulative payments of $0.3 million and $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. Also, during the six months ended June 30, 2019, the Company received the final milestone payment of $0.2 million ($0.16 million net of Taiwan tax) which is based on cumulative sales of PAINKYL by TTY exceeding $10 million.

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BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)


Symproic license	$	30,000
Transaction expenses	636
Total value	$	30,636

6. 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


March 31, 2020	Gross Carrying Value		Accumulated Amortization		Intangible Assets, net
Product rights	$	6,050	$	(6,050)	$	—
BELBUCA license and distribution rights	45,000		(14,625)		30,375
Symproic license and distribution rights	30,636		(2,435)		28,201
Total intangible assets	$	81,686	$	(23,110)	$	58,576


December 31, 2019	Gross Carrying Value		Accumulated Amortization		Intangible Assets, net
Product rights	$	6,050	$	(6,003)	$	47
BELBUCA license and distribution rights	45,000		(13,500)		31,500
Symproic license and distribution rights	30,636		(1,827)		28,809
Total intangible assets	$	81,686	$	(21,330)	$	60,356

7. Notes 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~~$60.0 million (the “Term Loan”), with the ability to draw an additional ~~$20~~$20.0 million within twelve months of the closing date. The Loan Agreement replaced the Company’s ~~existing~~previous Term Loan Agreement ~~(the “Original Loan Agreement”)~~ with CRG Servicing LLC ~~(“CRG”~~("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 on the first day for the quarter (LIBOR effective rate as of ~~June 28, 2019~~January 1, 2020 was ~~2.52%~~2.00%.). 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~~debt balance had been categorized within Level 2 of the ~~assets~~fair value hierarchy. The carrying amount of the ~~Company and~~debt approximates its fair value based on prevailing interest rates as of the ~~subsidiary guarantors, subject to certain exceptions.~~

balance sheet date.

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

2019
   —
2020
   —
2021
   —
2022
   13,846
2023
   18,461
2024
   18,462
2025
   9,231


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


Total notes payable obligation
   $ 58,448


March 31, 2020:

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(Unaudited)


2020	—
2021	—
2022	13,846
2023	18,462
2024	18,462
2025	9,230
Total maturities	$	60,000
Unamortized discount and loan costs	(1,366)
Total notes payable obligation	$	58,634

8. 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,
   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.~~


	Three months ended March 31,
	2020			2019
BELBUCA	$	33,469		$	18,703
% of net product sales	89		%	95		%
Symproic	4,179			—
% of net product sales	11		%	—
BUNAVAIL	67			1,056
% of net product sales	—		%	5		%
Net product sales	$	37,715		$	19,759

In March 2020 the company announced it will discontinue marketing of BUNAVAIL in the U.S. in 2020.

9. 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~~three months ended ~~June 30, 2019,~~March 31, 2020, a total of ~~2,134,956~~2,260,505 options to purchase Common Stock, with an aggregate fair market value of approximately ~~$9.0~~$13.3 million, were granted to employees, officers and ~~directors~~a director of the Company. Options have a term of 10 years from the grant date. Options granted to employees, officers and directors vest ratably over a ~~three-year period and options granted to members of the Board of Directors vest ratably through 2022.~~three-year period. The fair value of each option is amortized as compensation expense evenly through the vesting period.

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.

The key assumptions used in determining the fair value of options granted during the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 follows:


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

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(Unaudited)


Expected price volatility			59.00%-61.76%
Risk-free interest rate			0.51%-1.68%
Weighted average expected life in years			6 years
Dividend yield			—

Option activity during the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 was as follows:

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






Granted in 2019:

Officers and Directors
   1,132,109    3.93
Employees
   1,002,847    4.51
Exercised
   (360,379 )    4.60
Forfeitures
   (204,587 )    4.07



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.


	Number of shares	Weighted average exercise price per share		Aggregate intrinsic value
Outstanding at January 1, 2020	5,496,971	$	3.64	$	15,455
Granted in 2020:
Officers and Directors	1,074,998	6.08
Employees	1,185,517	5.67
Exercised	(107,287)	3.15
Forfeitures	(171,060)	3.68
Outstanding at March 31, 2020	7,479,139	$	4.32	$	3,336

As of ~~June 30, 2019,~~March 31, 2020, options exercisable totaled ~~1,992,349.~~2,369,440. There are approximately ~~$7.9~~$12.7 million of unrecognized compensation ~~cost~~costs related tonon-vested share-based compensation awards, including options and restricted stock units (“RSUs”) granted. These costs will be expensed through ~~2022.~~

2023.

