UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

(Mark One)

For the quarterly period ended March 31,September 30, 2018

For the transition period from    to    

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

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

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

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 May 10,November 8, 2018, there were 59,288,80470,707,109 shares of company Common Stock issued and 59,273,31370,691,618 shares of company Common Stock outstanding.

BioDelivery Sciences International, Inc. and Subsidiaries

Quarterly Report on Form10-Q

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)

See notes to condensed consolidated financial statements

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

(Unaudited)

See notes to condensed consolidated financial statements

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

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

(Unaudited)

See notes to condensed consolidated financial statements

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. DOLLARS, IN THOUSANDS)

(Unaudited)

See notes to condensed consolidated financial statements

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

SUPPLEMENTAL CASH FLOW INFORMATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Non-cash Operating, Financing and Investing Activities:

The Company recorded the intrinsic value related to the beneficial conversion feature of the Series BNon-Voting Convertible Preferred Stock during the nine months ended September 30, 2018 totaling $12.5 million to retained earnings and additionalpaid-in capital in accordance with accounting principles generally accepted in the United States (“GAAP”).

The Company recorded the fair value of an accumulated total of 1,640,1982,119,925 shares of common stock issued to officers who retired from the Company during the threenine months ended March 31,September 30, 2018 totaling approximately $4.3$5.3 million to expense in accordance with accounting principles generally acceptedGAAP.

The Company recorded $0.6 million of accrued financing expenses related to the Series BNon-Voting Convertible Preferred Stock offering during the nine months ended September 30, 2018. Such expense is recorded as accounts payable and accrued liabilities in the United States (“GAAP”).condensed consolidated balance sheet.

The Company recorded the fair value of the bargain purchase price of the BELBUCA^® acquisition totaling $27.3 million to income during the threenine months ended March 31,September 30, 2017 in accordance with GAAP (see note 7, Business Combinations and Asset Acquisitions).GAAP.

See notes to consolidated financial statements

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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

Overview

BioDelivery Sciences International, Inc., together with its subsidiaries (collectively, the “Company”) is a specialty pharmaceutical company that is developing and commercializing, either on its own or in partnerships with third parties, new applications of approved therapeutics to address important unmet medical needs using both proven and new drug delivery technologies. The Company is focusing on developing products to meet unmet patient needs in the areas of pain management and addiction.

The accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of normal and recurring adjustments) necessary for a fair presentation of these financial statements. The condensed consolidated balance sheet at December 31, 2017 has been derived from the Company’s audited consolidated financial statements included in its annual report on Form10-K for the year ended December 31, 2017. 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 (“SEC”) rules and regulations. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report onForm 10-K for the year ended December 31, 2017.

Operating results for the three month periodand nine-month periods ended March 31,September 30, 2018 are not necessarily indicative of results for the full year or any other future periods.

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

Principles of consolidation

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

Use of estimates in financial statements

The preparation of the accompanying condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The Company reviews all significant estimates affecting the consolidated financial statements on a recurring basis and records the effect of any necessary adjustments prior to their issuance. Significant estimates of the Company include: revenue recognition, 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 in connection with business combinations, and deferred income taxes.

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 $0.6 million and $0.2 million for inventory obsolescence as of both March 31,September 30, 2018 and December 31, 2017.2017, respectively.

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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

Revenue recognition

Product sales

As discussed further below in Recent accounting pronouncements-adopted,Note 2, effective January 1, 2018, the Company adopted Accounting Standards Update (“ASU”)2014-09, “Revenue from Contracts with Customers” (“Topic 606”) and began recognizing revenue under the new accounting guidance on that date. Under the new accounting guidance, the Company recognizes revenue on product sales when control of the promised goods is transferred to its customers in an amount that reflects the consideration expected to be received in exchange for transferring those goods. The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. When determining whether the customer has obtained control of the goods, the Company considers any future performance obligations. Generally, there is no post-shipment obligations on product sold.

Performance obligations

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

Adjustments to product sales

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

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

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

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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

Product returns-Consistent with industry practice, the Company offers contractual return rights that allow its customers to return the products within an18-month period that begins six months prior to and ends twelve months after expiration of the products. The accrual to payment cycle for returns is longer and can take several years depending on the expiration of the related products.

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

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

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

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

Cost of sales

Cost of sales includes the direct costs attributable to the production of BELBUCA^®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 on equipment that the Company has purchased to produce BELBUCA^® and BUNAVAIL^®. It also includes any batches not meeting specifications and raw material yield losses which are expensed as incurred. Cost of sales also includes royalty expenses that the Company owes to third parties.

