12.

Stockholders’ equity:

Common Stock

On March 11, 2011, the Company closed a private placement financing, issuance and sale of Common Stock. The final amount of Common Stock issued in the offering was an aggregate of 4,807,693 shares of Common Stock.

On December 3, 2012, the Company closed a registered direct offering, issuance and sale of Common Stock. The final amount of Common Stock issued in the offering was an aggregate of 6,791,887 shares of Common Stock.

In November 2013, the Company filed a shelf registration statement which registered up to $75 million of the Company’s securities for potential future issuance, and such registration statement was declared effective on December 18, 2013. In January 2014, the Company pulled from the shelf registration 658,489 shares of common stock for approximate proceeds of $4 million.

Preferred Stock

The Company had authorized five million “blank check” shares of $.001 par value convertible preferred stock. On December 3, 2012, the Company closed a registered direct offering, issuance and sale of Series A Preferred. The final amount of Series Preferred issued in the offering was an aggregate of 2,709,300 shares of Series A Preferred. In the event of the Company’s liquidation, dissolution or winding up, holders of the Series A Preferred will receive a payment equal to $.001 per share of Series A Preferred before any proceeds are distributed to the holders of common stock. After the payment of this preferential amount, and subject to the rights of holders of any class or series of capital stock hereafter created specifically ranking by its terms senior to the Series A Preferred, the holders of Series A Preferred will participate ratably in the distribution of any remaining assets with the common stock and any other class or series of our capital stock hereafter created that participates with the common stock in such distributions. At December 31, 2013, 2,709,300 shares of Series A Preferred were outstanding and 2,290,700 shares of “blank check” preferred stock remain authorized but undesignated.

Restricted Stock Units:

During the year ended December 31, 2012, a total of 57,500 RSUs were issued to independent directors pursuant to the Company’s 2011 Equity Incentive Plan and fully vested September 14, 2012. The expense related to the issuance of these RSUs was approximately $0.3 million in 2012 and was recorded in general and administrative expense in the consolidated statement of operations.

During the year ended December 31, 2013, a total of 1,078,336 RSUs with a fair market value of approximately $4.5 million were granted to members of the Company’s senior management. 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, and vest in equal installments over three years. This grant was in lieu of the 2012 annual option grant typically given to senior management in order to bring the percentage ownership of senior management in line with the senior management of companies in the Company’s peer group.

In addition, in June 2013, the Company issued 3,125 RSUs with a fair value of $0.01 million to a new board member, which vested immediately. The Company also issued in August 2013, a total of 118,853 RSUs to board members with a fair value of approximately $0.6 million, of which 63,853 RSUs vested immediately and the remaining 55,000 vest in August 2014.

Performance Long Term Incentive Plan

In December 2012, the Company approved the BDSI Performance Long Term Incentive Plan (“LTIP”). The LTIP is designed as an incentive for the Company’s senior management to generate revenue for the Company.

The LTIP consists of Restricted Stock Units (as defined under the Company’s 2011 Equity Incentive Plan, and which is referred to as Performance RSUs) which are rights to acquire shares of the Company’s common stock. All Performance RSUs granted under the LTIP will be granted under the Company’s 2011 Equity Incentive Plan (as the same may be amended, supplemented or superseded from time to time) as “Performance Compensation Awards” under such plan. The participants in the LTIP are either named executive officers or senior officers of the Company.

The term of the LTIP began with the Company’s fiscal year ended December 31, 2012 and lasts through the fiscal year ended December 31, 2019. The total number of Performance RSUs covered by the LTIP is 1,078,000, of which 978,000 were awarded in 2012 (with 100,000 Performance RSUs being reserved for future hires). The Performance RSUs under the LTIP did not vest upon granting, but instead are subject to potential vesting each year over the 8 year term of the LTIP depending on the achievement of revenue by our company, as reported in our Annual Report on Form 10-K. A total of 8,968 RSUs vested, subject to performance criteria, during the year ended December 31, 2013. The expense related to the issuance of these RSUs

was approximately $0.03 million in 2012 and $0.9 million in 2013, and was recorded in general and administrative expense in the consolidated statement of operations. The fair value of RSUs is determined using actual market prices of the Common Stock and the number of shares expected to vest.