Restricted stock units

During the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, a cumulative total of ~~360,250~~229,769 RSUs were granted to the Company’s executive officers, ~~members~~a member of senior management, and a ~~former officer and directors~~director with a fair market value of approximately ~~$1.6~~$1.3 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 EIP.~~

RSU grants are time-based, all of which generally vest from a one to ~~three-year~~three-year period. ~~The RSU grant to the former officer vested on his retirement date April 30, 2019.~~

Restricted stock activity during the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 was as follows:

   Number of
restricted
shares    Weighted
average fair
market value
per RSU
Outstanding at January 1, 2019
   2,166,102    $ 2.59
Granted:

Executive officers
   223,250    4.44
Directors
   90,000    4.85
Employees
   47,000    4.67
Vested
   (692,032 )    4.89
Forfeitures
   (76,632 )    3.10




Outstanding at June 30, 2019
   1,757,688    $ 3.31

Number of
restricted
shares Weighted
average fair
market value
per RSU
Outstanding at January 1, 2020 1,648,559 $ 3.86
Granted:
Executive officers 201,314 5.52
Directors 16,000 4.46
Employees 12,455 5.52
Vested (459,670) 4.36
Forfeitures (407,217) 3.45
Outstanding at March 31, 2020 1,011,441 $ 3.66

Warrants:

The Company has granted warrants to purchase shares of Common Stock. Warrants may be granted to affiliates in connection with certain agreements. There were no warrants issued during the three months ended March 31, 2020 and as of March 31, 2020, a cumulative of 2,136,019 warrants remain outstanding.

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Preferred Stock

During the ~~six~~three months ended ~~June 30, 2019, 1,384~~March 31, 2020, 175 shares of Series B Preferred Stock (“Series B”) were converted into ~~7,688,888~~972,222 shares of Common Stock. As of ~~June 30, 2019, 1,716~~March 31, 2020, 443 shares of Series B are outstanding. ~~As of June 30, 2019,~~

During the three months ended March 31, 2020, 2,093,155 shares of Series A Preferred Stock (“Series A”) were converted on a one-for-one basis into shares of Common Stock. There are ~~outstanding. There were no conversions~~0 remaining outstanding shares of Series A ~~during the six months ended June 30, 2019.~~

as of March 31, 2020.

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

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(Unaudited)~~

Earnings Per Share


	Three months ended March 31,
	2020		2019
Basic:
Net income (loss) attributable to common stockholders	$	4,966	$	(3,833)
Weighted average common shares outstanding	97,118,267		71,344,831
Basic earnings (loss) per common share	$	0.05	$	(0.05)
Diluted:
Effect of dilutive securities:
Net income (loss) attributable to common stockholders, diluted	$	4,966	$	(3,833)
Weighted average common shares outstanding	97,118,267		71,344,831
Effect of dilutive options and warrants	9,847,495		—
Dilutive weighted average common shares outstanding	106,965,762		71,344,831
Diluted earnings (loss) per common share	$0.05		$(0.05)

During the three months ended ~~June 30, 2019 and 2018,~~March 31, 2020, outstanding stock options, RSUs, warrants and preferred shares of ~~18,131,489~~9,847,495 were included in the computation of diluted earnings per common share. During the three months ended March 31, 2019, outstanding stock options, RSUs, warrants and ~~23,849,633, respectively,~~preferred shares of 24,743,605 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, 2019 and 2018, outstanding stock options, RSUs, warrants and preferred shares of 17,528,530 and 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.

~~11.~~

10. 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~~per disclosure requirements 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.

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(Unaudited)

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, the RB Plaintiffs filed an action against the Company (and the Company’s commercial partner) relating to the Company’s BUNAVAILproduct 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. 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.

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

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(Unaudited)~~

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. 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.

On August 29, 2019, a three-judge panel of the Court of Appeals for the Federal Circuit granted the motion and dismissed the Company’s appeal.On September 30, 2019, the Company filed a petition for an en banc rehearing of the order dismissing the Company’s appeal by the full Federal Circuit Court of Appeals.

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. 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. On October 16, 2018, denying the motion to dismiss as moot, the Delaware District Court granted the Company’s motion to transfer the case to the EDNC. On November 20, 2018, the Company moved the EDNC to dismiss the complaint for patent infringement for failure to state a claim for relief.

