Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 10-Q
__________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                 
Commission file number 001-31361
__________________________________
BioDelivery Sciences International, Inc.
(Exact name of registrant as specified in its charter)
__________________________________
Delaware35-2089858
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
4131 ParkLake Ave., Suite 225, Raleigh, NC
27612
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number (including area code): 919-582-9050
__________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading
Symbol(s)
Name of each exchange
on which registered
Common stock, par value $0.001BDSIThe Nasdaq 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 Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-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” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
Accelerated Filer
Non-Accelerated FilerSmaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  ☒
As of November 12, 2019, there were 89,928,219 shares of company Common Stock issued and 89,912,728 shares of company Common Stock outstanding.



Table of contents
BioDelivery Sciences International, Inc. and Subsidiaries
Quarterly Report on Form 10-Q
TABLE OF CONTENTS
Page
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 at Facebook.com/BioDeliverySI and on Twitter at @BioDeliverySI to distribute material information. Our financial and other material information is routinely posted to and accessible on the Investors section of our website, available at www.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.



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BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS, IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Unaudited)
September 30,
2019
December 31,
2018
ASSETS
Current assets:
Cash and cash equivalents$55,863  $43,822  
Accounts receivable, net33,422  13,627  
Inventory, net10,766  5,406  
Prepaid expenses and other current assets4,874  3,188  
Total current assets104,925  66,043  
Property and equipment, net3,713  3,072  
Goodwill2,715  2,715  
License and distribution rights, net62,044  36,000  
Other intangible assets, net211  703  
Total assets$173,608  $108,533  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities$46,545  $21,539  
Total current liabilities46,545  21,539  
Notes payable, net58,515  51,652  
Other long-term liabilities654  5,600  
Total liabilities105,714  78,791  
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred Stock, 5,000,000 shares authorized; Series A Non-Voting Convertible Preferred Stock. $.001 par value, 2,093,155 shares outstanding at both September 30, 2019 and December 31, 2018, respectively; Series B Non-Voting Convertible Preferred Stock, $.001 par value, 1,698 and 3,100 shares outstanding at September 30, 2019 and December 31, 2018, respectively.
2  2  
Common Stock, $.001 par value; 175,000,000 shares authorized at September 30, 2019 and 125,000,000 shares authorized at December 31, 2018, respectively; 89,796,774 and 70,793,725 shares issued;89,781,283 and 70,778,234 shares outstanding at September 30, 2019 and December 31, 2018, respectively.
90  71  
Additional paid-in capital433,746  381,004  
Treasury stock, at cost, 15,491 shares(47) (47) 
Accumulated deficit(365,897) (351,288) 
Total stockholders’ equity67,894  29,742  
Total liabilities and stockholders’ equity$173,608  $108,533  
See notes to condensed consolidated financial statements

1

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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 September 30,Nine months ended September 30,
2019201820192018
Revenues:
Product sales$29,623  $13,763  $77,438  $34,367  
Product royalty revenues683  370  2,154  2,197  
Contract revenues  23  160  1,047  
Total Revenues:30,306  14,156  79,752  37,611  
Cost of sales5,350  3,779  14,325  11,760  
Expenses:
Research and development  699    4,038  
Selling, general and administrative23,360  13,489  62,304  41,013  
Total Expenses:23,360  14,188  62,304  45,051  
Income (loss) from operations1,596  (3,811) 3,123  (19,200) 
Interest expense(1,234) (2,567) (17,732) (7,598) 
Other (expense) income, net(3) (2) 5  (8) 
Income (loss) before income taxes$359  $(6,380) $(14,604) $(26,806) 
Income tax expense(5)   (5) (53) 
Net income (loss) $354  $(6,380) $(14,609) $(26,859) 
Beneficial conversion feature of convertible preferred stock  (12,500)   (12,500) 
Net income (loss) attributable to common stockholders$354  $(18,880) $(14,609) $(39,359) 
Basic
Weighted average common stock shares outstanding89,649,922  64,900,007  81,612,112  60,599,456  
Basic earnings (loss) per share $  $(0.29) $(0.18) $(0.65) 
Diluted
Weighted average common stock shares outstanding105,138,894  64,900,007  81,612,112  60,599,456  
Diluted earnings (loss) per share$  $(0.29) $(0.18) $(0.65) 
See notes to condensed consolidated financial statements

