AcelRx Pharmaceuticals
Annual Report 2014

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549FORM 10-K☑ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2014 or ☐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: 001-35068ACELRX PHARMACEUTICALS, INC.(Exact name of registrant as specified in its charter) Delaware41-2193603(State or other jurisdiction ofincorporation or organization)(IRS EmployerIdentification No.)351 Galveston DriveRedwood City, CA 94063(650) 216-3500(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)Securities registered pursuant to Section 12(b) of the Act: Title of Each ClassName of Each Exchange on Which Registered Common Stock, $0.001 par valueThe NASDAQ Stock Market LLCSecurities registered pursuant to Section 12(g) of the Act:None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑ 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 of1934 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 suchfiling requirements for the past 90 days. Yes ☑ No ☐ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§-232.405 of this chapter) during the preceding 12 months (or for suchshorter period that the registrant was required to submit and post such files). Yes ☑ No ☐ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§-229.405) is not contained herein, and will not becontained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K. ☑ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer ☐Accelerated filer ☑Non-accelerated filer ☐ (Do not check if a smaller reporting company)Smaller reporting company ☐Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2) Yes ☐ No ☑ The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, 2014 (the last business day of the registrant’s mostrecently completed second fiscal quarter), based upon the last sale price reported on the NASDAQ Global Market on that date, was approximately$318,700,000. The calculation excludes 12,280,685 shares of the registrant’s common stock held by current executive officers, directors and stockholdersthat the registrant has concluded are affiliates of the registrant. Exclusion of such shares should not be construed to indicate that any such personpossesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant or that such person is controlled byor under common control with the registrant.As of February 25, 2015, the number of outstanding shares of the registrant’s common stock was 43,714,665.DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's notice of annual meeting of stockholders and proxy statement to be filed pursuant to Regulation 14A within 120 days afterRegistrant's fiscal year end of December 31, 2014, are incorporated by reference into Part III of this report. 1 ACELRX PHARMACEUTICALS, INC. 2014 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PagePART I Item 1. Business4Item 1A. Risk Factors33Item 1B. Unresolved Staff Comments59Item 2. Properties59Item 3. Legal Proceedings59Item 4. Mine Safety Disclosures60PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities61Item 6. Selected Financial Data62Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations64Item 7A. Quantitative and Qualitative Disclosures About Market Risk76Item 8. Financial Statements and Supplementary Data76Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure77Item 9A. Controls and Procedures77Item 9B. Other Information78PART III Item 10. Directors, Executive Officers and Corporate Governance79Item 11. Executive Compensation79Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters79Item 13. Certain Relationships and Related Transactions, and Director Independence80Item 14. Principal Accounting Fees and Services80PART IV Item 15. Exhibits, Financial Statement Schedules80Signatures81 Unless the context indicates otherwise, the terms “AcelRx,” “AcelRx Pharmaceuticals,” “we,” “us” and “our” refer to AcelRx Pharmaceuticals, Inc. ACELRX and “ACCELERATE.INNOVATE.ALLEVIATE.” are registered trademarks of AcelRx Pharmaceuticals, Inc. Other trademarks of AcelRxPharmaceuticals, Inc., including ZALVISO™, appearing in this annual report on Form 10-K are the property of AcelRx Pharmaceuticals, Inc. This reportalso contains trademarks and trade names that are the property of their respective owners. 2 Forward-Looking Statements This Annual Report on Form 10-K, or Form 10-K, contains “forward-looking statements” within the meaning of Section 21E of the Securities ExchangeAct of 1934, as amended, or the Exchange Act, which are subject to the “safe harbor” created by that section. The forward-looking statements in this Form10-K are contained principally under “Item 1. Business,” “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations.” In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,”“would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or thenegative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements involverisks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from theinformation expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-lookingstatement contained in this Form 10-K, we caution you that these statements are based on a combination of facts and factors currently known by us andour projections of the future, about which we cannot be certain. Many important factors affect our ability to achieve our objectives, including: •our ability to resubmit the Zalviso NDA, including our ability to satisfactorily conduct the additional clinical study requested by the FDA,and any additional studies that may be required by the FDA in order to resubmit the Zalviso NDA, and the time and resources required to doso; •our ability to obtain and maintain regulatory approval of Zalviso and other product candidates, and any related restrictions, limitations,and/or warnings in the label of an approved product candidate; •the success, cost and timing of our product development activities and clinical trials, including an additional clinical study for Zalviso; •our ability to obtain funding for our operations, including funding necessary for the planned commercialization and manufacturing ofZalviso in the United States and advancement of clinical trials for other product candidates including our planned Phase 3 clinical programfor ARX-04; •the potential achievement of collaboration milestones, including the approval of the Marketing Authorization Application for Zalviso in theEuropean Union and the timing thereof; •our plans to research, develop and commercialize our product candidates; •our ability to attract additional collaborators with development, regulatory and commercialization expertise; •the size and growth potential of the markets for our product candidates, and our ability to serve those markets; •our liquidity and capital resources; •our ability to successfully commercialize our product candidates; •the rate and degree of market acceptance of our product candidates; •our ability to develop sales and marketing capabilities, whether alone or with potential future collaborators; •regulatory developments in the United States and foreign countries; •the performance of our third party suppliers and manufacturers; •the success of competing therapies that are or become available; •the loss of key scientific or management personnel; •the accuracy of our estimates regarding expenses, future revenues, capital requirements and needs for additional financing; and •our ability to obtain and maintain intellectual property protection for our product candidates. In addition, you should refer to “Item 1A. Risk Factors” in this Form 10-K for a discussion of these and other important factors that may cause our actualresults to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that theforward-looking statements in this Form 10-K will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, theinaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as arepresentation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. Also, forward-looking statements represent our estimates and assumptions only as of the date of this Form 10-K. We undertake no obligation to publicly update anyforward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. 3 PART I Item 1. Business Overview We are a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for the treatment of acute pain.Our lead product candidate is Zalviso, formerly known as ARX-01. Zalviso is intended for the management of moderate-to-severe acute pain inhospitalized adult patients. Zalviso consists of sufentanil sublingual tablets delivered by the Zalviso System, a needle-free, handheld, patient-administered, pain management system (together, “Zalviso”). On July 25, 2014, the U.S. Food and Drug Administration, or FDA, issued a Complete Response Letter, or CRL, for our New Drug Application, or NDA,for Zalviso. The CRL contains requests for additional information on the Zalviso System to ensure proper use of the device. The requests includesubmission of data demonstrating a reduction in the incidence of optical system errors, changes to the Instructions for Use for the device to addressinadvertent dosing, among other items, and submission of additional data to support the shelf life of the product. In the third quarter of 2014, we held aType A meeting with the FDA to discuss the Zalviso CRL received in July. During the meeting we discussed the resubmission of the Zalviso NDA and thesteps necessary for the resubmission. In advance of resubmitting our Zalviso NDA, we agreed with the FDA to submit protocols for the bench testing andHuman Factors, or HF, studies for their review and comment. In addition, the FDA requested in the minutes of the meeting that we provide a riskassessment that analyzes the risks associated with inadvertent dosing and the rationale that bench testing and HF studies are sufficient to address thespecific items included in the CRL. We submitted the protocols and this rationale in the fourth quarter of 2014. In January 2015, we received feedbackfrom the FDA on the protocol and the planned analysis of the results of the bench test. No modifications to the conduct of the bench test were necessary;however, in response to the FDA’s request, we refined the planned analysis of the bench test results. In February 2015, we received feedback from the FDAon the HF protocols. In this feedback, the FDA confirmed that the HF studies as proposed were acceptable to evaluate the design changes related toinadvertent dispensing of tablets. In March 2015, we received additional correspondence from the FDA stating that in addition to the bench testing andtwo Human Factors studies we have performed in response to the issues identified in the CRL, an additional clinical study is needed to assess the risk ofinadvertent dispensing and overall risk of dispensing failures. We plan to meet with the FDA to discuss and clarify the need for an additional clinicalstudy, and the