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(Unaudited)

On August 6, 2019, the EDNC granted the Company’s motion to dismiss, and dismissed the complaint without prejudice. On or about November 11, 2019, Aquestive refiled a complaint in the EDNC against the Company alleging that BELBUCA infringes the ‘167 Patent. 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~~(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. 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. The Company filed complaints in Delaware against Teva on December 22, 2016 and February 3, 2017 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 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, 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,

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(Unaudited)

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® 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 the Company. The Company was served with the complaint on April 27, 2018. The complaint specifically alleged that it licensed its 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, the Company moved to dismiss the case against it and most recently, on July 6, 2018, the plaintiffs filed a notice to voluntarily dismiss 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~~BELBUCA 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, EXCEPT PER SHARE AMOUNTS)~~

~~(Unaudited)~~

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 March 15, 2019, the Company filed a complaint against the Defendants in New Jersey asserting the same claims for patent infringement made in the Delaware lawsuit. On April 19, 2019, Defendants filed an answer to the Delaware complaint wherein they denied infringement of the ‘866, ‘843 and ‘539 patents and asserted counterclaims seeking declaratory relief concerning the alleged invalidity andnon-infringement of such patents.

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(Unaudited)

On April 25, 2019, the Company voluntarily dismissed the 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 invalidity.

Derivative Litigation

On July 2, 2018, the Company filed a Schedule 14A Proxy Statement (the “Proxy”) with the U.S. Securities and Exchange Commission (the “SEC”) in connection with its 2018 Annual Meeting. Proposals 1 and 2 of the Proxy sought stockholder approval to amend the Company’s Certificate of Incorporation by deleting Article TWELFTH of the Company’s Certificate of Incorporation in its entirety and replacing it with a new Article TWELFTH that, among other things (i) provided for the declassification of the Company’s Board in phases, with the full declassification to be achieved in 2020 (the “Declassification Amendment”) and (ii) changed the voting standard for the uncontested election of directors to the Board from a plurality standard to the majority of votes cast standard as set forth in the bylaws of the Company (the “Election Amendment” and together with the “Declassification Amendment”, the “Amendments”).

On August 2, 2018, the Company held the 2018 Annual Meeting, at which time the stockholders voted on the Amendments. Following the 2018 Annual Meeting, based on consultation with the Company’s advisors, the Company determined that the Amendments had been adopted by the requisite vote of stockholders and effected the Amendments by filing a Certificate of Amendment to the Certificate of Incorporation with the Secretary of State of the State of Delaware on August 6, 2018.

On September 11, 2019, two purported stockholders of the Company filed a putative class action against the Company and our directors in the Court of Chancery of the State of Delaware, captioned Drachman v. BioDelivery Sciences International, Inc., et al., C.A. No. 2019-0728-AGB (Del. Ch.) (the “Complaint”). The Complaint alleges that the Amendments did not receive the requisite vote of stockholders at the 2018 Annual Meeting and asserts claims for violation of the Delaware General Corporation Law, breach of fiduciary duties, and declaratory judgment. The Complaint seeks, inter alia, a declaration that the Amendments were not validly approved and invalidation of the Amendments, including altering the one-year terms of all directors duly elected at the 2018 and 2019 Annual Meetings to three-year terms. The Complaint also seeks costs and disbursements, including attorneys’ fees. The Company will respond to the complaint and defend against it vigorously.

On November 5, 2019, the Board determined that ratifying the declassification of the Board and the change in the voting standard as set forth in the Amendments, as well as ratifying the filing and effectiveness of the Amendments, is in the best interests of the Company and its stockholders. The Board thus approved resolutions ratifying such acts and the filing and effectiveness of the Amendments under Section 204 of the Delaware General Corporation Law. The Company will submit the ratification to its stockholders for their adoption in accordance with Section 204 at its 2020 Annual Meeting.

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~~Item 2.~~

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

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~~Forward-Looking Statements” below.

Overview

Strategy

Our strategy is evolving with the establishment of our commercial footprint in the management of chronic ~~conditions.~~pain. We seek to continue 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 will continue to explore opportunities to acquire or license, additional products that meet the needs of patients living with debilitating chronic conditions and treated primarily by therapeutic specialists. As we gain access to these drugs and technologies, we ~~intend~~plan 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 transformative acquisitions or licensing opportunities, we ~~intend~~plan to leverage our experience and apply it to developing new partnerships that enable us to commercialize novel products that can change the lives of people suffering from debilitating chronic conditions.

~~Second~~

Our commercial strategy for BELBUCA is to further drive continued adoption in the large long-acting opioid market based on its unique profile coupled with growing physician interest, policy tailwinds, and expanding payer access. We aim to leverage the specialized commercial infrastructure we established for BELBUCA as a vehicle to enable commercial growth in Symproic, which is increasingly seen as a complementary asset.

First Quarter and Recent Highlights

•On ~~April 4, 2019,~~January 6, 2020, we ~~entered into an exclusive licensing agreement with Shionogi, Inc. to commercialize Symproic in~~announced the ~~United States~~appointment of Kevin Ostrander as Senior Vice President of Business Development and ~~Puerto Rico effective immediately, for the treatment of 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 portionmember of the ~~offering (10,000,000 shares), before deducting~~Company Executive Leadership Team.