2

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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 StockAdditional
Paid-In
Capital
Treasury
Stock
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmountSharesAmountSharesAmount
Balances, June 30, 20192,093,155  $2  1,716  $  89,535,024  $88  $432,358  $(47) $(366,251) $66,150  
Stock-based compensation—  —  —  —  —  —  1,267  —  —  1,267  
Stock option exercises—  —  —  —  52,121  —  123  —  —  123  
Restricted stock awards—  —  —  —  109,629  2  (2) —  —    
Series B conversion to common stock—  —  (18) —  100,000  —  —  —  —  —  
Net income—  —  —  —  —  —  —  —  354  354  
Balances, September 30, 20192,093,155  $2  1,698  $  89,796,774  $90  $433,746  $(47) $(365,897) $67,894  
Preferred Stock
Series A
Preferred Stock
Series B
Common StockAdditional
Paid-In
Capital
Treasury
Stock
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmountSharesAmountSharesAmount
Balances, June 30, 20182,093,155  $2  5,000  $  59,459,446  $59  $366,123  $(47) $(325,400) $40,737  
Stock-based compensation—  —  —  —  —  —  892  —  —  892  
Stock option exercises—  —  —  —  116,387  —  222  —  —  222  
Restricted stock awards—  —  —  —  467,298  1  (1) —  —    
Series B issuance, net of issuance cost—  —  —  —  —  —  99  —  —  99  
Series B conversion to common stock—  —  (1,900) —  10,555,556  11  (11) —  —    
Series B beneficial conversion feature—  —  —  —  —  —  12,500  —  (12,500)   
Net loss—  —  —  —  —  —  —  —  (6,380) (6,380) 
Balances, September 30, 20182,093,155  $2  3,100  $  70,598,687  $71  $379,824  $(47) $(344,280) $35,570  


3

Table of contents
Preferred Stock
Series A
Preferred Stock
Series B
Common StockAdditional
Paid-In
Capital
Treasury
Stock
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmountSharesAmountSharesAmount
Balances, January 1, 20192,093,155  $2  3,100  $  70,793,725  $71  $381,004  $(47) $(351,288) $29,742  
Stock-based compensation—  —  —  —  —  —  3,978  —  —  3,978  
Stock option exercises—  —  —  —  412,500  —  1,193  —  —  1,193  
Restricted stock awards—  —  —  —  801,661  1  (1) —  —    
Series B conversion to common stock—  —  (1,402) —  7,788,888  8  (8) —  —    
Equity offering, net of finance costs—  —  —  —  10,000,000  10  47,580  —  —  47,590  
Net loss—  —  —  —  —  —  —  —  (14,609) (14,609) 
Balances, September 30, 20192,093,155  $2  1,698  $  89,796,774  $90  $433,746  $(47) $(365,897) $67,894  
Preferred Stock
Series A
Preferred Stock
Series B
Common StockAdditional
Paid-In
Capital
Treasury
Stock
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmountSharesAmountSharesAmount
Balances, January 1, 20182,093,155  $2    $  55,904,072  $56  $313,922  $(47) $(305,056) $8,877  
Stock-based compensation—  —  —  —  —  —  4,896  —  —  4,896  
Stock option exercises—  —  —  —  285,403  —  528  —  —  528  
Restricted stock awards—  —  —  —  1,733,731  2  (2) —  —    
Common stock issuance upon retirement
—  —  —  —  2,119,925  2  (2) —  —    
Series B issuance, net of issuance costs—  —  5,000  —  —  —  47,993  —  —  47,993  
Series B conversion to Common Stock—  —  (1,900) —  10,555,556  11  (11) —  —    
Series B beneficial conversion feature—  —  —  —  —  —  12,500  —  (12,500)   
Cumulative effect of accounting change—  —  —  —  —  —  —  —  135  135  
Net loss—  —  —  —  —  —  —  —  (26,859) (26,859) 
Balances, September 30, 20182,093,155  $2  3,100  $  70,598,687  $71  $379,824  $(47) $(344,280) $35,570  
See notes to condensed consolidated financial statements
4

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BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. DOLLARS, IN THOUSANDS)
(Unaudited)
Nine months ended September 30,
20192018
Operating activities:
Net loss$(14,609) $(26,859) 
Adjustments to reconcile net loss to net cash flows from operating activities
Depreciation and amortization253  685  
Impairment loss on equipment  78  
Accretion of debt discount and loan costs11,441  2,953  
Amortization of intangible assets5,084  3,868  
Provision for inventory obsolescence57  396  
Stock-based compensation expense3,978  4,896  
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable(19,795) (3,581) 
Inventories(5,416) 261  
Prepaid expenses and other assets(1,686) (545) 
Accounts payable and accrued liabilities14,844  (427) 
Net cash flows used in operating activities(5,849) (18,275) 
Investing activities:
Product acquisitions(20,674) (1,951) 
Acquisitions of equipment(79) (155) 
Net cash flows used in investing activities(20,753) (2,106) 
Financing activities:
Proceeds from issuance of common stock48,000    
Proceeds from issuance of Series B preferred stock  50,000  
Equity issuance costs(410) (1,410) 
Proceeds from notes payable60,000    
Proceeds from exercise of stock options1,193  528  
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 activities38,643  48,668  
Net change in cash and cash equivalents12,041  28,287  
Cash and cash equivalents at beginning of period43,822  21,195  
Cash and cash equivalents at end of period$55,863  $49,482  
Cash paid for interest$5,339  $4,645  
See notes to condensed 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)