Reclassification

Certain amounts were reclassified between Provision for inventory obsolescence, Accounts receivable, Inventories and Accounts payable and accrued expenses in the Condensed Consolidated Statement of Cash Flows for the threenine months ended March 31,September 30, 2017 to conform to current year presentation. These reclassifications had no effect on the previously reported net cash flows from operations, activities or net losses.

Recent accounting pronouncements-adopted

InThe SEC has released SEC Final Rule ReleaseNo. 33-10532 Disclosure Update and Simplification, which adopts amendments to certain disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other SEC disclosure requirements, U.S. GAAP, or changes in the first quarter of 2018,information environment. The amendments also refer certain SEC disclosure requirements that overlap with but require information incremental to U.S. GAAP to the Company adopted Topic 606. UnderFinancial Accounting Standards Board (“FASB”) for potential incorporation into U.S. GAAP. The amendments are intended to facilitate the standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of information to investors and simplify compliance without significantly altering the nature, amount, timing,total mix of information provided to investors. These amendments are part of an initiative by the Division of Corporation Finance to review disclosure requirements applicable to issuers to consider ways to improve the requirements for the benefit of investors and uncertainty of revenueissuers. The amendments became effective on November 5, 2018 and cash flows arising from contracts with customers. The Company applieddid not have a material impact to the five-step method outlined in the ASU to all revenue streams and elected the modified retrospective implementation method. The additional disclosures required by Topic 606 have been included in Note 2.Company.

Recent accounting pronouncements-issued, not yet adopted

The FASB’s new leases standard, ASUAccounting Standards Update (“ASU”)2016-02, Leases (Topic 842), was issued on February 25, 2016. ASU2016-022016, is intended to improve financial reporting about leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment. The ASU will require organizations that lease assets referred to as “Lessees” to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. An organization is to provide disclosures designed to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements concerning additional information about the amounts recorded in the financial statements. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(U.S. DOLLARS, IN THOUSANDS)

(Unaudited)

expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease.

However, unlike current GAAP which requires only capital leases to be recognized on the balance sheet, the new ASU will require both types of leases (i.e., operating and capital leases) to be recognized on the balance sheet. The FASB lessee accounting model will continue to account for both types of leases. The capital lease will be accounted for in substantially the same manner as capital leases are accounted for under existing GAAP. The operating lease will be accounted for in a manner similar to operating leases under existing GAAP, except that lessees will recognize a lease liability and a lease asset for all of those leases. The new standard requires a

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 (continued):

modified-retrospective approach to adoption and is effective for interim and annual periods beginning on January 1, 2019 but may be adopted earlier. The Company expects to adopt this standard beginning in 2019. The Company does not expect that this standard will have a material impact on its condensed consolidated statements of operations, but the Company does expect that upon adoption, this standard will impact the carrying value of its assets and liabilities on its condensed consolidated balance sheets as a result of the requirement to record

right-of-use assets and corresponding lease obligations for current operating leases. In addition, the standard will require that the Company update its systems, processes and controls it uses to track, record and account for its lease portfolio.

ASU2018-07, issued in June 2018, expands the scope of Topic 718, “Compensation – Stock Compensation”, to include share-based payment transactions for acquiring goods and services from nonemployees. The objective of the ASU is to maintain or improve the usefulness of the information provided to the users of financial statements while reducing cost and complexity by simplifying several aspects of existing guidance. The amendments are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year and early adoption is permitted. The Company is currently assessing the impact of adopting this ASU on its condensed consolidated financial statements.

2. Revenue from contracts with customers:

Effective January 1, 2018, the Company adopted Topic 606. The Company elected to apply the standard and all related ASUs using the modified retrospective method beginning January 1, 2018. The Company applied this guidance only to those contracts that were not completed at the date of adoption. As a result of adoption, the cumulative impact to the Company’s retained earnings at January 1, 2018 was $0.1$0.135 million. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company expects the impact of the adoption of the new standard on its existing contracts to be immaterial to the Company’s net income on an ongoing basis, however additional disclosures have been added in accordance with the ASU.

The Company does not anticipate any significant changes in the timing or amount of revenue recognized for the Company’s product sales and relatedgross-to-net adjustments under ASCTopic 606. The Company’s net product sales continue to be recognized when delivery has occurred, and itsgross-to-net adjustments are estimated and recorded in the accounting period related to when sales occur in the manner fundamentally consistent with the Company’s prior accounting methodology.