•On February 27, 2020, we presented at the ~~underwriter discounts and 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 23, 2019, we refinanced our existing debt agreement with a new facility from BioPharma Credit plc (“Pharmakon”). The new facility consists~~American Academy of Pain Medicine’s (AAPM) 36th Annual Meeting, positive results of a ~~$60.0 million term loan~~study titled, “A Phase I Placebo-Controlled Trial Comparing the Effect of Buprenorphine Buccal Film and ~~will generate an estimated $1.5 million in annual interest cost savings compared to the previous debt facility.~~

Oral Oxycodone Hydrochloride on Respiratory Drive”.

•

~~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 (“Task Force”) final report which proposes best practices for managing chronic and acute pain.

~~On July~~March 9, ~~2019,~~2020, we announced ~~that several regional health care plans improved patient access~~the appointment of Jeffrey A. Bailey to ~~BELBUCA during the second quarter~~our Board 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 access to BELBUCA to more than 165 million, representing more than 90% of the U.S. commercial insurance market.

Directors.

Our Products ~~and Related Trends~~

Our product portfolio currently consists of four products that are approved by the FDA. Three of our products utilize our patented BEMA thin film drug delivery technology.

BELBUCA

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

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

•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

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•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, chronic pain management specialists, and clinicians we believe have the greatest opportunity to be adopters of BELBUCA. As of January ~~2019,~~2020, BELBUCA had formulary coverage for more than ~~88%~~96% of commercial lives.

Additionally, we recently completed a Phase I placebo-controlled study to compare the effects of BELBUCA and oral oxycodone hydrochloride (a full μ-opioid receptor agonist) on respiratory drive, as measured by the ventilatory response to hypercapnia (VRH) after drug administration. While analyses of the data is currently ongoing, our primary endpoint showed there was no significant change in respiratory drive compared to placebo for any dose of BELBUCA (300, 600, or 900 mcg) and there was worsening respiratory drive compared to placebo for oxycodone, and it was statistically significant at the 60mg dose.

The risks to our company associated with BELBUCA include: (i) inability to continue 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 our company and our public stock price.

SYMPROIC

Symproic is a peripherallyacting mu-opioid receptor antagonist ~~or PAMORA,~~("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~~enteric mu-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~~According to data from Symphony Health, in 2019 Symproic prescription volume grew over 60%, capturing 10% of the PAMORA market. In 2019 the PAMORA market ~~for PAMORAs included~~declined by 3%, with over ~~550,000~~585,000 PAMORA 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.

As of January 2020, Symproic had formulary coverage for more than 95% of commercial lives.

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;~~manufacture adequate supplies for commercial use; (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 psychosocial support. BUNAVAIL contains the

partial opioid agonist buprenorphine, which binds to the same receptors as opiate drugs but has a

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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~~ In March 2020, we announced that we are discontinuing marketing for ~~opioid dependence, allowing for effective treatment with half the dose when 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 68% reduction in the ~~incidence of constipation at the end of 12 weeks~~U.S. in a Phase 3 trial in patients converted from Suboxone sublingual tablets or film to BUNAVAIL. The impact of a growing generic Suboxone market has resulted in declining market conditions, and as such, BUNAVAIL is no longer a 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 placed in a favorable formulary position.

The risks to our company associated with BUNAVAIL 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 BUNAVAIL manufacturing costs; (iv) failure of our sales force to effectively sell the product and, (v) inadequate reimbursement.

2020.

ONSOLIS

In July 2009, ONSOLIS (fentanyl buccal soluble film) was approved for the management of 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 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 doses to allow patients to titrate to an adequate level of pain control. We are not currently assessing options for U.S. commercialization of ONSOLIS. Given current declining market conditions, we have no plans to ~~reintroduce~~introduce the product in the USU.S. at this time. The product is no longer a strategic asset for the Company.

We will continue to seek additional license agreements. We anticipate that funding for the next several years will come primarily from earnings from sales of BELBUCA and Symproic, and ~~BUNAVAIL,~~ milestone payments and royalties from Mylan and TTY.

Results of Operations

Comparison of the three months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~

Product Sales. We recognized ~~$28.1~~$37.7 million and ~~$10.8~~$19.8 million in product sales during the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. The increase in ~~2019~~2020 is principally due to increased BELBUCA product sales from higher patient utilization, the ~~utilization~~impact of managed care wins, along with a price increase taken on January 1, 2020, and the acquisition of ~~Symproic.~~

Symproic, offset by lower BUNAVAIL product sales.