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 chronic conditions. The Company is utilizing its novel and proprietary BioErodible MucoAdhesive (BEMA) drug-delivery technology and other drug delivery technologies to develop and commercialize new applications of proven therapies aimed at addressing important unmet medical needs. The Company commercializes in the United States using its own 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 opioid-induced constipation in adult patients with chronic non-cancer pain (Note 6).
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 has been derived from the Company’s audited consolidated financial statements included in its annual report on Form 10-K for the year ended December 31, 2018. Certain footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the Securities and Exchange Commission rules and regulations. It is 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 on Form 10-K for the year ended December 31, 2018.
Operating results for the three- and nine-month periods ended September 30, 2019 are not necessarily indicative of results for the full year or any other future periods.
As used herein, the Company’s common stock, par value $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”), 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 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 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 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.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)

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.
Inventory
Inventories are stated at the lower of cost or net realizable value with costs determined for each batch under the first-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 $0.2 million for inventory obsolescence as of both September 30, 2019 and December 31, 2018.
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.
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 obligation on product sold.
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.
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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)

Adjustments to product sales
The Company recognizes product sales net of estimated allowances for rebates, price adjustments, returns, chargebacks, vouchers and prompt payment discounts. A significant majority of the Company’s adjustments to gross product revenues are the result of accruals for its commercial contracts, retail consumer subsidy programs, and Medicaid and Medicare rebates.
The Company establishes allowances for estimated rebates, chargebacks and product returns based on numerous qualitative and quantitative factors, including:
the number of and specific contractual terms of agreements with customers;
estimated levels of inventory in the distribution channel;
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 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 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 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.
Product returns-Consistent with industry practice, the Company offers contractual return rights that allow its customers to return the products within an 18-month period that begins six months prior to and ends twelve months after expiration of the products.
Rebates- The liability for government program rebates is calculated based on historical and current rebate redemption and utilization rates contractually submitted by each program’s administrator.
Price adjustments and chargebacks-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 may be required to pay higher or lower total price adjustments and/or chargebacks than it had estimated, and such differences may be significant.
The Company, from time to time, offers certain promotional product-related incentives to its customers. The Company has voucher programs for BELBUCA, Symproic and BUNAVAIL whereby the Company offers a point-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.
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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)

Prompt payment discounts-The Company typically offers its wholesale customers a prompt payment discount of 2% as an incentive 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. In addition to this relatively short accrual to payment cycle, the Company receives daily information from the wholesalers regarding their sales of the Company’s products and actual on hand inventory levels of its products. This enables the Company to execute accurate provisioning procedures. Consistent with the pharmaceutical industry, the accrual to payment cycle for returns is longer and can take several years depending on the expiration of the related products.
Cost of sales
Cost of sales includes the direct costs attributable to the production of BELBUCA and BUNAVAIL. 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. 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.
Since April 2019, cost of sales has also included direct costs attributable to the production of Symproic.
For BREAKYL and PAINKYL (the Company’s out-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.
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 September 30, 2019:
Level 1Level 2Level 3Balance at September 30, 2019
Cash and cash equivalents$55,863  —  —  $55,863  
The cash and cash equivalent balance as of September 30, 2019 includes investments in various money market accounts and cash held in interest bearing accounts.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)

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 nine months ended September 30, 2019. Research and development expense for the nine months ended September 30, 2018 totaled $4.0 million.
2. Leases:
The components of lease expense were as follows:
Three months ended September 30,Nine months ended September 30,
2019201820192018
Lease Cost
Operating lease cost
Operating lease$82  $81  $246  $244  
Variable lease costs3  1  10  1  
Total lease cost$85  $82  $256  $245  
Nine months ended September 30,
20192018
Other Information
Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases
$261  $245  

Nine months ended September 30,
20192018
Lease Term and Discount Rate
Weighted-average remaining lease term Operating leases3.0 years4.0 years
Weighted-average discount rate Operating leases11.8 %11.8 %
Maturity of Lease Liabilities
Future minimum lease payments under non-cancellable leases as of September 30, 2019 were as follows:
Maturity of Lease Liabilities
2019$89  
2020360  
2021370  
2022219  
Total lease payments$1,038  
Less: Interest(152) 
Present value of lease liabilities$886  
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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)