potential design and objectives of such a study. As a result of this most recent FDA communication and the need for clarity with the FDA,the Zalviso NDA resubmission is on hold. We will provide an update on the timing of the resubmission of the Zalviso NDA after we obtain moreinformation from the FDA. The FDA has precleared certain aspects of our proposed Risk Evaluation and Mitigation Strategy, or REMS, and indicated thatthey will continue discussion of our proposed REMS after the Zalviso NDA has been resubmitted. Zalviso Zalviso is an investigational, pre-programmed, non-invasive system to allow hospital patients with moderate-to-severe acute pain to self-dose withsufentanil sublingual tablets to manage their pain. Zalviso is designed to help address certain problems associated with post-operative intravenouspatient-controlled analgesia, by offering: •A high therapeutic index opioid: Zalviso uses sufentanil, an opioid that has a high therapeutic index. The therapeutic index is the ratio of theeffective dose versus the lethal dose. In animal studies, the therapeutic index for sufentanil was approximately 100 times larger than fentanyland 300 times larger than morphine. •A non-invasive route of delivery: Zalviso utilizes a sufentanil tablet which allows for a sublingual (under the tongue) route of delivery.Sufentanil is highly lipophilic which provides for rapid absorption in the fatty cells (or mucosal tissue) found under the tongue, and for rapidtransit across the blood-brain barrier to reach the mu-opioid receptors in the brain. The sublingual delivery used by Zalviso provides rapidonset of analgesia. The sublingual delivery system also eliminates the risk of IV-related analgesic gaps and IV complications, such ascatheter-related infections. In addition, because patients do not require direct connection to an IV patient-controlled analgesia, or PCA,infusion pump through IV tubing, Zalviso allows for ease of patient mobility. •A simple, pre-programmed PCA solution: Zalviso allows patients to self-dose sufentanil sublingual tablets via a pre-programmed, securesystem designed to eliminate the risk of programming errors. We submitted an NDA for Zalviso in September 2013 and, as mentioned above, the FDA issued a CRL for Zalviso on July 25, 2014. We have conductedadditional Human Factors studies and bench testing to address the related issues within the CRL. As mentioned above, in March 2015 we receivedcorrespondence from the FDA stating that in addition to the bench testing and two Human Factors studies we have performed in response to the issuesidentified in the CRL, an additional clinical study is needed to assess the risk of inadvertent dispensing and overall risk of dispensing failures. We plan tomeet with the FDA to discuss the need for an additional clinical study, and the potential design and objectives of such a study. 4TM The 505(b)(2) NDA submission for Zalviso is based on a development program that includes data from seven Phase 1 studies, three Phase 2 clinical trials,and three Phase 3 clinical trials. The Phase 3 trial program included two placebo-controlled efficacy and safety trials and one open-label activecomparator trial, in which Zalviso was compared to IV PCA with morphine. To date, the Zalviso safety database includes more than 600 patients. Zalvisosuccessfully achieved the primary efficacy endpoints for each of the Phase 2 and Phase 3 trials. A summary of the Phase 3 trials and results is as follows: •Active comparator trial (IAP309)—in November 2012, we reported top-line data demonstrating that Zalviso met its primary endpoint of non-inferiority in a Phase 3 open-label active comparator trial designed to compare the efficacy and safety of Zalviso (15 mcg/dose, 20 minutelock-out) to IV PCA with morphine (1mg/dose, 6 minute lock-out) for the treatment of moderate-to-severe acute post-operative painimmediately following major abdominal or orthopedic surgery. •Double-blind, placebo-controlled, abdominal surgery trial (IAP310)—in March 2013, we reported top-line data demonstrating that Zalvisomet its primary endpoint in a pivotal Phase 3 trial designed to compare the efficacy and safety of Zalviso to placebo in the management ofacute post-operative pain after major open abdominal surgery. Adverse events reported in the trial were generally mild or moderate in natureand similar in both placebo and treatment groups. Utilizing a randomized, double-blind, placebo-controlled design, this pivotal Phase 3 trialenrolled 178 adult patients at 13 U.S. sites. •Double-blind, placebo-controlled, orthopedic surgery trial (IAP311)—in May 2013, we reported top-line data demonstrating that Zalvisomet its primary endpoint in a pivotal Phase 3 trial designed to compare the efficacy and safety of Zalviso to placebo in the management ofacute post-operative pain after major orthopedic surgery. Utilizing a randomized, double-blind, placebo-controlled design, this pivotal Phase3 trial enrolled 426 adult patients at 34 U.S. sites. Treatment-emergent adverse events were generally mild to moderate in nature and similarfor the majority of adverse events between Zalviso and placebo-treated patients, despite the shorter duration of exposure in the placebo-treated patients caused by early termination due to inadequate analgesia. In December 2013, we announced a commercial collaboration with Grünenthal, covering the territory of the European Union, certain other Europeancountries and Australia for Zalviso for use in the management of moderate-to-severe acute pain within a hospital, hospice, nursing home or othermedically supervised setting. We retain all rights in remaining countries, including the United States, Asia and Latin America. The collaboration includeda Collaboration and License Agreement, or License Agreement, and a Manufacturing and Supply Agreement, or Supply Agreement. Under the terms of the License Agreement, we received an upfront cash payment of $30.0 million in December 2013, and in the third quarter of 2014, wereceived a milestone payment of $5.0 million related to the Marketing Authorization Application, or MAA, submission to the European MedicinesAgency, or EMA. We are eligible to receive an additional $15.0 million milestone payment upon the approval of the MAA. If approved, we are eligible toreceive approximately $200.0 million in additional milestone payments, based upon successful regulatory and product development efforts ($28.5million) and net sales target achievements ($171.5 million). Grünenthal will also make tiered royalty, supply and trademark fee payments in the mid-teensup to the mid-twenties percent range, on net sales of Zalviso in the Grünenthal territory. Grünenthal will be responsible for all commercial activities for Zalviso, including obtaining and maintaining pharmaceutical product regulatory approvalin the Grünenthal territory. We will be responsible for obtaining and maintaining device regulatory approval in the Grünenthal territory andmanufacturing and supply of Zalviso to Grünenthal for commercial sales. In July 2014, Grünenthal filed an MAA with the EMA under the centralized procedure in the European Union, or EU, for Zalviso for the management ofmoderate-to-severe acute pain in adult patients in a medically-supervised environment. In the fourth quarter of 2014, Grünenthal received 120-dayquestions from the EMA per the EMA’s standard regulatory review process. We have been working with Grünenthal towards the submission of theresponse to the 120-day questions. Grünenthal is currently working to complete the response and submit it to the EMA by the end of March 2015.Assuming the EMA accepts this filing, we anticipate a Committee for Medicinal Products for Human Use, or CHMP, opinion in the summer of 2015 and afinal decision by the EMA in the fall of 2015. In association with potential commercialization of Zalviso in the European Union, we underwent a Conformite Europeenne approval process for theZalviso device, more commonly known as a CE Mark approval process. In December 2014, we received CE Mark approval, which permits the commercialuse of the Zalviso device in the European Union. However, as a drug-device combination product, Zalviso will not be utilized commercially unless anduntil the EMA approves the Zalviso MAA. In connection with the CE Mark approval, we were also granted International Standards Organization, or ISO,13485:2003 certification of our quality management system in November 2014. This is an internationally recognized quality standard for medicaldevices issued by our notified body, the British Standards Institution, or BSI. ISO 13485:2003 certification recognizes that consistent quality policies and procedures are in place for the development, design and manufacturing ofmedical devices. The certification indicates that we have successfully implemented a quality system that conforms to ISO 13485 standards for medicaldevices. Certification to this standard is one of the key regulatory requirements for a CE Mark in the European Union as well as to meet equivalentrequirements in other international markets. The certification applies to the Redwood City, California location which designs, manufactures anddistributes finished medical devices. 5 ARX-04 We are also developing a Sufentanil Sublingual Single-Dose Tablet, or ARX-04, for the treatment of moderate-to-severe acute pain to be administered bya healthcare professional to a patient in settings of acute pain, such as in the emergency room, hospital floor, ambulatory care environment, or on thebattlefield. In December 2013, we completed an End-of-Phase 2 Meeting with the FDA to identify a Phase 3 program pathway forward for evaluation ofARX-04. We plan to initiate a pivotal Phase 3 trial for ARX-04 in patients with post-operative pain following abdominal surgery by the end of March2015. Pending completion of enrollment, we anticipate top-line data from this study in the fourth quarter of 2015. We have also been notified by the Department of Defense, or DoD, that they are preparing a contract to provide partial funding to support furtherdevelopment of ARX-04. We are currently engaged in the contracting process with the DoD to determine the nature, scope, amount and timing of thecontract. Phase 3 Program •In June 2014, we completed a pharmacokinetic study in support of the ARX-04 development program. In this study of healthy volunteers, itwas shown that two sublingual administrations of a Zalviso 15mcg sufentanil sublingual tablet dosed 20 minutes apart were comparable, interms of area under the plasma concentration time curve, or AUC, exposure and peak plasma concentration, to one sublingual administrationof an ARX-04 30mcg sufentanil sublingual tablet. We have proposed the inclusion of approximately 300 patients from the Zalviso clinicalprogram in the ARX-04 safety database to the FDA and we have