Product Royalty Revenues. We recognized ~~$1.5~~$0.6 million in PAINKYL and ~~$1.4~~BREAKYL product royalty revenue during the three months ended March 31, 2020 under our license agreements with TTY and Mylan, respectively. We recognized $0.002 million in product royalty revenue during the three months ended ~~June 30,~~March 31, 2019, under agreements related to previous research and ~~2018,~~development contracts. Product royalty revenue related to PAINKYL and BREAKYL is primarily via government demand in the Ex-U.S. countries where the products are sold by TTY and Mylan, respectively. ~~Of the aforementioned amounts, $1.0 million and $0.9 million, respectively, can be attributed to royalties on net sales of BREAKYL under our license agreement with Meda.~~

Contract Revenues. We recognized ~~$0.5 million and $0.5~~$0.008 million in ~~PAINKYL royalty revenue~~contract revenues during the three months ended ~~June 30,~~March 31, 2019 ~~and 2018, respectively, under our license agreement with TTY.~~

~~Contract Revenues.~~ We recognized $0.16 million in PAINKYL contract revenue during the three months ended June 30, 2019 under our license agreement with TTY. We recognized $0.02 million in contract revenue during the three months ended June 30, 2018 related to our ~~former~~ license ~~agreement with Purdue for BELBUCA in Canada.~~

agreements TTY. There were no such contract revenues during the same period of 2020.

Cost of Sales. We incurred ~~$4.9~~$5.6 million and ~~$4.6~~$4.1 million in cost of sales during the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. Cost of sales includes product cost, royalties paid, depreciation, yield adjustments and quarterly minimum royalty payments to CDC IV, LLC (“CDC”).

Selling, General and Administrative Expenses. During the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ selling, general and administrative expenses totaled ~~$22.0~~$26.7 million and ~~$14.0~~$17.0 million, respectively. Selling, general and administrative costs include commercialization costs for BELBUCA, BUNAVAIL and Symproic, legal, accounting and management wages, 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~~March 31, 2020 is due to the increase in compensation expense related to our expansion efforts and increased marketing ~~efforts and expenses related to the acquisition of Symproic.~~

efforts.

~~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,~~March 31, 2020, we had net interest expense of $1.3 million, which includes interest expense of $1.4 million and $0.06 million of amortization of discount and loan costs. During the three months ended March 31, 2020, we also had interest income of $0.2 million.

During the three months ended March 31, 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~~$2.6 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~~and $0.6 million of related amortization of ~~discount~~loan discounts and ~~loan~~deferred finance 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~~February 2017 term loan agreement from CRG.

Trends and Uncertainties

Potential Impact of the ~~CRG loan consisted~~COVID-19 Pandemic

Table of ~~$5.2 million~~contents

In December 2019, a strain of novel coronavirus (now commonly known as COVID-19) was reported to have surfaced in ~~unamortized deferred loan fees, $3.9 million~~Wuhan, China. COVID-19 has since spread rapidly throughout many countries, and, on March 12, 2020, the World Health Organization declared COVID-19 to be a global pandemic. In an effort to contain and mitigate the spread of COVID-19, many countries, including the U.S., have imposed unprecedented restrictions on travel and businesses, and there have been business closures and a substantial reduction in ~~unamortized warrant discount~~economic activity in countries that have had significant outbreaks of COVID-19.

COVID-19 may have a material adverse impact on our results of operations, including, but not limited to, product sales, revenue, 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 relatedproduct supply. However, significant uncertainty remains as to the ~~former CRG loan.~~

~~Comparison~~potential impact of the ~~six months ended June 30, 2018~~COVID-19 pandemic on our operations, 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,~~~~General~~~~and~~~~Administrative~~~~Expenses~~. 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, 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 increase in selling, general~~global economy as a whole. It is currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. We do not yet know the full extent of any impact on our business or our operations, however, we will continue to monitor the COVID-19 situation closely and ~~administrative expenses during 2019 is due~~intend to ~~the increase in compensation expense related to our expansion efforts, increased marketing efforts~~follow health and ~~expenses related to the acquisition of Symproic.~~

~~Research and Development.~~ We recognized $3.3 million of research and development expense during the six 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 six months ended June 30, 2019 due to the Company focusing entirely on commercialized products beginning in 2019.

~~Interest expense, net~~~~. During the six months ended June 30, 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~~

safety guidelines as they evolve.

~~million of related amortization of discount and loan costs for both the old and new debt arrangements, and $0.4 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 in~~one-time~~ ~~costs.~~

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

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, all related to the former CRG loan.

