9. Stockholders’ Equity:

Stock-based compensation

During the nine months ended September 30, 2014, a total of 152,265 options to purchase Common Stock with an aggregate fair market value of approximately $1 million were granted to Company employees. The options granted have a term of 10 years from the grant date and vest ratably over a three year period. The fair value of each option is amortized as compensation expense evenly through the vesting period. The fair value of each option award is estimated on the grant date using the Black-Scholes valuation model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. Expected volatilities are based on implied volatilities from historical volatility of the Common Stock, and other factors estimated over the expected term of the options. The expected term of options granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus contract term. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term. The weighted average for key assumptions used in determining the fair value of options granted during the nine months ended September 30, 2014 follows:


Expected price volatility	74.7-78.05	%
Risk-free interest rate	1.00-1.58	%
Weighted average expected life in years	6 years
Dividend yield	—

Option activity during the nine months ended September 30, 2014 was as follows:


	Number of Shares			Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value
Outstanding at January 1, 2014		4,192,927		$	3.82
Granted in 2014:
Officers and Directors		—			—
Others		152,265			9.41
Exercised		(1,337,878	)		3.48
Forfeitures		—			—

Outstanding at September 30, 2014		3,007,314		$	4.26	$	38,598,170

Options outstanding at September 30, 2014 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		2,059,390		5.25	$	3.10
$5.01 – 10.00		905,344		4.01	$	6.44
$10.01-15.00		23,744		9.82	$	12.44
$15.01-20.00		18,836		9.99	$	15.95

		3,007,314					$	38,598,170

Options exercisable at September 30, 2014 are as follows:


Range of Exercise Prices	Number Exercisable		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Aggregate Intrinsic Value
$1.00 – 5.00		1,725,513		4.69	$	2.98
$5.01 – 10.00		740,000		2.84	$	6.35
$10.01-15.00		—
$15.01-20.00		—

		2,465,513					$	32,321,327

The weighted average grant date fair value of options granted during the nine months ended September 30, 2014 was $6.77. There were no options granted during the nine months ended September 30, 2014 whose exercise price was lower than the estimated market price of the stock at the grant date. A summary of the status of the Company’s non-vested stock options as of January 1, 2014, and changes during the nine months ended September 30, 2014 is summarized as follows:


Nonvested Shares	Shares			Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value
Nonvested at January 1, 2014		614,468
Granted		152,265
Vested		(224,932	)
Forfeited		—

Nonvested at September 30, 2014		541,801		$	3.33	$	6,276,843

As of September 30, 2014, there was approximately $11.3 million of unrecognized compensation cost related to non-vested share-based compensation awards, including options and restricted stock units (“RSUs”) granted. These costs will be expensed through 2017.

On July 17, 2014, the Company held its 2014 Annual Meeting of Stockholders (the “Annual Meeting”). During the Annual Meeting, stockholders approved the amendment to the Company’s 2011 Equity Incentive Plan to increase the number of shares of common stock authorized for issuance under the plan by 2,000,000 shares from 6,800,000 to 8,800,000.

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 at September 30, 2014, all of which are exercisable are as follows:


Range of Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Aggregate Intrinsic Value
$0.01 – 5.00		900,425		0.56	$	3.12	$	12,578,937

During the nine months ended September 30, 2014, approximately 1.1 million shares of Common Stock underlying warrants were exercised for proceeds to the Company of $4.9 million. Also during the nine months ended September 30, 2014, there were 357,356 shares of Common Stock underlying a warrant exercised on a cashless basis, which resulted in a net issuance of 218,367 shares to the warrant holder.

In October, 2014, 0.6 million shares of Common Stock underlying warrants were exercised for proceeds to the Company of approximately $1.9 million.

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. Concurrent with the filing of such registration statement, the Company established an “at-the-market” offering program utilizing the universal shelf registration for up to $15 million of Common Stock. Cantor Fitzgerald & Co. is the placement agent for such offering program. In January 2014, the Company sold 658,489 shares of Common Stock under such offering program for approximate net proceeds of $3.9 million. In September and October 2014, the Company sold 529,010 and 116,911 shares of Common Stock, respectively, under such offering program for approximate net proceeds of $8.6 million and $1.9 million, respectively.

On February 7, 2014, the Company entered into a definitive Securities Purchase Agreement with certain institutional investors relating to a registered direct offering by the Company of 7,500,000 shares of the Company’s Common Stock, par value $.001 per share. The shares were sold at a price of $8.00 per share, yielding net offering proceeds of $58.2 million. The offering price per share was determined based on an approximately 3.1% discount to the closing price of the Common Stock on February 7, 2014.

During the nine months ended September 30, 2014, Company employees, directors and affiliates exercised approximately 1.3 million stock options, with net proceeds to the Company of approximately $4.6 million.

Preferred Stock

The Company has authorized five million “blank check” shares of $.001 par value convertible preferred stock. During the nine months ended September 30, 2014, 570,300 shares of Series A Preferred stock converted to common stock. At September 30, 2014, 2,139,000 shares of Series A Preferred were outstanding.

Earnings Per Share

During the nine months ended September 30, 2014 and 2013, outstanding stock options, warrants and convertible preferred stock of 6 million and 9.2 million, respectively, were not included in the computation of diluted earnings per share, because to do so would have had an antidilutive effect.

Recovery of Stockholder Short Swing Profit

In February 2014, three executive officers of the Company paid a total of approximately $0.08 million to the Company, representing the disgorgement of short swing profits under Section 16(b) under the Exchange Act. The amount was recorded as additional paid-in capital.

Restricted Stock Units

During the nine months ended September 30, 2014, a total of 995,619 RSUs were granted to members of the Company’s senior management, with a fair market value of approximately $8.8 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, and vest in equal installments over three years.

During the nine months ended September 30, 2014, a total of 110,000 RSUs were granted to members of the Company’s board of directors, with a fair market value of approximately $1.5 million. These RSUs were issued under the Company’s 2011 Equity Incentive Plan, as amended, and vest in equal installments over one year. Additionally, there were 15,000 RSUs granted to two new board members, with a market value of approximately $0.2 million. These RSUs were issued under the Company’s 2011 Equity Incentive Plan, as amended, and vest in 2015.

Also during the nine months ended September 30, 2014, the following RSUs vested; 1) a total of 359,446 RSUs that were previously granted in 2013 to members of the Company’s senior management with a fair market value of approximately $3.2 million, 2) a total of 55,000 RSUs that were previously granted in 2013 to members of the Company’s board of directors with a fair market value of approximately $0.7 million and 3) a total of 55,000 RSUs that were granted in 2014 to members of the Company’s board of directors with a fair market value of approximately $0.7 million. These RSUs were issued under the Company’s 2011 Equity Incentive Plan, as amended.

Performance Long Term Incentive Plan

In December 2012, the Company’s Board of Directors (the “Board”) 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 RSUs (which are referred to in this context as Performance RSUs) which are rights to acquire shares of 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 the Company, as reported in its Annual Report on Form 10-K. During the nine months ended September 30, 2014, a total of 4,447 RSUs vested, subject to performance criteria.