Basis of Presentation (Policies)

6 Months Ended

Jun. 30, 2013

Overview:

The accompanying unaudited condensed consolidated financial statements of BioDelivery Sciences International, Inc., a Delaware corporation, together with its wholly-owned subsidiaries, Arius Pharmaceuticals, Inc., a Delaware corporation (“Arius One”), and Arius Two, Inc., a Delaware corporation (“Arius Two”), and its majority-owned, inactive subsidiary, Bioral Nutrient Delivery, LLC, a Delaware limited liability company (“BND”, together with Arius One and Arius Two, collectively, the “Company” or “we”, “us” or similar terminology) have been prepared by the Company without audit. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at June 30, 2013, and for all periods presented, have been made. All intercompany accounts and transactions have been eliminated.

Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the Securities and Exchange Commission (“SEC”) rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2012, which are included in the Company’s 2012 Annual Report on Form 10-K, filed with the SEC on March 18, 2013 (the “2012 Annual Report”). The accompanying condensed consolidated balance sheet at December 31, 2012 has been derived from the audited financial statements at that date, but does not include all information and notes required by GAAP for complete financial statements.

The Company is a specialty pharmaceutical company that is leveraging its novel and proprietary patented drug delivery technologies to develop and commercialize, either on its own or in partnerships with third parties, new applications of proven therapeutics. The Company is focusing on developing products to meet unmet patient needs in the areas of pain management and addiction.

The Company’s pain franchise currently consists of three products, two of which utilize the patented BioErodible MucoAdhesive (“BEMA”) drug delivery technology, a thin film applied to the inner lining of the cheek. ONSOLIS (fentanyl buccal soluble film) is approved in the U.S., Canada, E.U. (where it is marketed as BREAKYL) and Taiwan (where it is marketed as PAINKYL™), for the management of breakthrough pain in opioid tolerant, adult patients with cancer. The commercial rights to ONSOLIS are licensed to Meda AB (“Meda”) for all territories worldwide except for Taiwan (licensed to and TTY Biopharm Co. Ltd. (“TTY”)) and South Korea (licensed to Kunwha Pharmaceutical Co., Ltd. (“Kunwha”)). The Company’s second pain product using the BEMA technology, BEMA Buprenorphine, is in Phase 3 clinical trials for the treatment of moderate to severe chronic pain and is licensed on a worldwide basis to Endo Health Solutions, Inc. (“Endo”). The Company’s third pain product in development is Clonidine Topical Gel for the treatment of painful diabetic neuropathy, which was licensed from Arcion Therapeutics, Inc. (“Arcion”) in March 2013. Additionally, in July 2013, the Company filed a New Drug Application for BUNAVAIL (buprenorphine naloxone buccal film), a high dose formulation of buprenorphine in combination with naloxone for the maintenance treatment of opioid dependence.

The results of operations for the six month period ended June 30, 2013 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year. Readers of this Quarterly Report are strongly encouraged to review the risk factors relating to the Company which are set forth in the 2012 Annual Report.

BDSI^® and BEMA^® are registered trademarks of the Company. The BioDelivery Sciences logo and BUNAVAIL^TM are trademarks owned by the Company. ONSOLIS^® is a registered trademark of Meda Pharmaceuticals, Inc. ONSOLIS^® is a registered trademark of Meda Pharmaceuticals, Inc. BREAKYL™ is a trademark owned by Meda Pharma GmbH & Co. KG. PAINKYL™ is a trademark owned by TTY Biopharm. All other trademarks and tradenames are owned by their respective owners.

As used herein, the term “Common Stock” means the Company’s common stock, par value $.001 per share.

Fair Value of Financial Assets and Liabilities

Fair value of financial assets and liabilities:

The Company measures the fair value of financial assets and liabilities 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. 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 assets and liabilities measured at fair value on a recurring basis at June 30, 2013 and December 31, 2012, respectively:


	June 30, 2013								December 31, 2012
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Fair Value Measurements Using:
Assets
Derivative asset (warrant)	$	—	$	—	$	—	$	—	$	—	$	50,300	$	—	$	50,300
Liabilities

Derivative liabilities	$	—	$	3,030,140	$	—	$	3,030,140	$	—	$	4,497,977	$	—	$	4,497,977

The table below provides a reconciliation of the beginning and ending balances for the assets and liabilities measured at fair value using observable inputs (Level 2). The table reflects net gains and losses for all financial assets and liabilities categorized as Level 2 as of June 30, 2013 and December 31, 2012.


	$			Number of Warrants
Assets:
Warrant asset as of December 31, 2012	$	50,300			2,000,000
Decrease in fair value of warrants (Note 7)		(50,300	)		(2,000,000	)

Warrant asset as of June 30, 2013	$	—			—


Liabilities:
Warrant liability as of December 31, 2012	$	4,497,977			2,009,436
Decrease in fair value of warrants		(1,467,837	)		—

Warrant liability as of June 30, 2013	$	3,030,140			2,009,436