~~Revenues~~

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

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


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

Non-GAAP Financial Information:

We report our condensed consolidated financial results in accordance with GAAP; however, we believe that earnings before interest, taxes, depreciation and amortization (“EBITDA”) and other non-GAAP results should not 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~~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;

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•We exclude stock-based compensation expense from non-GAAP net income/(loss) although (a) it has been, and will likely continue to be for the foreseeable future, a significant recurring expense for our business and an important part of 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 likely 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 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,
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 )

Three Months Ended
March 31,
Reconciliation of GAAP net income/(loss) to EBITDA (non-GAAP) 2020 2019
GAAP net income/(loss) $ 4,966 $ (3,833)
Add back:
Provision for income taxes (278) —
Net interest expense 1,294 2,561
Depreciation and amortization 1,802 1,375
EBITDA $ 7,784 $ 103
Reconciliation of GAAP net income/(loss) to Non-GAAP net income/(loss)
GAAP net income/(loss) 4,966 (3,833)
Non-GAAP adjustments:
Stock-based compensation expense 1,520 1,142
Amortization of intangible assets 1,781 1,289
Amortization of warrant discount — 269
Non-GAAP net income/(loss) $ 8,267 $ (1,133)

Liquidity and Capital Resources

Since inception, we have financed our operations principally from the sale of equity securities, proceeds from borrowings, convertible notes, and notes payable, funded research arrangements, revenue generated as a result of our worldwide license and development agreements and the commercialization of our BELBUCA, Symproic and BUNAVAIL products. We intend to finance our commercialization and working capital needs from existing cash, earnings from the commercialization of BELBUCA ~~Symproic~~ and ~~BUNAVAIL,~~Symproic, 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, 2019,~~March 31, 2020, we had cash and cash equivalents of approximately ~~$57.2~~$70.6 million. We ~~used $4.4~~generated $6.4 million of cash in operations during the ~~six~~three months ended ~~June 30, 2019.~~March 31, 2020. We believe that we have sufficient cash to manage the business as currently planned.

Additional capital may be required to support the continued commercialization of our BELBUCA and Symproic ~~and BUNAVAIL~~ products, ~~as well as~~or 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.~~

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Accordingly, we anticipate that we 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 in ~~2019~~2020 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, 2019~~March 31, 2020 are as follows in thousands:

   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

*	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.~~

Payments Due by Period
Total Less than
1 year 1-3 years 3-5 years More than
5 years
Lease obligations $ 861 $ 363 $ 498 $ — $ —
Secured loan facility 60,000 — 4,615 55,385 —
Interest on secured loan facility 21,684 5,779 10,893 5,012 —
Minimum royalty expenses* 10,875 1,500 3,000 3,000 3,375
Purchase obligations** 1,026 872 154 — —
Total contractual cash obligations $ 94,446 $ 8,514 $ 19,160 $ 63,397 $ 3,375

* 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, 2019,~~March 31, 2020, 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, ~~2018~~2019 (the ~~“2018~~“2019 Annual Report”).

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~~Item 3.~~

~~Quantitative and Qualitative Disclosures About Market Risk~~

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest rate risk

Our cash includes all highly liquid investments with an original maturity of three months or less. Because of the short-term maturities of our cash, we do not believe that an increase in market rates would have a significant impact on the realized value of our investments. We place our cash on deposit with financial institutions in the U.S. The Federal Deposit Insurance Corporation covers $0.25 million for substantially all depository accounts. As of March 31, 2020, we had approximately $70.6 million, which exceeded these insured limits.

Foreign currency exchange risk

We currently have, and may in the future have increased, commercial, manufacturing and clinical agreements which are denominated in Euros or other foreign currencies. 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 or other applicable currencies, or by weak economic conditions in Europe 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.

Market Risk

We do not engage in speculative transactions nor do we hold or issue financial instruments for trading purposes. In connection with the recapitalization of our business, we have entered into a secured credit facility consisting of a term loan. Our term loan note bears interest which includes fluctuating interest rates based on LIBOR.

There is currently uncertainty around whether LIBOR will continue to exist after 2021. However, if LIBOR ceases to exist, we will not be required to renegotiate our loan documents with our current lender.

~~Item 4.~~

~~Controls and Procedures~~

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, 2019.~~

March 31, 2020.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during our ~~second~~first quarter of ~~2019~~2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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), (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, the impact of COVID-19 on our business and results of operations, those listed under Item 1A of our ~~2018~~most recent Annual Report on Form 10-K filed with the SEC on March 12, 2020 and under Item 1A of this Quarterly Report on Form 10-Q 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.~~

Item 1. Legal Proceedings.

See Note 11, Commitments and Contingencies, to our condensed consolidated financial statements included in Part I, Item I of this Quarterly Report on Form10-Q, which is incorporated into this item by reference.

~~Item 1A.~~

~~Risk Factors.~~

~~We are dependent on third party suppliers for key components~~

Item 1A. Risk Factors.