Under the new standard, timing for recognition of certain contract revenue may be accelerated such that a portion of revenue will be estimated and recognized in revenue earlier than the previous accounting standards. During the threenine months ended March 31,September 30, 2018, the Company recorded milestonefinancing revenue for contractstwo milestones that are not due until between years 2020-2023. This financing component is recorded as a cumulative effect adjustment2020 and the receivables were discounted for time value of money.2023, respectively.

The main types of revenue contracts are:

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

2. Revenue from contracts with customers (continued):

The impact of adoption of ASCTopic 606 on the Company’s condensed consolidated balance sheet and condensed consolidated statement of operations as of and for the three months ended March 31,September 30, 2018 follows (in thousands):

The cumulative effectimpact of the changes made toadoption of Topic 606 on the Company’s condensed consolidated balance sheet fromstatement of operations for the modified retrospective adoption of ASC 606 was asthree and nine months ended September 30, 2018 follows (in thousands):

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

3. Liquidity and management’s plans:

At March 31,September 30, 2018, the Company had cash of approximately $12.1$49.5 million. The Company used $6.8$18.3 million of cash in operations during the threenine months ended March 31,September 30, 2018 and had stockholders’ equity of $1.4$35.6 million, versus stockholders’ equity of $8.9 million at December 31, 2017. The Company expectsbelieves that it has sufficient current cash to manage the business as currently planned into the second quarter of 2019,2020 which assumes either access to an additional $15 million of loan proceeds through the Company’s term loan with CRG Servicing LLC (“CRG”) if the Company satisfies the third draw requirements (see note 10), and/or further assumes the Company’s ability to access to the equity markets if the Company chooses (or a combination of both debt and equity, if available) that would provide sufficient capital necessary to support the continued commercialization of BELBUCA^® and BUNAVAIL^®.

Additionally, beginning April 2018, the Company has the ability to access to its previously established“at-the-market” offering program utilizing the universal shelf registration for up to $40 million of Common Stock. The Company’s cash on hand estimation therefore assumes the availability of the foregoing capital sources and further assumes that the Company does not otherwise face unexpected events, costs or contingencies, any of which could affect the Company’s cash requirements from time to time.

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(U.S. DOLLARS, IN THOUSANDS)

(Unaudited)

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

The following table represents the components of inventory as of:

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

4. Inventory:

The following table represents the components of inventory as of:

5. Accounts payable and accrued liabilities:

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

6. Property and equipment:

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

Depreciation and amortization expense was approximately $0.2 million for each of the three-month periods ended September 30, 2018 and $0.1September 30, 2017, respectively. Depreciation expense was $0.7 million and $0.5 million for the three monthnine-month periods ended March 31,September 30, 2018 and September 30, 2017, respectively.

The Company has periodically entered into license and development agreements to develop and commercialize certain of its products. The arrangements typically are multi-deliverable arrangements that are funded through upfront payments, milestone payments, royalties and other forms of payment to the Company. The Company’s significant license and development agreements are as follows:

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

On December 7, 2016, the Company7. License agreements and Endo entered into the Termination Agreement to terminate Endo’s licensing rights for BELBUCA^®. The transaction closed on January 6, 2017. At the closing date, the Company purchased from Endo the following net assets (the “net assets”): (i) current BELBUCA^®acquired product inventory andwork-in-progress, (ii) material manufacturing contracts related to BELBUCA^®, (iii) BELBUCA^®-related domain names and trademarks (including the BELBUCA^® trademark), (iv) BELBUCA^® -related manufacturing equipment, and(v) all pre-approval regulatory submissions, including any Investigational New Drug Applications and New Drug Applications, regulatory approvals and post-approval regulatory submissions concerning BELBUCA^®. The purchase price for the net assets (the “Asset Purchase Price”) was equal to the sum of: (i) the aggregate book value of the portion of the transferred product inventory forecasted to be used or sold by the Company, (ii) the aggregate book valueof work-in-progress inventory, and (iii) the assumption of any assumed liabilities. Together with the Asset Purchase Price, pursuant to the terms of the Termination Agreement, the Company paid to Endo a fee in the amount of $5 million in consideration for (i) Endo’s agreement not to compete for a period of two years from the closing date of the termination agreement and (ii) Endo’s waiver of its right to sell product for twelve months following the closing of the termination agreement.rights:

The BELBUCA^® acquisition was accounted for as a business combination in accordance with ASC No. 805, Business Combinations which, among other things, requires assets acquired and liabilities assumed to be measured at their acquisition date fair values. Determining the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions, including, but not limited to, the selection of appropriate valuation methodology, projected revenue, expenses and cash flows, weighted average cost of capital, discount rates, and estimates of terminal values. The Company believes the estimates used were reasonable and the significant effects of the BELBUCA^® acquisition were properly reflected.

