13.

Stockholders’ equity:

Common Stock

On August 23, 2017, the Company and Dr. Mark Sirgo entered into a retirement agreement (the “Sirgo Retirement Agreement”). Pursuant to the Sirgo Retirement Agreement, all unvested RSUs previously issued under the Company’s equity incentive plans and held by Dr. Sirgo as of the retirement date were cancelled and, in lieu thereof, Dr. Sirgo was awarded a one-time issuance of shares of Common Stock based upon a net present valuation of the cancelled RSUs in January 2018 of 795,730 shares of Common Stock.

On January 12, 2018, the Company and Dr. Niraj Vasisht entered into a retirement agreement (the “Vasisht Retirement Agreement”). Pursuant to the Vasisht Retirement Agreement, all unvested RSUs previously issued under the Company’s equity incentive plans and held by Dr. Vasisht as of the retirement date were cancelled and, in lieu thereof, Dr. Vasisht was awarded a one-time issuance of shares of Common Stock based upon a net present valuation of the cancelled RSUs in March and December 2018 of 309,162 and 65,000 shares of Common Stock, respectively.

The Compensation Committee of the Board of Directors approved in early 2018, equity awards for 2017 in the form of RSUs to its named executive officers (including Drs. Sirgo and Vasisht) and other senior executives. Dr. Sirgo, received 285,305 and Dr. Vasisht received 198,129, respectively, shares of Common Stock in fulfillment of the Company’s contractual obligations. Such shares were issued in 2018.

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.

On November 9, 2018, The Company filed a shelf registration statement (as amended on January 18, 2019) which registered up to $150 million of the Company’s securities for potential future issuance and such registration statement was effective on February 7, 2019.

Preferred Stock and Series A Preferred

The Company had authorized five million “blank check” shares of $.001 par value convertible preferred stock. 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, 2018, 2,093,155 shares of Series A Preferred were outstanding and 2,285,700 shares of “blank check” preferred stock remain authorized but undesignated. There were no conversions of Series A Preferred during the years ended December 31, 2018, 2017 or 2016.

Series B Preferred stock financing

In May of 2018, the Company closed on the 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 as Series B Non-Voting Convertible Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”) at a purchase price of $10,000 per share.

Each share of Series B Preferred Stock is convertible into a number of shares of the Company’s common stock at a conversion price of $1.80 per share (subject to adjustment for stock splits and stock dividends as provided in the Certificate of Designation). At the time of closing the then outstanding shares of Series B Preferred Stock were 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, subject to certain limitations related to beneficial ownership.

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. 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, subject to certain limitations related to beneficial ownership.

During the year ended December 31, 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 December 31, 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 year ending December 31, 2018 upon the August 2018 stockholder approval, which eliminated the contingency. 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, the intrinsic value of the conversion option , totaling $12.5 million, was recorded as a reduction to additional paid-in capital, increasing net loss attributable to the Company Common stockholders.

Restricted stock units

During the year ended December 31, 2018, 2,034,261 RSUs, were granted to members of the Company’s executive officers, board of directors, certain employees and retiring officers, with a fair market value of approximately $4.7 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 as following: (i) For executive officers, half of the grant vests in equal installments over three years and the remaining half vests subject to performance criteria over three years, (ii) for employees, the grants immediately vested in full October 2018, (iii) for the board of directors grants vest ratably from August 2018 to August 2022, and (iv) and for retiring officers, the grants vested immediately vested in full February and March 2018.

Restricted stock activity during the year ended December 31, 2018 was as follows:


	Number of Restricted Shares			Weighted Average Fair Market Value Per RSU
Outstanding at January 1, 2018		4,706,895		$	5.20
Granted:
Executive officers		1,183,750			2.25
Directors		469,261			2.59
Employees		381,250			2.28
Vested		(1,863,731	)		2.57
Forfeitures		(591,398	)		2.46
Conversions		(2,119,925	)		2.72

Outstanding at December 31, 2018		2,166,102		$	2.59

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 ending 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 and of that reserve, 35,000 Performance RSUs were awarded in 2015). No additional Performance RSUs were awarded in 2017 or 2018. 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 pre-defined revenue amounts by the Company, as reported in its Annual Report on Form 10-K. During the years ended December 31, 2018, 2017 and 2016, a total of 31,036, 9,958 and 13,347 RSUs vested, respectively, subject to performance criteria.