COVID-19 may materially and adversely affect our business and our financial results.

The recent COVID-19 pandemic is understood to have originated in Wuhan, China in December 2019 and has since spread globally, including to the United States and European countries. The continued spread of COVID-19 could adversely impact our ~~delivery technologies, products~~operations, including our efforts to market BELBUCA 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~~Symproic. Any decrease in sales or ~~limited numbers of suppliers, and supply shortages or loss of these suppliers could result in interruptions~~interruption in supply ~~or increased costs. Certain components used in our development activities, such as the active pharmaceutical ingredients, or API,~~of any 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~~increase our operating expenses 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~~business and financial results.

In addition, COVID-19 has resulted in significant governmental measures being implemented to control the spread of the virus, including quarantines, travel restrictions, social distancing and business shutdowns. We have taken temporary precautionary measures intended to help minimize the risk of the virus to our employees, including temporarily requiring all employees to work remotely. We have already suspended non-essential travel worldwide for our employees and are discouraging employee attendance at other gatherings. These measures could negatively affect our business. For instance, temporarily requiring all employees to work remotely may induce absenteeism, disrupt our operations or ~~interruption~~increase the risk of a cybersecurity incident. COVID-19 has also caused volatility 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,~~global financial markets and threatened a slowdown in the global economy, 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~~negatively affect our ability to ~~complete clinical trials, obtain approval for commercialization~~raise additional capital on attractive terms or ~~commence marketing or cause us~~at all.

The extent to ~~lose sales, force us into breach~~which COVID-19 may impact our business will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration 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~~pandemic, the severity of ~~regulatory requirements, affect product formulations~~COVID-19 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~~actions to contain and treat COVID-19, particularly in the ~~same strengths~~geographies where we or our third party suppliers and ~~dosage form as a drug product already listed~~contract manufacturers or contract research organizations operate. We cannot presently predict the scope and severity of any potential business shutdowns or disruptions. If we or any of the third parties with ~~the FDA, and which has been shown~~whom we engage, however, were to ~~be bioequivalent~~experience shutdowns or other business disruptions, our ability to ~~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~~conduct 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~~business in the ~~field in which we are seeking to generate sales~~manner and on the timelines presently

Table 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 entered~~into 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 entered~~into 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.

contents

~~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, weplanned could be ~~forced to license technology from Aquestive or be prevented from marketing BUNAVAIL or BELBUCA, or otherwise incur liability for damages,~~materially and negatively affected, which could have a material adverse ~~effect~~impact on our ~~ability for us or~~business and our ~~partners to market~~results of operations 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.

financial condition.

~~Item 2.~~

~~Unregistered Sales of Equity Securities and Use of Proceeds.~~

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

None.

~~Item 3.~~

~~Defaults upon Senior Securities.~~

Item 3. Defaults upon Senior Securities.

None.

~~Item 4.~~

~~Mine Safety Disclosures.~~

Item 4. Mine Safety Disclosures.

Not applicable.

~~Item 5.~~

~~Other Information.~~

Item 5. Other Information.

None.

Item 6. Exhibits.

~~Item 6.~~

~~Exhibits.~~

Number			Description

~~Number~~		~~Description~~

~~3.1~~31.1		Amended and Restated Bylaws of the Company *

~~10.1~~	~~Exclusive License Agreement dated April 4, 2019 between the Company and Shionogi Inc. (1)~~

~~10.2~~	~~Loan Agreement dated May 23, 2019 between the Company and Biopharma Credit PLC *†~~

~~10.3~~	~~2019 Stock Option and Incentive Plan (2)~~

~~10.4~~	Form of Incentive Stock Option Agreement under the 2019 Stock Option and Incentive Plan.*

~~10.5~~	Form of Nonqualified Stock Option Agreement for Company Employees under the 2019 Stock Option and Incentive Plan.*

~~10.6~~	~~Form of Nonqualified Stock Option Agreement forNon-Employee~~ Directors under the 2019 Stock Option and Incentive Plan.*

~~10.7~~	Form of Restricted Stock Unit Award Agreement for Company Employees under the 2019 Stock Option and Incentive Plan.*

~~10.8~~	~~Form of Restricted Stock Unit Award Agreement forNon-Employee~~ Directors under the 2019 Stock Option and 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)~~

~~Incorporated by reference to the Company’s Form8-K~~ ~~filed on April 10, 2019.~~

~~(2)~~

~~Incorporated by reference to Appendix A of the Company’s Form DEF 14A filed on June 17, 2019~~

*	Filed 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.

†	~~Portions of this exhibit (indicated by asterisks) have been omitted in accordance with the rules of the Securities and Exchange Commission.~~

This certification will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the 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.