designed the two Phase 3 ARX-04 trials accordingly. The ARX-04 safetydatabase required by the FDA is 500 patients. We have confirmation from FDA that some of the Zalviso patients can be included in theoverall ARX-04 safety database; however, further discussion is needed to determine the exact number of such patients that can be usedtowards achieving the 500 patient minimum total safety exposure number required for ARX-04. Based on an ongoing pharmacokineticanalysis, we may need to increase enrollment in our planned Phase 3 clinical trial program to meet the FDA’s requested exposurerequirements to ARX-04. •We plan to initiate a Phase 3 clinical trial, a double-blind, placebo-controlled efficacy and safety study of patients with post-operative painfollowing abdominal surgery by the end of March 2015. We expect top-line data from this trial in the fourth quarter of 2015. Approximately160 patients are planned to be enrolled in this study. •In the first half of 2015, contingent on DoD funding, we plan to initiate our second planned Phase 3 clinical trial, an open-label safety studyof patients who present to the emergency room with moderate-to-severe pain due to trauma or injury. We expect top-line data from this trial inthe second half of 2015. Approximately 40 patients are planned to be enrolled in this study. Timing of this trial is currently pendingfinalization of the DoD contract. Should we experience delays in such contract negotiations, we may elect to delay this Phase 3 trial beyondthe first half of 2015. Phase 2 Clinical Study Results In April 2013, we reported top-line data showing that the primary endpoint was achieved in a placebo-controlled, dose-finding, Phase 2 clinical trial ofARX-04 for acute pain. This trial randomized 101 patients following bunionectomy surgery in a 2:2:1 ratio to 30 mcg sufentanil sublingual tablet, 20mcg sufentanil sublingual tablet, or placebo treatment arms. Ninety-one percent of patients entering the trial completed the 12-hour trial period. Results demonstrated that patients receiving 30 mcg sufentanil sublingual tablet doses, administered by a healthcare professional, no more frequentlythan once per hour, had significantly greater pain reduction as measured by Summed Pain Intensity Difference to baseline during the 12-hour trial period(SPID-12) than placebo-treated patients (p=0.003). Adverse events, or AEs, reported in the trial were generally mild-to-moderate in nature, with two serious adverse events, or SAEs, of post-surgicalinfection reported, both of which were determined by the investigator to be unrelated to trial drug. Research and development of ARX-04, including the Phase 2 trial and pre-Phase 3 development, was funded by a $5.6 million grant from the U.S. ArmyMedical Research and Materiel Command, or USAMRMC. As of December 31, 2013, we had recognized the full amount of the grant of $5.6 million. ARX-02 and ARX-03 In addition to ARX-04, our product candidate pipeline consists of two other sufentanil-based sublingual product candidates. The Sufentanil SublingualTablet Breakthrough Pain, or BTP, Management System, or ARX-02, is a pain management system for the treatment of cancer patients who suffer fromBTP. The Sufentanil/Triazolam Sublingual Tablet, or ARX-03, is a single, fixed-dose, combination drug product designed to provide mild sedation,anxiety reduction and pain relief for patients undergoing painful procedures in a physician’s office. We have successfully completed Phase 2 clinicaltrials for ARX-02 and ARX-03. Future development of ARX-02 and ARX-03 is contingent on funding from a corporate partnership or other externalfunding source. 6 Sufentanil Sublingual Tablets Sufentanil, a high therapeutic index opioid, which has no active metabolites, is 5 to 10 times more potent than fentanyl and is used intravenously as aprimary anesthetic to produce balanced general anesthesia for surgery, and for epidural administration during labor and delivery. Sufentanil has manypharmacological advantages over other opioids. Published studies demonstrate that sufentanil produces significantly less respiratory depressive effectsrelative to its analgesic effects compared to other opioids, including morphine, alfentanil and fentanyl. These third party clinical results correlate wellwith preclinical trials demonstrating sufentanil’s high therapeutic index, or the ratio of the toxic dose to the therapeutic dose of a drug, used as a measureof the relative safety of the drug for a particular treatment. Accordingly, we believe that sufentanil can be developed to provide an effective and well-tolerated treatment for acute pain. The following table illustrates the difference between the therapeutic index of different opioids. Opioid TherapeuticIndex Meperidine 5 Methadone 12 Morphine 71 Hydromorphone 232 Fentanyl 277 Sufentanil 26,716 In addition, the pharmaceutical attributes of sufentanil, including lipid solubility and ionization, result in rapid cell membrane penetration and onset ofaction, which we believe make sufentanil an optimal opioid for the treatment of acute pain. Although the analgesic efficacy and safety of sufentanil have been well established, the product’s use has been historically limited due to its shortduration of action when delivered intravenously. Sublingual delivery of sufentanil avoids the high peak plasma levels and short duration of action of IVadministration. Our portfolio of product candidates leverages the above mentioned advantages of sufentanil delivered via the sublingual route. We believe our non-invasive, proprietary sufentanil tablet sublingual dosage form potentially overcomes many of the limitations of current treatment options available foracute pain. None of our product candidates have been approved by the United States Food and Drug Administration, orFDA. We have not generated any revenue from the sale of any of our product candidates. 7 Sublingual Delivery of Sufentanil: Summary of Phase 1 Clinical Studies Results We have completed seven Phase 1 studies with our proprietary sufentanil sublingual tablets to support our four product candidates under development.These studies demonstrated desirable and consistent pharmacokinetic, or PK, parameters, including: •relatively high bioavailability via the oral mucosa and very low gastrointestinal, or GI, bioavailability; •prolonged plasma levels relative to IV delivery; •PK parameters proportional to dose across a wide range of doses (2.5 mcg to 80 mcg); •lower peak plasma concentration, or Cmax, than IV delivery; •time to maximum plasma concentrations, or Tmax, range from 20 to 120 minutes; •while clearance increased in younger patients and heavier patients, clearance was not affected by race, sex, renal or hepatic parameters orconcomitant CYP3A4 substrates; •slightly increased Cmax and prolonged half-life with concomitant administration of the CYP3A4 inhibitor ketoconazole; •lack of drug accumulation with repeat-dosing and achievement of steady-state plasma concentrations after the 13th dose (with 20 minutesbetween dosings); •relatively low patient to patient variability in Tmax and Cmax; and •repeat dosing PK that supports a 20-minute minimum re-dosing interval. The chart below illustrates the PK profile of sufentanil sublingual tablets compared to IV delivery of sufentanil from one of our completed Phase 1 PKstudies. In summary, we have demonstrated that sublingual delivery of sufentanil avoids the high peak plasma levels and short duration of action of IVadministration, potentially enabling broader use of sufentanil. Our proprietary sufentanil sublingual tablet dosage form is a very small disc-shaped tabletwith a bioadhesive excipient, or inactive ingredient, which enables the tablet to adhere to mucosal tissues. When placed under the tongue, the sufentanilsublingual tablet imbibes saliva, adhering it to the sublingual tissues and forming a hydrogel patch. Sufentanil, from the sublingual tablet, rapidlydeposits into the fatty tissues under the tongue. The drug then absorbs into the plasma over several hours at roughly the same rate as it is beingredistributed and/or cleared from the plasma resulting in a plateau plasma concentration from approximately 20 to 120 minutes. The sufentanil sublingualtablet fully disintegrates within 5-10 minutes. The small size of the sufentanil sublingual tablet, pictured above, is designed to minimize the salivaresponse and amount of sufentanil swallowed, resulting in high oral transmucosal uptake, whereby a majority of the drug is absorbed via the oral tissuesultimately into the bloodstream, and thereby provides consistent pharmacokinetics. 8 Our Product Candidates The following table summarizes key information about our existing product candidates. Product Candidate Description Target Indication StatusZalviso Sufentanil SublingualTablet System Moderate-to-severeacute pain in thehospital setting NDA submitted to the FDA in September 2013, CRL received July 25, 2014. In March2015, we received correspondence from the FDA stating that an additional clinicalstudy is needed. We intend to meet with the FDA to discuss and clarify the need for anadditional clinical study, and the potential design and objectives of such a study.Timing of the NDA resubmission is to be clarified after the FDA meeting. MAA submitted to EMA in July 2014. Assuming the EMA accepts this filing, weanticipate a CHMP opinion in the summer of 2015 and a final decision by the EMA inthe fall of 2015. ARX-04 Sufentanil SublingualSingle-Dose Tablet Moderate-to-severeacute pain In April 2013, we reported that a Phase 2 trial of ARX-04 in patients afterbunionectomy surgery achieved its primary endpoint. The FDA agreed that this was awell-controlled study and could be used as a pivotal study. We plan to initiate a Phase 3 clinical trial that will evaluate the efficacy and safety ofARX-04 vs. placebo for the treatment of moderate-to-severe acute pain followingambulatory abdominal surgery by the end of March 2015, with top-line dataanticipated in the fourth quarter of 2015, pending completion of enrollment. This trialwas designed as the second of two well-controlled studies required for potential NDAfiling for ARX-04, the first was the bunionectomy Phase 2 study. We plan to initiate our second planned Phase 3 clinical trial, an open-label safety studyof patients who present to the emergency room with moderate-to-severe pain due totrauma or injury in the first half of 2015, with top-line data anticipated in the secondhalf of 2015, contingent on DoD funding. This study is not required to satisfy theregulatory requirements for ARX-04. Timing of this trial is currently pendingfinalization of the DoD contract. Should we have delays in such contract negotiationswe may elect to delay this Phase 3 trial beyond the first half of 2015. ARX-02 Sufentanil SublingualTablet BreakthroughPain, or BTP,Management System Cancerbreakthrough pain Phase 2 clinical trial and End of Phase 2 meeting completed. Future development contingent upon identification of corporate partnership resources. ARX-03 Sufentanil/TriazolamSublingual Tablet Mild sedation andpain relief duringpainful proceduresin a physician’soffice Phase 2 clinical trial and End of Phase 2 meeting completed. Future development contingent upon identification of corporate partnership resources. 