Stock options

The Company has a 2011 Equity Incentive Plan. During the 2017 Annual Meeting of Stockholders (the “Annual Meeting”), stockholders approved an 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 7,100,000 shares from 11,050,000 to 18,150,000.

An additional 523,854 shares of Common Stock underlying options previously granted under the Company’s Amended and Restated 2001 Incentive Plan remain outstanding and exercisable as of December 31, 2018. 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.

During the years ended December 31, 2018, 2017 and 2016, Company employees, directors and affiliates exercised approximately 0.4 million, 0.2 million and 0.1 million stock options, respectively, with net proceeds to the Company of approximately $0.7 million, 0.4 million and $0.3 million, respectively.

Stock option activity for the years ended December 31, 2018, 2017 and 2016 is as follows:


	Number of Shares			Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value
Outstanding at January 1, 2016		3,397,529		$	5.42	$	3,124

Granted in 2016:
Officers and Directors		95,000		$	2.34
Others		558,373			3.12
Exercised		(147,425	)		2.01
Forfeitures		(434,486	)		13.17

Outstanding at December 31, 2016		3,468,991		$	4.14	$	0

Granted in 2017:
Officers and Directors		83,658		$	2.64
Others		873,017			1.96
Exercised		(202,519	)		2.17
Forfeitures		(1,510,193	)		5.13

Outstanding at December 31, 2017		2,712,954		$	2.98	$	1,190

Granted in 2018:
Officers and Directors		1,249,817		$	2.49
Others		1,299,360			2.60
Exercised		(350,441	)		2.00
Forfeitures		(502,186	)		3.48

Outstanding at December 31, 2018		4,406,004		$	3.19	$	4,172

Options outstanding at December 31, 2018 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		3,948,887		7.72	$	2.70
$5.01 – 10.00		387,361		4.78	$	5.91
$10.01 – 15.00		38,756		6.15	$	13.09
$15.01 – 20.00		31,000		6.00	$	16.20

		4,406,004					$	4,172

Options exercisable at December 31, 2018 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		1,196,693		4.07	$	3.15
$5.01 – 10.00		375,722		4.71	$	6.10
$10.01 – 15.00		38,756		6.15	$	13.09
$15.01 – 20.00		31,000		5.80	$	16.20

		1,642,171					$	653

The weighted average grant date fair value of options granted during the years ended December 31, 2018, 2017 and 2016 was $1.57, $1.46 and $1.75, respectively. There were no options granted during the years ended December 31, 2018, 2017 or 2016 whose exercise price was lower than the estimated market price of the stock at the grant date.

Nonvested stock options as of December 31, 2018, 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, 2018		885,484
Granted		2,549,177
Vested		(209,500	)
Forfeited		(461,328	)

Nonvested at December 31, 2018		2,763,833		$	1.54	$	5,979

As of December 31, 2018, there was approximately $6.9 million of unrecognized compensation cost related to unvested share-based compensation awards granted. These costs will be expensed over the next four years.

Stock-based compensation

During the year ended December 31, 2018, a total of 2,549,177 options to purchase Common Stock, with an aggregate fair market value of approximately $3.9 million, were granted to Company employees and directors. The options granted have a term of 10 years from the grant date and vest ratably between a one and three-year period. The fair value of each option is amortized as compensation expense evenly through the vesting period.

Warrants:

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

During the year ended December 31, 2016, the Company granted warrants to purchase 84,986 shares of Common Stock at an exercise price of $3.53 per share to Midcap and its affiliates in connection with the Company’s extension agreement with MidCap. The warrants were valued using the Black-Scholes Model, which fair value is approximately $0.05 million. As of December 31, 2018, 84,986 warrants remain outstanding.

In February 2017, the Company granted warrants to purchase 1,701,583 shares of Common Stock at an exercise price of $2.38 per share to CRG and certain of its affiliates in connection with the Company’s term loan agreement with CRG. The warrants were valued using the Black-Scholes Model, which fair value is approximately $4.5 million.

In December 2017, the Company granted warrants to purchase 349,451 shares of Common Stock at an exercise price of $3.42 per share to CRG and certain of its affiliates in connection with the Company’s 2^nd tranche funding from its term loan agreement with CRG. The warrants were valued using the Black-Scholes Model, which fair value is approximately $1.5 million. As of December 31, 2018, a cumulative of 2,051,034 to CRG and affiliates remain outstanding.