*Filed 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.

#This certification will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the 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.

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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 8, 2019~~May 7, 2020

By:

~~By:~~

/s/ Herm Cukier

Herm Cukier

Chief Executive Officer and Director

(Principal Executive Officer)

Date: ~~August 8, 2019~~May 7, 2020

By:

~~By:~~

/s/ Mary Theresa Coelho

Mary Theresa Coelho

Treasurer and Chief Financial Officer

(Principal Financial and Accounting Officer)

S-1


	June 30, 2019			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	57,215		$	43,822
Accounts receivable, net		24,879			13,627
Inventory, net		9,974			5,406
Prepaid expenses and other current assets		3,298			3,188

Total current assets		95,366			66,043
Property and equipment, net		3,853			3,072
Goodwill		2,715			2,715
License and distribution rights, net		63,778			36,000
Other intangible assets, net		375			703

Total assets	$	166,087		$	108,533

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

Total current liabilities		40,762			21,539
Notes payable, net		58,448			51,652
Other long-term liabilities		727			5,600

Total liabilities		99,937			78,791
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, 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		432,358			381,004
Treasury stock, at cost, 15,491 shares		(47	)		(47	)
Accumulated deficit		(366,251	)		(351,288	)

Total stockholders’ equity		66,150			29,742

Total liabilities and stockholders’ equity	$	166,087		$	108,533


	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Revenues:
Product sales	$	28,056		$	10,766		$	47,815		$	20,604
Product royalty revenues		1,461			1,386			1,471			1,826
Contract revenues		160			23			160			1,026

Total Revenues:		29,677			12,175			49,446			23,456

Cost of sales		4,923			4,566			8,975			7,981

Expenses:
Research and development		—			854			—			3,338
Selling, general and administrative		21,955			14,021			38,944			27,526

Total Expenses:		21,955			14,875			38,944			30,864

Income (loss) from operations		2,799			(7,266	)		1,527			(15,389	)
Interest expense		(13,937	)		(2,525	)		(16,498	)		(5,030	)
Other (expense) income, net		8			1			8			(6	)

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

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

Basic and diluted:
Weighted average common stock shares outstanding		83,821,811			59,400,317			77,571,003			58,735,351

Basic and diluted loss per share	$	(0.13	)	$	(0.16	)	$	(0.19	)	$	(0.35	)


	Six months ended June 30,
	2019			2018
Operating activities:
Net loss	$	(14,963	)	$	(20,479	)
Adjustments to reconcile net loss to net cash flows from operating activities
Depreciation and amortization		168			456
Impairment loss on equipment		—			78
Accretion of debt discount and loan costs		11,374			1,782
Amortization of intangible assets		3,187			2,578
Provision for inventory obsolescence		149			412
Stock-based compensation expense		2,711			4,004
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable		(11,252	)		(423	)
Inventories		(4,716	)		(489	)
Prepaid expenses and other assets		(110	)		1,454
Accounts payable and accrued liabilities		9,078			(1,118	)

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

Investing activities:
Product acquisitions		(20,674	)		(1,951	)
Acquisitions of equipment		(79	)		(122	)

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

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

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

Net change in cash and cash equivalents		13,393			34,529
Cash and cash equivalents at beginning of period		43,822			21,195

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

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


	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
2019	$	177
2020		360
2021		370
2022		219

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

Present value of lease liabilities	$	947


	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


	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


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


	Number of restricted shares			Weighted average fair market value per RSU
Outstanding at January 1, 2019		2,166,102		$	2.59
Granted:
Executive officers		223,250			4.44
Directors		90,000			4.85
Employees		47,000			4.67
Vested		(692,032	)		4.89
Forfeitures		(76,632	)		3.10

Outstanding at June 30, 2019		1,757,688		$	3.31


	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	)


	Three Months Ended March 31,
Reconciliation of GAAP net income/(loss) to EBITDA (non-GAAP)	2020		2019
GAAP net income/(loss)	$	4,966	$	(3,833)
Add back:
Provision for income taxes	(278)		—
Net interest expense	1,294		2,561
Depreciation and amortization	1,802		1,375
EBITDA	$	7,784	$	103
Reconciliation of GAAP net income/(loss) to Non-GAAP net income/(loss)
GAAP net income/(loss)	4,966		(3,833)
Non-GAAP adjustments:
Stock-based compensation expense	1,520		1,142
Amortization of intangible assets	1,781		1,289
Amortization of warrant discount	—		269
Non-GAAP net income/(loss)	$	8,267	$	(1,133)


	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

35-2089858

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

4131 ParkLake Ave., Suite 225, Raleigh, NC

(Address of principal executive offices)

(Zip Code)