9 Zalviso— Sufentanil Sublingual Tablet System This product candidate has not beenapproved by the FDA. We have notgenerated any revenue from the sale ofany of our product candidates.The Market Opportunity for Zalviso According to the 2014 Decision Resources Acute Pain Report, or 2014 DR Report, the acute pain market(represented by treatments for post-operative pain, acute musculoskeletal pain and cancer breakthroughpain) in the United States, Europe and Japan realized 2013 revenues of $12.7 billion, and is expected toreach approximately $13.3 billion by 2023. Opioid analgesic use dominates the management of acute pain,representing 44% of the 2013 market, and is projected to grow to 46% of the 2023 market. Post-operativeacute pain treatment in the United States is projected to grow significantly in the 2013 to 2023 period, frommanagement of 13.8 million procedures in 2011 to 16.0 million procedures in 2023, a 1.5% CAGR. Despiteits size, this market remains underserved. Studies report that up to 75% of patients experience inadequatepain relief after surgery. Inadequate pain relief can lead to decreased mobility, which increases the risks ofother medical complications, including deep vein thrombosis and partial lung collapse, and can result inextended hospital stays. Additionally, based on an analysis of data published in 2008 from the World HealthOrganization, we estimate that there are approximately 27 million surgical procedures annually in othermoderate-to-high per capita healthcare expenditure nations in which patients experience moderate-to-severepain. In the United States, we estimate that approximately one third of all procedures conducted are orthopedic in nature, one third are gastrointestinal,obstetric or gynecologic, and the remaining third are a mix of spinal, cardiothoracic and other procedures. Commissioned market research targetingsurgeons and anesthesiologists has identified a consistent positive response to the attributes of Zalviso and indicates an interest in using Zalviso in atleast 75% of their eligible patients. Additional market research indicated that physicians expressed interest in using Zalviso for patients who stay in thehospital for less than 24 hours and are not traditionally treated with IV PCA. Regardless of size or affiliation of hospitals, the majority of Pharmacy andTherapeutics, or P&T, committees we surveyed were likely to review and approve Zalviso, subject to demonstration of satisfactory pharmacoeconomicvalue. How Zalviso Addresses the Unmet Medical Need in Moderate-To-Severe Acute Pain Management in a Hospital Setting Hospitalized patients in moderate-to-severe acute pain could significantly benefit from the following items: •more rapid onset of analgesia; •fewer medication errors, especially relating to the use of opioids; •fewer side effects, including infection and bleeding risks due to invasive routes of delivery; •enhanced ability for patients to ambulate after surgery and avoid falls; and •patient control over their pain medication which has been shown to increase patient satisfaction. For example, epidural catheters delivering local anesthetic are invasive and have a significant risk of lower extremity weakness and tethering the patientto a pump attached to an IV pole, creating multiple mobility impediments and fall risks; nerve blocks of the lower extremities (e.g., femoral nerve blocks)are also invasive and create weakness and fall risks; oral multimodal analgesia is not patient-controlled, is nurse-intensive and suffers from slow onset ofaction. While IV PCA does allow patient control over their pain medication, it suffers from the following: •side effects associated with the most commonly used opioid, morphine, and its active metabolites; •infection risk, analgesic gaps and decreased mobility associated with the invasive nature of IV delivery; and •medication errors, which in some instances may be fatal, due to the complexity of IV PCA pumps, many of which arise from programmingerrors. 10 In our clinical studies, Zalviso has demonstrated the following attributes: •a rapid onset of effect in comparison to intravenous delivery of morphine, and an ability to control pain as a monotherapy after moderate toseverely painful surgeries such as knee replacement or colectomies; •an ability for young and old patients alike to use Zalviso; •a low rate of severe adverse event experiences; •a rate of adverse events that is similar to a placebo-treated patient population, with the exception of opioid induced itching; •a high level of Patient Satisfaction as a result of Zalviso usage under patient control to manage pain after surgery over 48 to 72 hours; and •a high Nurse Ease of Care rating for ease of set-up and use of Zalviso by the health care professional. According to published literature, the estimated annual error rate is 407 errors per 10,000 people treated with IV PCA in the United States. Publishedanalysis of MEDMARX from 2000 to 2005 reveals that IV PCA errors represent a four-fold higher relative risk of harm compared to all other medicationerrors. The most recent published analysis of the FDA MAUDE database reports that 5% of IV PCA operator errors reported during a two-year indexperiod, from 2002 to 2003, resulted in patient deaths. Approximately 56,000 adverse events were reported to the FDA between 2005 and 2009, prompting70 Class II recalls of infusion pump devices that could cause temporary or reversible adverse effects and 14 Class I recalls of infusion pump devices thatcould cause serious injury or death. These issues with infusion pumps have resulted in the issuance of new draft guidance by the FDA, significantlyincreasing the data required to be submitted by IV PCA pump manufacturers to address safety problems. Zalviso has the potential to address many of the key disadvantages of IV PCA, including: •eliminating the risk of IV PCA related infections, reducing analgesic gaps and enhancing mobility; and •eliminating the risk of programming errors. We believe that Zalviso provides a favorable safety, efficacy and tolerability profile, potentially enabling Zalviso to become a new standard of care formoderate to severe acute pain control via patient-controlled analgesia. Zalviso Description The benefits of Zalviso are the result of combining the following three elements: •sufentanil, a high therapeutic index opioid; •Sufentanil sublingual tablets, our proprietary, non-invasive sublingual dosage form; and •our novel, pre-programmed, handheld PCA device that enables simple patient-controlled delivery of sufentanil sublingual tablets in thehospital setting and eliminates the risk of programming errors. Zalviso allows patients to self-administer sufentanil sublingual tablets as needed to manage their moderate-to-severe acute pain in the hospital setting,and provides the record-keeping attributes of a conventional IV PCA pump while avoiding some of the key issues, such as programming errors, associatedwith conventional IV PCA use. Zalviso utilizes sufentanil, which has one of the highest therapeutic indices of all commercially available opioids, making it an attractive candidate forthe management of post-operative pain. Formulated in our proprietary sublingual tablet dosage form, sufentanil provides for relatively highbioavailability, with lower peak drug levels and a longer duration of action compared to IV delivery. 11 The Zalviso System consists of the following components: a disposable dispenser tip (Figure A); a disposable dispenser cap (Figure B); an adhesivethumb tag (Figure C); a cartridge of 40 sufentanil sublingual 15 mcg tablets (approximately a two-day supply) in a disposable radio frequencyidentification and bar-coded cartridge (Figure D); a reusable, rechargeable handheld controller (as pictured, nurse-side view) (Figure E); a tether (FigureF); and an authorized access card (Figure G). This product candidate has not been approved by the FDA. We have not generated any revenuefrom the sale of any of our product candidates. Drugs are classified or scheduled by the Drug Enforcement Agency, or DEA, according to their potential for abuse and addiction. Sufentanil is scheduledas a class II opioid. Scheduled drugs, when they are under patient control in a hospital setting, must be secured and have adequate dose access control andtracking mechanisms. Our novel handheld PCA device has the following safety features: •an authorized access card, which is a wireless system access key for the healthcare professional; •a wireless, electronic, adhesive thumb tag that acts as a single-patient identification key; •pre-programmed 20-minute lock-out to avoid overdosing; •tablet singulation, or dispensing, motion that eliminates runaway motor delivery risk; •a security tether that is designed to prevent theft and misuse; and •fully automated inventory record of sufentanil sublingual tablet usage. To set up Zalviso, the nurse or healthcare professional turns on the controller and follows the simple step-by-step instructions on the color graphical userinterface screen described below: •retrieve the sufentanil sublingual tablet cartridge from secure drug storage; •lock the cartridge and dispenser into the controller; and •set up the secure patient access system, which is comprised of a security tether and a wireless, electronic, adhesive thumb tag that acts as asingle-patient identification key. To use Zalviso, the patient would: •confirm that the green indicator light is illuminated, meaning the device is available to dose; •place dispenser tip under tongue and push the large button on the controller with the thumb to which the thumb tag has been applied, whichin turn dispenses a single sufentanil sublingual tablet; •remove the device from mouth upon hearing a tone confirming delivery of the sufentanil sublingual tablet; and •see the blue indicator light illuminate, indicating no new dose can be dispensed for the next 20 minutes. Zalviso—Development Status We submitted an NDA for Zalviso in September 2013 and, as mentioned above, the FDA issued a CRL for Zalviso on July 25, 2014. In March 2015, wereceived correspondence from the FDA stating that in addition to the bench testing and two Human Factors studies we have performed in response to theissues identified in the CRL, an additional clinical study is needed to assess the risk of inadvertent dispensing and overall risk of dispensing failures. Weplan to meet with the FDA to discuss and clarify the need for an additional clinical study, and the potential design and objectives of such a study. 