The following table summarizes the consideration paid to acquire BELBUCA^® and the estimated values of assets acquired and liabilities assumed in the accompanying consolidated balance sheet based on their fair values on January 6, 2017 (the date of the Endo Closing):

As a result of the business combination, the Company recognized a deferred tax liability of $16.0 million. This deferred tax liability was netted against its deferred tax assets as of March 31, 2017. Because a full valuation allowance has been provided against the Company’s deferred tax assets as it is considered more likely than not that they will not be utilized, the Company released a corresponding amount of its valuation allowance during the three months ended March 31, 2017 and recognized a $16.0 million tax benefit in the accompanying condensed consolidated statement of operations.

During the three months ended March 31, 2017, the Company recorded the asset acquisition as a bargain purchase gain of $27.3 million in the accompanying condensed consolidated statement of operations.

Purdue license and supply agreement:

On July 12, 2017, the Company, along with Purdue Pharma, an Ontario limited partnership (“Purdue”), announced that they had executed an exclusive agreement granting to Purdue the licensing, distribution, marketing and sale rights related to BELBUCA^® in Canada. Financial terms of the Purdue agreement include: (i) total upfront and other cash milestone payments (relating to marketing authorization transfer and certain other marketing- and sales-related milestones) of up to an aggregate of CAD 4.5 million, including approximately CAD 1.5 million (0.5 million CAD and 1.0 million CAD received August 2017 and October 2017, respectfully); (ii) a low double digit percent royalty payable quarterly by Purdue to the Company based on Canadian net sales of BELBUCA^®, which

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(U.S. DOLLARS, IN THOUSANDS)

(Unaudited)

royalty rate is subject to adjustment in certain circumstances; (iii) an annual royalty fee commencing a period of time after the commercial launch of BELBUCA^® in Canada, which fee is creditable against royalties payable by Purdue and subject to reduction in certain circumstances; and (iv) payment by Purdue of certain costs incurred to obtain and transfer the marketing authorization for BELBUCA^® in Canada, a portion of which will be reimbursed by the Company as a reduction of royalties payable by Purdue.Canada.

On January 30, 2018, the Company and Purdue announced that BELBUCA^® iswas now commercially available in Canada. The first commercial sale of BELBUCA^® in Canada triggered a milestone payment to the Company from Purdue in the amount of CAD 1 million (US $0.8 million), which the Company received and recognized as revenue in March 2018.

TTY license and supply agreement

On October 7, 2010, theThe Company announcedhas 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. The agreement results in potential milestone payments to the Company of up to $1.3 million, which include an upfront payment of $0.3 million that was received in 2010. In addition, the Company will receive an ongoing royalty based on net sales. TTY will be responsible for the regulatory filing of BEMA^® Fentanyl in Taiwan as well as future commercialization in that territory. The term of the agreement with TTY is for the period from October 4, 2010 until the date fifteen years after first commercial sale unless the agreement is extended in writing or earlier terminated as provided for in the agreement.

During the three months ended March 31, 2018, theThe Company received cumulative payments of $0.4$0.9 million from TTY whichduring each of the nine month periods ended September 30, 2018 and 2017, respectively, related to royalties based on product purchased in Taiwan by TTY of PAINKYL^™ which is recorded in the accompanying condensed consolidated statement of operations. There were no payments received during the three months ended March 31, 2017.

8. Notes payable:

On February 21, 2017 (the “Closing Date”), the Company entered into a term loan agreement (the “Term Loan Agreement”) with CRG, as administrative agent and collateral agent, and the lenders named in the Term Loan Agreement (the “Lenders”). The Company utilized approximately $29.4 million of the initial loan proceeds under the Term Loan Agreement to repay all the amounts owed by the Company under the MidCap Credit Agreement (“Midcap”). During the three months ended March 31, 2017, $0.7 million of deferred loan costs arising out of the MidCap Credit Agreement were expensed and recorded as interest expense in the accompanying consolidated statement of operations.