Stock options:

The Company has a 2011 Equity Incentive Plan, which was approved by stockholders in July 2011 and covers a total of 4,200,000 shares of Common Stock. An additional 3,192,596 shares of Common Stock underlying options previously granted under the Company’s Amended and Restated 2001 Incentive Plan remain outstanding and exercisable. The Company’s Amended and Restated 2001 Incentive Plan expired in July 2011 and no new securities may be issued thereunder. Options may be awarded during the ten-year term of the 2011 Equity Incentive Plan to Company employees, directors, consultants and other affiliates.

Stock option activity for the years ended December 31, 2013, 2012 and 2011 is as follows:


	Number of Shares			Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value
Outstanding at January 1, 2011		4,311,539		$	3.65
Granted in 2011:
Officers and Directors		209,619		$	3.44
Others		238,918			3.41
Exercised		(129,888	)		2.69
Forfeitures		(76,937	)		3.09

Outstanding at December 31, 2011		4,553,251		$	3.66	$	—


Granted in 2012:
Officers and Directors		281,174		$	2.36
Others		485,540			2.80
Exercised		(789,305	)		2.60
Forfeitures		(250,741	)		3.26

Outstanding at December 31, 2012		4,279,919		$	3.70	$	4,572,205


Granted in 2013:
Officers and Directors		55,659		$	5.39
Others		223,135			4.47
Exercised		(115,667	)		3.25
Forfeitures		(250,119	)		2.89

Outstanding at December 31, 2013		4,192,927		$	3.82	$	9,145,780

Options outstanding at December 31, 2013 are as follows:


Range of Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Aggregate Intrinsic Value
$1.00 – 5.00		3,230,768		5.48	$	3.10
$5.01 – 10.00		962,159		4.02	$	6.25

		4,192,927					$	9,145,780

Options exercisable at December 31, 2013 are as follows:


Range of Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Aggregate Intrinsic Value
$1.00 – 5.00		2,671,959		4.78	$	3.03
$5.01 – 10.00		906,500		3.66	$	6.30

		3,578,459					$	7,759,365

The weighted average grant date fair value of options granted during the years ended December 31, 2013, 2012 and 2011 was $3.28, $1.97 and $3.43, respectively. There were no options granted during the years ended December 31, 2013, 2012 or 2011 whose exercise price was lower than the estimated market price of the stock at the grant date.

Nonvested stock options as of December 31, 2013, and changes during the year then ended, are as follows:


Nonvested Shares	Shares			Weighted Average Grant Date Fair Value		Intrinsic Value
Nonvested at January 1, 2013		854,640
Granted		278,794
Vested		(342,538	)
Forfeited		(176,428	)

Nonvested at December 31, 2013		614,468		$	2.59	$	1,386,415

As of December 31, 2013, there was approximately $4.6 million of unrecognized compensation cost related to unvested share-based compensation awards granted. These costs will be expensed over the next six years.

Warrants:

The Company has granted warrants to purchase shares of Common Stock. Warrants may be granted to affiliates in connection with certain agreements.

Warrants outstanding and exercisable at December 31, 2013 are as follows:


Range of Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Aggregate Intrinsic Value
$0.00 – 5.00		2,356,792		1.44	$	3.92	$	4,640,492

The Company issued warrants to purchase 357,356 shares of Common Stock at a price of $4.20 in connection with a loan financing in July 2013 (note 9). The warrants had a fair value of approximately $1 million at the date of the grant.

Reclassification of derivative liability to equity:

During the year ended December 31, 2013, warrants by an investor were exercised to purchase 10,000 shares of Common Stock at $5.00 per share. Until the time of exercise, the aforementioned warrants were treated as a derivative liability. Upon exercise of the warrants, these amounts were reclassified to equity based on the fair value on the date of exercise.

During the year ended December 31, 2012, warrants by various investors were exercised to purchase 281,865 shares of Common Stock at prices ranging from $3.00 to $5.00 per share. Until the time of exercise, 236,865 of the aforementioned warrants were treated as a derivative liability. Upon exercise of the warrants, these amounts were reclassified to equity based on the fair value on the date of exercise.

During the year ended December 31, 2011, CDC IV, LLC (“CDC”) exercised warrants to purchase 601,120 shares of Common Stock for $2.91 per share. Until the time of exercise the warrants were treated as a derivative liability. Upon exercise of the warrants, these amounts were reclassified to equity based on the fair value on the date of exercise.