12 The 505(b)(2) NDA submission for Zalviso is based on a development program that includes data from seven Phase 1 studies, three Phase 2 clinical trials,and three Phase 3 clinical trials. The Phase 3 trial program included two placebo-controlled efficacy and safety trials and one open-label activecomparator trial, in which Zalviso was compared to IV PCA with morphine. To date, the Zalviso safety database includes more than 600 patients. Zalvisosuccessfully achieved the primary efficacy endpoints for each of the Phase 2 and Phase 3 trials. Zalviso—Clinical Program Summary Our Phase 3 program for Zalviso consisted of three Phase 3 clinical trials. We have reported positive top-line results from each of the three clinical trials.Prior to our Phase 3 program, we completed three successful Phase 2 clinical trials of sufentanil sublingual tablets in the post-operative setting. ThesePhase 2 clinical trials demonstrated analgesic efficacy over a 12-hour study period, a low adverse event profile and excellent device functionality. Duringour End of Phase 2 meeting with the FDA, the FDA stated that the demonstration of efficacy versus placebo in two Phase 3 clinical trials with a totalsafety database of at least 600 patients exposed to the active drug should suffice to support an NDA. We designed our Phase 3 clinical trials based on thefeedback from the FDA. Phase 3 Clinical Trials for Zalviso Active comparator trial (IAP309) In November 2012, we reported top-line data showing that Zalviso had met its primary endpoint of non-inferiority in the Phase 3 open-label activecomparator trial designed to compare the efficacy and safety of Zalviso (15 mcg/dose) to IV PCA with morphine (1mg/dose) for the treatment of moderate-to-severe acute post-operative pain. Utilizing a randomized, open-label, parallel group design, this trial enrolled 359 adult patients at 26 U.S. sites for thetreatment of pain immediately following open-abdominal or major orthopedic surgery (hip and knee replacement). Patients were randomized 1:1 totreatment with Zalviso or IV PCA morphine and were treated for a minimum of 48 hours and up to 72 hours. Regarding disposition and safety assessments, throughout the course of the trial, 7.3% of patients treated with Zalviso dropped out of the trialprematurely due to lack of efficacy compared to 8.9% of patients treated with IV PCA morphine. Additionally, 7.3% of the patients treated with Zalvisodropped out of the trial due to an adverse event compared to 10.0% of the IV PCA morphine patients. We observed 13 patients who experienced seriousadverse events, or SAEs, in the trial, of whom three patients experienced serious adverse events assessed as possibly or probably related to the trial drug,one was related to Zalviso and two were related to IV PCA morphine. Overall the adverse events were similar between the two groups, however,continuous oxygen saturation monitoring demonstrated a lower percentage of patients with desaturations below 95% in the Zalviso group compared toIV PCA morphine (p = 0.028). The primary endpoint for the trial was a comparison of the patient’s response using the Patient Global Assessment, or PGA, of method of pain control overthe 48-hour trial period between the patients treated with Zalviso and IV PCA morphine. The PGA uses a 4-point scale of poor, fair, good or excellent torate each method of pain control. The primary endpoint was determined by measuring the proportion of patients who responded “good” or “excellent”using the PGA to rate their method of pain control. An overview of the top-line primary endpoint results of this Phase 3 clinical trial demonstrates that: •Zalviso was non-inferior (p<0.001) to IV PCA morphine for the primary endpoint of PGA comparison over the 48-hour study period asdetermined by the combined percentage of patients with PGA ratings of “good” or “excellent” (78.5% vs. 65.6%, respectively). A p-value is aprobability with a value ranging from 0 to 1, which indicates the likelihood that a clinical trial is different between treatment and controlgroups. P-values below 0.05 mean that there is a 95% or greater chance that there is a true difference between the groups, and are typicallyreferred to as statistically significant. •The assessment of non-inferiority was based on a lower limit of—15% for the 95% confidence interval, or CI, around the difference betweenthese percentages. Because the 95% CI was +3.7% to +22.1% for the 48 hour PGA and therefore did not cross the zero difference line, asecondary comparison of the primary endpoint, specifically a statistical analysis of superiority could be performed. In this trial, Zalviso wasstatistically superior to IV PCA morphine for the PGA endpoint (p=0.007). Statistically superior PGA was also seen at the 24 hour and 72 hourtime points. A number of secondary endpoints were also evaluated, including pain intensity difference, or PID, and pain relief at each evaluation time point,comparison of individual PGA ratings, a Healthcare Professional Global Assessment, or HPGA, of method of pain control, dropouts from the trial due toinadequate analgesia and adverse events, and Patient and Nurse Ease of Care Questionnaires using a validated questionnaire methodology specifically toevaluate PCA systems. 13 Zalviso had a significantly more rapid onset of action based on both PID and pain relief scores from 1 to 4 hours after initiation of dosing compared to IVPCA morphine (PID: p < 0.001 for 1 and 2 hours and p = 0.002 at 4 hours; pain relief: p = 0.003 at 1 hour and p < 0.001 at 2 and 4 hours). Zalvisoachieved a PGA rating of “excellent” in 42.9% of treated patients, compared to 30.6% for IV PCA with morphine, with a p-value of 0.016. The Healthcare Professional Global Assessment, or HPGA, was measured at 24, 48 and 72 hours, and produced similar results to the Patient GlobalAssessment. HPGA ratings of “good” or “excellent” at 48 hours were 81.4% for Zalviso compared to 70.0% for IV PCA morphine. An assessment of non-inferiority was conducted and demonstrated that Zalviso was non-inferior to IV PCA morphine (p < 0.001) in the trial. Because the 95% CI was +2.6% to+20.2% for the 48 hour HPGA and therefore didn’t cross the zero difference line, a statistical analysis for superiority could be performed, whichdemonstrated that for this trial, Zalviso was statistically superior to IV PCA morphine for the HPGA endpoint at 48 hours (p=0.012). Statistically superiorHPGA was also seen at the 24 hour and 72 hour time points. The Patient Ease of Care Questionnaire, or Patient Questionnaire, asked patients to respond to 21 questions regarding aspects of analgesia and PCAsystems using a zero to five rating scale, including statements such as, but not limited to, “pain woke me up from my sleep,” “the device was easy to use,”and “the device interfered with my ability to get out of bed and walk around.” Answers to the Patient Questionnaire were combined for an Overall PatientEase of Care score. These Patient Questionnaire statements were also grouped into six validated subscales, such as “comfort with device,” “impact onmovement,” and “knowledge and understanding.” Patients were also asked in this Patient Questionnaire to rate their Overall Satisfaction with the level ofpain control and with the way in which the medication was administered during the trial. The Nurse Ease of Care Questionnaire, or Nurse Questionnaire, asked nurses to respond to 21 questions regarding aspects of analgesia and PCA systemsusing a zero to five rating scale, including statements regarding the set-up and management of the systems and management of the patients. Answers tothe Nurse Questionnaire were combined for an Overall Nurse Ease of Care score. These Nurse Questionnaire statements were grouped into two validatedsubscales entitled “time-consuming” and “bothersome.” Nurses were also asked in this Nurse Questionnaire to rate their Overall Satisfaction based on thelevel of pain control and with their overall satisfaction of the system. An overview of results of the Patient and Nurse Questionnaires results includes: •Patients in the trial reported that they had significantly greater Overall Satisfaction with Zalviso compared to IV PCA morphine (4.15 vs. 3.84,respectively, out of a 0 to 5 scale, with a p-value equal to 0.004). •Patients in the trial reported that they had greater Overall Ease of Care with Zalviso compared to IV PCA morphine (4.45 vs. 4.07,respectively, out of a 0 to 5 scale, with a p-value less than 0.001). •Nurses managing patients in the trial reported they had significantly greater Overall Satisfaction with Zalviso compared to IV PCA morphine(3.92 vs. 3.35, respectively, out of a 0 to 5 scale, with a p-value less than 0.001). •Nurses managing patients in the trial reported they had greater Overall Ease of Care with Zalviso compared to IV PCA morphine (4.27 vs.3.82, respectively, out of a 0 to 5 scale, with a p-value equal to 0.017). As noted above, additional subscale analyses were performed related to the Overall Ease of Care with Zalviso as reported by both nurses and patients. Theresults, as detailed in the tables below, demonstrate that all Patient Ease of Care subscales were significantly higher for Zalviso than for IV PCA morphinein the trial. For the Nurse Ease of Care subscales, nurses rated Zalviso significantly less bothersome than IV PCA morphine and there was a trend towardsZalviso being less time consuming than IV PCA morphine. Patient Ease of Care Subscale(0-5 scale) Zalviso IV PCA morphine p Value Confidence with Device 4.69 4.51 0.015 Comfort with Device 4.47 4.33 0.041 Impact on Movement 4.73 3.88 <0.001 Dosing Confidence 4.74 4.47 0.003 Pain Control 3.58 3.16 0.004 Knowledge and Understanding 4.47 4.05 <0.001 14 Nurse Ease of Care Subscale(0-5 scale) Zalviso IV PCA morphine p Value Time consuming 0.92 1.24 0.076 Bothersome 0.54 1.09 0.006 Double-blind, placebo-controlled, abdominal surgery trial (IAP310) In March 2013, we reported top-line data results demonstrating that Zalviso met its primary endpoint in a pivotal Phase 3 trial designed to compare theefficacy and safety of Zalviso to placebo in the management of acute post-operative pain after major open abdominal surgery. Adverse events reported inthe trial were generally mild or moderate in nature and similar in both placebo and treatment groups. Utilizing a randomized, double-blind, placebo-controlled design, this pivotal Phase 3 trial enrolled 178 adult patients at 13 U.S. sites for the treatment of acute post-operative pain immediatelyfollowing major abdominal surgery. Patients were treated for post-operative pain for a minimum of 48 hours, and up to 72 hours. Patients wererandomized 2:1, with 119 patients randomized