Pursuant to the Term Loan Agreement, the Company borrowed $45.0 million from the Lenders as of the Closing Date, and may be eligible to borrow up toon December 26, 2017 borrowed an additional $30.0 million in two tranches of $15.0 million each contingent(the “Second Draw”) that was contingently available upon achievement of certain conditions, including: (i) in the case of the first tranche, representing the second potential draw under the Loan Agreement (the “Second Draw”), satisfying both (a) certain minimum net revenue thresholds on or before September 30, 2017 or December 31, 2017 and (b) a certain minimum market capitalization threshold for a period of time prior to the funding of the Second Draw (provided, that if the Company does not achieve the minimum net revenue thresholds necessary for the Second Draw but does achieve a certain minimum market capitalization threshold for a period of time prior to December 31, 2017, the Company would be eligible for a Second Draw funding in the amount of $5.0 million); and (ii) in the case of the second tranche, representing the third potential draw under the Loan Agreement (the “Third Draw”), satisfying both (a) certain minimum net revenue thresholds on or before June 30, 2018 or September 30, 2018 and (b) a certain minimum market capitalization threshold for a period of time prior to the funding of the Third Draw. On December 26, 2017, the Company was eligible and elected to receive the Second Draw for gross proceeds of $15.0 million.conditions.

The original Term Loan Agreement hashada six-year term with three years of interest-only payments, (which(from 2017-2019). On May 16, 2018, the Company entered into an amendment to its Term Loan Agreement with CRG. Pursuant to the amendment: (i) the interest only period of the Loan Agreement was extended by one year, and certain milestones previously required for the extended interest only period have been removed; (ii) the “PIK” period (under which a portion of the interest accrued under the Loan Agreement can be deferred to maturity) will also be extended to four yearsfor a year, (to 2020); (iii) amortization of the loan principal can be deferred until maturity (making the payment of the loan a “balloon” payment) if the Company achieves certain net revenue and maintains a market capitalization thresholdsof $200 million prior to December 31, 2019), afterthe conclusion of the interest only period (provided that if the Company achieves, and thereafter falls below a $200 million market capitalization, amortization of the loan principal will resume); and (iv) certain Company revenue targets, the failure of which quarterly principal and interest payments will be due throughwould create an event of default under the December 31, 2022 maturity date.loan, have been recalculated. Interest on the amounts borrowed under the Term Loan Agreement accrues at an annual fixed rate of 12.50%, 3.5% of which (i.e., a resultant 9.0% rate) may be deferred during the interest-only period by adding such amount to the aggregate principal loan amount. On each borrowing date (including the Closing Date), the Company is required to pay CRG a financing fee based on the loan drawn on that date. The Company is also required to pay the Lenders a final payment fee equivalent to 9% of the original loan amount upon repayment of the Loansloans in full, in addition to prepayment amounts described below.

WeThe Company may prepay all or a portion of the outstanding principal and accrued unpaid interest under the Loan Agreement at any time upon prior notice to the Lenders subject to a certain prepayment fees during the first five years of the term (which fees are lowered over time) and no prepayment fee thereafter. In certain circumstances, including a change of control and certain asset sales or licensing

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(U.S. DOLLARS, IN THOUSANDS)

(Unaudited)

transactions, we arethe Company is required to prepay all or a portion of the loan, including the applicable prepayment premium of on the amount of the outstanding principal to be prepaid.

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

8. Notes payable (continued):

The following table represents future maturities of the CRGnotes payable obligation as of March 31,September 30, 2018:

9. Net sales by product:

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

However, the following table presents net sales by product:

10. Stockholders’ equity:

Stock-based compensation

During the threenine months ended March 31,September 30, 2018, a total of 618,1742,260,211 options to purchase Common Stock, with an aggregate fair market value of approximately $1.5$3.3 million, were granted to Company employees.employees and members of the Board of Directors. Options granted to employees have a term of 10 years from the grant date anddate. Options granted to employees vest ratably over a three year period.three-year period and options granted to members of the Board of Directors vest ratably through 2022. The fair value of each option is amortized as compensation expense evenly through the vesting period.

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

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

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

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

10. Stockholders’ equity (continued):

The key assumptions used in determining the fair value of options granted during the threenine months ended March 31,September 30, 2018 follows:

Option activity during the threenine months ended March 31,September 30, 2018 was as follows:

As of March 31,September 30, 2018, options exercisable totaled 1,769,300.1,711,966. There was approximately $4.9$6.4 million of unrecognized compensation cost related tonon-vested share-based compensation awards, including options and restricted stock units (“RSUs”) granted. These costs will be expensed through 2021.2022.