to sufentanil sublingual tablet treatment and 59 to placebo treatment. Both treatments were delivered bythe patient, as needed, using Zalviso with a 20-minute lock-out period. Patients in both groups could receive up to 2 mg morphine intravenously per houras a rescue medication, the primary purpose of this rescue medication being to provide placebo-treated patients access to pain medication to enable themto stay in the trial as long as possible. Pre-rescue pain scores were imputed to minimize the impact of this rescue opioid on efficacy evaluations. The primary endpoint evaluated pain intensity over the 48-hour study period compared to baseline, or Summed Pain Intensity Difference (SPID-48), inpatients following major open abdominal surgery. Patients receiving sufentanil sublingual tablets demonstrated a significantly greater SPID-48 comparedto placebo-treated patients during the study period (105.6 and 55.6, respectively; p=0.001). A number of secondary endpoints were also evaluated, including SPID at 24 hours and 72 hours, PID and pain relief values for each evaluation time point,drop outs from the trial due to inadequate analgesia and adverse events, and Patient Ease of Care Questionnaires using a validated questionnairemethodology specifically to evaluate patient-controlled analgesia systems. A summary of the results for the secondary endpoints is as follows: •24 hours and 72 hours after first dose, SPID was significantly greater in the sufentanil sublingual tablet-treated patients than in the placebo-treated patients (p<0.001 and p=0.004, respectively). •PID and pain relief values separated statistically from placebo as early as 45 minutes (p=0.027 for both). •A summed pain relief measure over the 48-hour study period, commonly referred to as TOTPAR, was significantly greater for sufentanilsublingual tablet-treated patients than placebo-treated patients (p=0.002) •Eighty, or 70.2%, of the sufentanil sublingual tablet-treated patients completed the 48-hour study period, compared to 30, or 51.7%, ofplacebo-treated patients. Reasons for drop-out in the sufentanil sublingual tablet-treated and placebo-treated groups were adverse events(5.3% and 6.9%, respectively), lack of efficacy (16.7% and 31.0%, respectively) and other (7.9% and 10.3%, respectively). •Only one patient, in the sufentanil sublingual tablet-treated group, experienced a serious adverse event, which was determined to be unrelatedto the study drug by the investigator. •Patients in the trial who were treated with sufentanil sublingual tablets reported an average Overall Ease of Care of 4.39 out of a 0 to 5 scale.In addition, patients in the placebo arm of the trial also reported favorable Overall Ease of Care scores, with an average score of 4.36. Theseresults are comparable to the results from the active comparator trial, which is summarized above. 15 The chart below illustrates the SPID-48 results from the pivotal Phase 3, double-blind, placebo-controlled, abdominal surgery trial (IAP310). Double-blind, placebo-controlled, orthopedic surgery trial (IAP311) In May 2013, we reported top-line data results demonstrating that Zalviso met its primary endpoint in a pivotal Phase 3 trial designed to compare theefficacy and safety of Zalviso to placebo in the management of acute post-operative pain after major orthopedic surgery. Adverse events reported in thestudy were generally mild or moderate in nature and were similar in both placebo and treatment groups for the majority of adverse events. Utilizing arandomized, double-blind, placebo-controlled design, this pivotal Phase 3 study enrolled 426 adult patients at 34 U.S. sites for treatment of moderate=to-severe acute pain immediately following major orthopedic surgery. Seven patients did not receive study drug, resulting in 419 patients being included inthe intent-to-treat (ITT) population. Patients were treated for a minimum of 48 hours, and up to 72 hours. Patients were randomized 3:1, with 315 patientsrandomized to sufentanil sublingual tablet treatment and 104 to placebo treatment. Both treatments were delivered by the patient, as needed, using theZalviso System with a 20-minute lock-out period. Patients in both groups could receive up to 2 mg morphine intravenously per hour as a rescuemedication, the primary purpose of this rescue medication being to enable placebo-treated patients to stay in the study. Pain scores recorded just prior tothe delivery of rescue medication were gathered and imputed forward to minimize the impact of this rescue opioid on efficacy evaluations. The primary endpoint evaluated pain intensity over the 48-hour study period compared to baseline, or Summed Pain Intensity Difference (SPID-48), inpatients following major orthopedic surgery. Patients receiving Zalviso demonstrated a significantly greater SPID-48 compared to placebo-treatedpatients during the study period (+76.1 and -11.5, respectively; p < 0.001). Two hundred fifteen (68.3%) sufentanil sublingual tablet-treated patientscompleted the 48-hour study period, compared to 43 (41.3%) placebo-treated patients. Primary reasons for drop-out in the sufentanil sublingual tablet-and placebo-treated groups were adverse events (7.0% and 6.7%, respectively) and lack of efficacy (14.3% and 48.1%, respectively). Secondary endpoint data included PID and pain relief values for each evaluation time point and demonstrated that PID separated from placebo at 1 hour(p = 0.03) and pain relief separated at 45 minutes (p < 0.01). SPID at 24 and 72 hours was also assessed and was highly significant as illustrated below. GroupSPID-24SPID-48SPID-72Sufentanil Sublingual Tablet33.876.1166.2Placebo-8.8-11.5-2.6Statistical Comparisonp<0.001p<0.001p<0.001 A secondary endpoint focused on Total Pain Relief measured at 48 hours (TOTPAR-48) was significantly higher in the Zalviso-treated patients than inthe placebo-treated patients (p<0.001). In addition, another secondary endpoint, measurement of Patient Global Assessment with Method of Pain Controlat 48 hours (PGA-48) was also highly significant in favor of Zalviso-treated patients (p<0.001). 16 Two patients (one each in the sufentanil sublingual tablet group and placebo group) experienced a serious adverse event considered possibly or probablyrelated to the study drug by the investigator. Combined related adverse events for the two placebo-controlled pivotal studies (IAP310 and IAP311) compared to placebo are shown below. Onlypruritus (itching) was statistically different for Zalviso compared to placebo (p = 0.002). Adverse Reactions Occurring in > 2% in Either Group Possibly or Probably Related Adverse Reactions ZALVISOn=429 Placebon=162 At least 2% in either group Two Placebo- Controlled Phase 3 Studies Nausea 29.4% 22.2% Vomiting 8.9% 4.9% Oxygen Saturation Decreased* 6.1% 2.5% Pruritus 4.7% 0 Dizziness 4.4% 1.2% Constipation 3.7% 0.6% Headache 3.3% 3.7% Insomnia 3.3% 1.9% Hypotension 3.0% 1.2% Confusional state 2.1% 0.6% *3patients (0.7%) in the Zalviso group had treatment-emergent respiratory events that required naloxone reversal. ARX-04—Sufentanil Sublingual Single-Dose Tablet This product candidate has not been approved by the FDA. We have not generated any revenue from the sale of any of our product candidates.The Market Opportunity for ARX-04 We believe that ARX-04 could be useful in a variety of medically supervised settings,including in the emergency room, for post-operative patients who are transitioning from theoperating room to the recovery floor, or who are recovering from either short-stay or ambulatorysurgery, and do not require more long-term patient-controlled analgesia, as well as forbattlefield casualty treatment, and by paramedics during patient transport. According to theNational Emergency Department Sample, or NEDS, there were more than 104 million adultemergency room visits in the United States during 2011, of which it is estimated that more than48 million were associated with moderate-to-severe acute pain; while in the EU there were morethan 91 million adult emergency room visits in the United States during 2011, of which it isestimated that more than 34 million were associated with moderate-to-severe acute pain. Basedon the National Survey of Ambulatory Surgery, in 2006, an estimated 27 million adult patientsunderwent outpatient surgical procedures in the United States, while in the EU, an estimated 12million adult patients underwent outpatient surgical procedures. Of these, we estimate morethan 11 million patients experienced moderate-to-severe pain in the United States, and nearly 3million patients in the EU experienced moderate-to-severe pain. According to the NationalInpatient Sample, in 2011, more than 15 million adult patients in the United States underwentsurgical procedures in an inpatient setting, while more than 17 million adult patients underwentsurgical procedures in an inpatient setting in the EU. Of these, it is estimated that more than 7million of these procedures performed in the United States resulted in moderate-to-severe pain,while more than 8 million of these procedures performed in the EU resulted in moderate-to-severe pain. 17 How ARX-04 Addresses the Unmet Medical Need for Moderate-to-Severe Acute Pain ARX-04 is a non-invasive, fast-onset sufentanil sublingual tablet product candidate for treatment of patients with moderate-to-severe acute pain. In theemergency room and in ambulatory care environments, patients often do not have immediate IV access available, or maintaining IV access can be animpediment to rapid discharge. Oral pills and liquids generally have slow and erratic onset of analgesia. Even patients with IV access may haveundesirable side effects with the commonly used IV opioids morphine and hydromorphone, such as sedation or oxygen desaturation. Moreover, IV dosingresults in high peak plasma levels, thereby limiting the opioid dose and requiring frequent redosing intervals to titrate to satisfactory analgesia.Additional treatment options are needed that can safely and rapidly treat acute trauma pain, in both civilian and military settings. ARX-04 Description ARX-04 is a non-invasive, fast-onset sufentanil sublingual tablet product candidate for treatment of patients with moderate-to-severe acute pain, inmedically supervised settings of trauma or injury, such as the emergency room, or for post-operative patients who are transitioning from the operatingroom to the recovery floor, or who are recovering from either short-stay or ambulatory surgery, and do not require more long-term, patient-controlledanalgesia, as well as for battlefield casualty treatment, and by paramedics during patient transport. ARX-04 features sufentanil, a high therapeutic indexopioid, in our proprietary sufentanil sublingual tablet technology that enables rapid sublingual absorption when the tablet is placed under the tongue. Asa result, sufentanil sublingual tablets can provide rapid onset of analgesia and display a consistent pharmacokinetic profile due to a high percentage ofdrug being absorbed sublingually instead of through the gastrointestinal tract. ARX-04 Clinical Program Summary We plan to initiate our first Phase 3 clinical trial for ARX-04 by the end of March 2015. Pending the completion of enrollment in this study, we anticipatetop-line results in the fourth quarter of 2015. In May 2011, we received a $5.6 million grant from the US Army Medical Research and Materiel Command, or USAMRMC, to conduct a Phase 2 dose-finding trial, and to prepare to enter Phase 3. In November 2012, we initiated the Phase 2 dose-finding trial and in April 2013, we announced that the trialachieved its primary endpoint. As of December 31, 2013, we had recognized the $5.6 million grant in full. Phase 3 Clinical Program for ARX-04 In December 2013 we completed an End of Phase 2 Meeting with the FDA to identify a Phase 3 program pathway forward for evaluation of ARX-04. Keyoutcomes from the End of Phase 2 Meeting included: •Agreement on a 500 subject safety database, 100 patients of whom would be studied with multiple doses of ARX-04; •Agreement that the bunionectomy Phase 2 study was a well-controlled study and could be used as a pivotal study; •Agreement that a single additional Phase 3 pivotal efficacy and safety study in a model of visceral pain would be sufficient to support an NDAsubmission; and •Agreement that the primary endpoint in the remaining Phase 3 study could be the SPID-12, with secondary endpoints following patients out to48 hours. In June 2014, we completed a pharmacokinetic study in support of the ARX-04 development program. In this study of healthy volunteers, it was shownthat two sublingual administrations of a Zalviso 15mcg sufentanil sublingual tablet dosed 20 minutes apart were comparable, in terms of AUC exposureand peak plasma concentration, to one sublingual administration of an ARX-04 30mcg sufentanil sublingual tablet. We have proposed the inclusion ofapproximately 300 patients from the Zalviso clinical program in the ARX-04 safety database to the FDA and we have designed the two Phase 3 ARX-04trials accordingly. As mentioned above, the ARX-04 safety database required by the FDA is 500 patients. We have confirmation from FDA that some ofthe Zalviso patients can be included in the overall ARX-04 safety database; however, further discussion is needed to determine the exact number of suchpatients that can be used towards achieving the 500 patient minimum total safety exposure number required for ARX-04. Based on an ongoingpharmacokinetic analysis, we may need to increase enrollment in our planned Phase 3 clinical trial program to meet the FDA’s requested exposurerequirements to ARX-04. 18 We plan to initiate a Phase 3 clinical trial, a double-blind, placebo-controlled efficacy and safety study of patients with post-operative pain followingabdominal surgery, by the end of March 2015. The single Phase 3 pivotal study requested by the FDA, SAP301, is a multi-center, double-blind, placebo-controlled study that will evaluate the efficacy and safety of ARX-04 vs. placebo for the treatment of moderate-to-severe acute pain following ambulatoryabdominal surgery. We anticipate that enrollment will take up to nine months. Pending the completion of enrollment in this study, we expect top-linedata from this trial in the fourth quarter of 2015. Approximately 160 patients are planned to be enrolled in this study. We have been notified by the DoD that they are preparing a contract to provide partial funding to support further development of ARX-04. We areengaged in the contracting process with the DoD to determine the nature, scope, amount and timing of the contract. As noted above, we plan to initiate aPhase 3 trial by the end of March 2015 so as to not sustain additional delays in the development of ARX-04 while we continue contract negotiations withthe DoD. We believe the DoD can be supportive of key aspects of the continued development of ARX-04 but we do not currently have a timeline bywhich we may receive funding. In the first half of 2015, contingent on DoD funding, we plan to initiate our second planned Phase 3 clinical trial, an open-label safety study of patientswho present to the emergency room with moderate-to-severe pain due to trauma or injury. We expect top-line data from this trial in the second half of2015. Approximately 40 patients are planned to be enrolled in this study. Timing of this trial is currently pending finalization of the DoD contract.Should we have delays in such contract negotiations, we may elect to delay this Phase 3 trial beyond the first half of 2015. Phase 2 Clinical Trial for ARX-04 In April 2013, we announced top-line results demonstrating that a placebo-controlled, dose-finding, Phase 2 trial of our investigational single-dosesufentanil sublingual tablet for acute pain, ARX-04, successfully met its primary endpoint. Results demonstrated that patients receiving 30 mcgsufentanil sublingual tablet doses, administered by a healthcare professional, no more frequently than once per hour, had significantly greater painreduction as measured by Summed Pain Intensity Difference to baseline during the 12-hour study period (SPID-12) than placebo-treated patients (+6.53for 30 mcg sufentanil sublingual tablet-treated patients and -7.12 for placebo-treated patients; p=0.003). The 20 mcg sufentanil sublingual tablet-treatedpatients did not achieve SPID-12 scores that differentiated from placebo. Adverse events reported in the study were generally mild-to-moderate in nature,with two serious adverse events of post-surgical infection reported, both of which were determined by the investigator to be unrelated to study drug. Thisdose-ranging study randomized 101 patients following bunionectomy surgery in a 2:2:1 ratio to 30 mcg sufentanil sublingual tablet, 20 mcg sufentanilsublingual tablet or placebo treatment arms. The intent-to-treat (ITT) population in this study averaged 42.5 years of age and was evenly balanced formales and females (51%:49%). Ninety-one percent of patients entering the study completed the full 12-hour study period. A number of secondary endpoints were also achieved, as follows: For the time-weighted sum of pain relief scores over the 12-hour study period, or TOTPAR12, there was a statistically significant difference in favor of the30 mcg group over placebo (9.73 vs. 4.37 p = 0.002). Patients treated with the 30 mcg dose of sufentanil sublingual tablet showed a rapid onset of actionwith a statistically significant beneficial difference in pain relief (p<0.001) and pain intensity (p<0.01) seen at 30 minutes after dosing compared toplacebo. Dosing averaged every 2.4 hours over the duration of the 12-hour study. In addition, patient global assessment of the 30 mcg dose at 12 hourswas superior to placebo (p=0.002) with 43.6% vs. 5.0% of the patients responding good or excellent for overall pain control. The 20 mcg dose was notsignificantly different from placebo for either endpoint. Two SAEs, both in the 20 mcg-dose group, occurred one week after the study (surgical infections) and were deemed unrelated to study drug. All but twoadverse events reported in the study were mild-to-moderate in nature with 58 patients (58%) reporting a total of 135 adverse events. The most frequentlyreported adverse events for all patients were nausea (30%), vomiting (17%), dizziness (14%) and somnolence (11%). Two patients discontinued treatment,one unrelated to study drug (anxiety/chest pain) and the other probably related to study drug (somnolence/respiratory depression), however both patientsrecovered without medical intervention. 19 ARX-02—Sufentanil Sublingual Tablet BTP Management System This product candidate has not been approved by theFDA. We have not generated any revenue from the sale of any of our product candidates.The Market Opportunity for ARX-02 According to the American Cancer Society, there were more than 1.5 million new cancer cases inthe United States in 2010. It is estimated that over 625,000 of these cases result in patients whoexperience breakthrough pain. We estimate the prescription volume for oral transmucosalproducts for the management of cancer breakthrough pain to be 220,000 prescriptions per year.This suggests that less than 10% of cancer patients with cancer breakthrough pain are treated withapproved transmucosal breakthrough pain medications. In addition, many physicians useimmediate release oral opioids to treat cancer breakthrough pain. We believe that this market issignificantly larger than the transmucosal product market. Market research among physiciansmanaging cancer patients indicates that ARX-02 could capture approximately a quarter of thecancer breakthrough pain prescriptions. In this research, ARX-02 was predicted to take shareequally from both the immediate release oral products and the transmucosal products. ARX-02 Description ARX-02 is a product candidate for the treatment of cancer patients who suffer from breakthrough pain. ARX-02 consists of a magazine containing 30single dose applicators, or SDAs, loaded into a multiple SDA dispenser, or MSD. Each SDA includes a sufentanil sublingual tablet that a patient can self-administer to his or her sublingual space for oral transmucosal absorption. The MSD: •protects and dispenses SDAs, one at a time; •displays a recent dose indicator that is designed to mitigate overdosing; •has child-resistant, elderly-friendly features; and •provides electronic date and time stamping of each SDA removal event. The date and time event log is designed to be retrieved from the MSD by a healthcare professional during an office visit to assist the prescriber inunderstanding the usage profile of the medication, including diversion or abuse. Overall, our goal is to improve the treatment of cancer breakthrough painwhile adding a substantially heightened level of detection and deterrence around prescription opioid use, misuse and abuse. While the initial dispenserfor outpatient use is designed for dispensing sufentanil sublingual tablets for cancer breakthrough pain events, we believe this concept could be adaptedinto developing dispensers for other scheduled drugs in the future. ARX-02 Clinical Program Overview We have completed a successful Phase 2 clinical trial of ARX-02. The primary endpoint in this trial was achieved and demonstrated that the time-weighted summed pain intensity difference over 30 minutes, or SPID-30, for sufentanil sublingual tablet-treated episodes was greater than placebo-treatedepisodes (p<0.001). In addition, pain intensity and pain relief were included as secondary endpoints. Lower scores for pain intensity were reported at eachevaluation time point for sufentanil sublingual tablet-treated episodes compared to placebo-treated episodes (p=0.027 at 15 minutes and p<0.001 at allother time points). Time reported time-weighted total pain relief, or TOTPAR, was greater at all time points for sufentanil sublingual tablet-treatedepisodes compared to placebo-treated episodes (p=0.049 and p=0.009 for the 10 and 15 minute time points, respectively, and p=<0.001 for the remainingtime points). The trial also demonstrated a low adverse event profile. We held an End of Phase 2 meeting with the FDA in July 2010. The FDA stated that the demonstration of efficacy versus placebo in a single Phase 3clinical trial with a total safety database of 300 to 500 patients exposed to active drug, with at least 100 patients treated for a minimum of three months,may support an indication for the treatment of cancer breakthrough pain with underlying chronic pain. Further development of the ARX-02 program is contingent on identification of corporate partnership resources. 