Restricted stock units

During the threenine months ended March 31,September 30, 2018, 1,155,6111,824,872 RSUs were granted to the Company’s executive officers, employees and employees,directors, with a fair market value of approximately $2.5$4.2 million. The fair value of restricted units is determined using quoted market prices of the Common Stock and the number of shares expected to vest. These RSUs were issued under the Company’s 2011 Equity Incentive Plan, as amended (the “EIP”).

Of the aforementioned 2018 RSU grants 292,500 are either time-based and 292,500 are performance based,or performance-based, all of which generally vest over a three-year period. Performance-based RSUs vest if specified predetermined net revenue and operating income goals are achieved with respect to the annual fiscal years 2018 through 2020.achieved. Actual performance relative to the predetermined performance measures are evaluated independently at the end of each fiscal year and the number of awards that will vest will be based upon the percentage of the individual performance measure achieved relative to the predetermined target. This allows for partial vesting relative to separate performance measures.

Pursuant to retirement agreements of certain Company senior staff, the remaining 570,611 RSUs terminated and immediately were issued into shares of Common Stock.

Restricted stock activity during the threenine months ended March 31,September 30, 2018 was as follows:

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

10. Stockholders’ equity (continued):

Series B Preferred Stock Financing

On May 17, 2018, the Company entered into a placement agency agreement with William Blair & Company, L.L.C., as placement agent, relating to the Company’s registered direct offering, issuance and sale of an aggregate of 5,000 shares of the Company’s authorized preferred stock that the Board of Directors of the Company has designated asSeries B Non-Voting Convertible Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”). All the shares were sold by the Company. The placement agency agreement contains customary representations, warranties and covenants of the Company and the Placement Agent. The closing of the offering was completed on May 21, 2018. The shares sold in the offering were issued pursuant to a shelf registration statement, as amended, that the Company filed with the SEC, which became effective on July 13, 2015.

Each share of Series B Preferred Stock is convertible into a number of shares of the Company’s common stock, par value $0.001 per share determined by dividing $10,000 by a conversion price of $1.80 per share (subject to adjustment for stock splits and stock dividends as provided in the Certificate of Designation). The outstanding shares of Series B Preferred Stock are convertible into an aggregate 27,777,778 shares of Common Stock. The Series B Preferred Stock does not contain any price-based anti-dilution protection. The Series B Preferred Stock is convertible at any time at the option of the holder, except that a holder will be prohibited from converting shares of Series B Preferred Stock into shares of Common Stock if, as a result of such conversion, such holder, together with its affiliates, would beneficially own more than 9.98% of the total number of shares of Common Stock then issued and outstanding, which percentage may be increased or decreasedon sixty-one (61) days’ notice from the holder of Series B Preferred Stock to the Company.

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

During the nine months ended September 30, 2018, a cumulative total of 1,900 shares of Series B Preferred Stock from various holders were converted into 10,555,556 shares of Common Stock. As of September 30, 2018, 3,100 shares of Series B Preferred Stock are outstanding.

The Series B Preferred Stock issued in May 2018 contained a contingent beneficial conversion feature (“BCF”) that was recognized during the three and nine months ending September 30, 2018 upon the August 2018 stockholder approval, which eliminated the contingency. The conversion feature is not a separate unit of account requiring bifurcation. The Company evaluated its convertible preferred stock in accordance with provisions of ASC 815, Derivatives and Hedging, including consideration of embedded derivatives requiring bifurcation. The issuance of the Series B Preferred Stock generated a BCF, which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. As a result, $12.5 million was recorded as a reduction to additionalpaid-in capital, increasing net loss attributable to the Company Common stockholders.

The Company recognized the BCF of the intrinsic value of the conversion option, which is the number of shares of common stock available upon conversion multiplied by the difference between the conversion price per share and the fair value of common stock per share on the commitment date, totaling $12.5 million, as after shareholder approval the convertible preferred stock may be converted immediately. Thisone-time,non-cash charge impacted net loss attributable to common stockholders and net loss per share for the three and nine month periods ended September 30, 2018.

Common Stock

On August 2, 2018, in connection with the Company’s 2018 Annual Meeting of Stockholders, the Company’s stockholders approved, among other matters, to amend the Company’s Certificate of Incorporation to increase the number of authorized shares of Common Stock from 75,000,000 to 125,000,000.

BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

10. Stockholders’ equity (continued):

Warrants

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

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

Expected term of warrants granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus contract term. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term. A cumulative total of 2,136,020 shares underlying warrants to purchase Common Stock are outstanding as of March 31,September 30, 2018 with a weighted average exercise price of $2.60 per share.

11. Earnings per common share:

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