20 ARX-03—Sufentanil/Triazolam Sublingual Tablet This product candidate has not beenapproved by the FDA. We have notgenerated any revenue from the sale of anyof our product candidates.The Market Opportunity for ARX-03 Each year in the United States, more than 100 million procedures take place in a physician’s office that areknown to be anxiety-inducing and painful, according to commissioned market research data that wascompleted in 2010. These include diagnostic procedures such as breast and prostate biopsies, cosmeticprocedures such as liposuction and dermal abrasions, interventional radiology procedures, and therapeuticprocedures such as vasectomies and endometrial ablation procedures. IV sedative medications are typicallynot offered to these patients because of the high cost of the specialized personnel and monitoringequipment. Despite the high potential for pain and anxiety, most patients currently undergo theseprocedures with only a local anesthetic, resulting in unnecessary procedure discomfort. We believe there issignificant opportunity for a fast-acting, effective and safe product that can provide mild levels of sedation,anxiety reduction and analgesia for painful procedures conducted in a physician’s office without the needfor specialized personnel to monitor the patient. ARX-03 Description ARX-03 Sufentanil/Triazolam Sublingual Tablet is a single, fixed-dose sublingual product candidate designed to be administered by a healthcareprofessional prior to a painful procedure in a physician’s office. An important advantage of sufentanil and triazolam over other drugs in their classes istheir rapid uptake from the sublingual mucosa. Our Phase 2 clinical data showed that administering ARX-03 via sublingual route prior to a procedureresults in a rapid onset of mild sedation and reduction in anxiety in 15 to 30 minutes. Sufentanil and triazolam have short half-lives compared to manyother agents in the same class of compounds, enabling patients treated with ARX-03 to be discharged immediately following completion of theprocedure. The sublingual route of administration avoids the high plasma concentrations associated with IV delivery, thereby obviating the need forspecialized personnel and extensive monitoring. ARX-03 Clinical Program Overview We have completed a successful Phase 2 clinical trial of ARX-03 demonstrating rapid onset of mild sedation and anxiety reduction, with a low adverseevent profile during an abdominal liposuction procedure. In addition, we participated in an End of Phase 2 meeting with the FDA in May 2010 to discussthe Phase 3 clinical program and requirements for an NDA submission. Based on these discussions, two four-arm factorial Phase 3 clinical trials will berequired with a minimum of 700 patients exposed to active drug. Further development of the ARX-03 program is contingent on identification of corporate partnership resources. Other Potential Applications for Our Sublingual Tablet Technology We believe that as a platform technology, the Sublingual Tablet, either as a standalone dosage form or in conjunction with various forms of dispensingmechanisms, has the potential to enable other product candidates utilizing a number of additional compounds to be delivered sublingually to the oralmucosa. There are numerous compounds used for the treatment of pain as well as other therapeutic indications which are dosed in microgram quantitiesand possess characteristics that we believe make them potential candidates for sublingual delivery via the Sublingual Tablet. Our Strategy Our strategy is to develop and commercialize a portfolio of sufentanil sublingual tablet-based products and other products in hospital markets in theUnited States. We have designed and are developing product candidates that meet clearly defined unmet medical needs, have clearly defined clinicaldevelopment programs, target large commercial market opportunities and require modestly-sized commercial organizations in the United States. Weselectively utilize third party contractors in order to maximize the capital efficiency of our development and commercialization efforts. We plan to enterinto partnerships to market our product candidates outside the United States. In December 2013, we announced a commercial collaboration withGrünenthal, covering the territory of the European Union, certain other European countries and Australia for Zalviso for potential use in pain treatmentwithin or dispensed by a hospital, hospice, nursing home or other medically supervised setting. We retain all rights in remaining countries, including theUnited States. We continue to seek partnerships to market Zalviso in markets outside of the Grünenthal territory and the United States. 21 Zalviso Zalviso is our lead product candidate and we are seeking FDA approval for the use of Zalviso to treat moderate-to-severe acute pain in the hospitalsetting. We submitted an NDA for Zalviso in September 2013 and, as mentioned above, the FDA issued a CRL for Zalviso on July 25, 2014. In March2015, we received correspondence from the FDA stating that in addition to the bench testing and two Human Factors studies we have performed inresponse to the issues identified in the CRL, an additional clinical study is needed to assess the risk of inadvertent dispensing and overall risk ofdispensing failures. We plan to meet with the FDA to discuss and clarify the need for an additional clinical study, and the potential design and objectivesof such a study. Our specific strategy with respect to Zalviso is to: •seek regulatory approval in the United States; •strengthen our commercial relationships for the manufacturing of the components and assembly of the Zalviso System; •build a targeted hospital-directed sales force in the United States; and •collaborate with Grünenthal to seek regulatory approval for Zalviso in their licensed territories. •seek commercial partnerships for Zalviso in other unlicensed countries outside of the United States. ARX-04 ARX-04 is a non-invasive, fast-onset sufentanil sublingual tablet product candidate for treatment of patients with moderate-to-severe acute pain, inmedically supervised settings of trauma or injury, such as the emergency room, or for post-operative patients who are transitioning from the operatingroom to the recovery floor, or who are recovering from either short-stay or ambulatory surgery, and do not require more long-term, patient-controlledanalgesia, as well as for battlefield casualty treatment, and by paramedics during patient transport. We plan to initiate our Phase 3 program for ARX-04 bythe end of March 2015, and, pending completion of enrollment, we anticipate top-line results from this study in the fourth quarter of 2015. We have been notified by the Department of Defense that they are preparing a contract to provide partial funding to support further development of ARX-04. We are engaged in the contracting process with the DoD to determine the nature, scope, amount and timing of the contract. In the first half of 2015, contingent on DoD funding, we plan to initiate our second planned Phase 3 clinical trial, an open-label safety study of patientswho present to the emergency room with moderate-to-severe pain due to trauma or injury. We expect top-line data from this trial in the second half of2015. Approximately 40 patients are planned to be enrolled in this study. Timing of this trial is currently pending finalization of the DoD contract.Should we have delays in such contract negotiations, we may elect to delay this Phase 3 trial beyond the first half of 2015. Our specific strategy with respect to ARX-04 is to: •complete our Phase 3 clinical program and seek regulatory approval in the United States; •further expand our relationship with our existing contract manufacturing organizations, or CMOs, for the manufacture of ARX-04; •leverage and build upon the targeted hospital-directed sales force we are building for Zalviso in the United States; and •seek commercial partnerships for ARX-04 in countries outside of the United States. Further development of ARX-02 and ARX-03 will depend on the identification of a partner to support these efforts. Sales and Marketing We anticipate developing a distribution capability and commercial organization in the United States to market and sell our product candidates alone orwith partners, while out-licensing commercialization rights outside of the United States. In executing our strategy, our goal is to have significant controlover the development process and commercial execution for our product candidates, while retaining meaningful economics. We plan to progressively build commercial capability to support introduction of Zalviso to the United States market as we move toward potential NDAapproval. We foresee two stages of commercial execution to support successful introduction of Zalviso in the United States: Prior to FDA approval of Zalviso, we plan to continue to: •highlight the clinical and health economic data identifying the limitations of IV PCA in use today; •increase awareness of the clinical profile of Zalviso through publication of our clinical data; •create and deploy a focused scientific support team to gather a detailed understanding of individual hospital needs in order to be prepared topresent Zalviso effectively at the time of commercial launch;  •establish advisory boards with anesthesiologists, surgeons, nurses and P&T committees to provide us with input on appropriate commercialpositioning for Zalviso for each of these key audiences; •build a sales and marketing organization that can define appropriate segmentation and positioning strategies and tactics for Zalviso; and •design a post-approval clinical development program. 22 Assuming FDA approval, we plan to: •establish Zalviso on hospital formularies through deployment of an experienced team to explain the clinical and economic benefits of Zalvisoin comparison to IV PCA; •create and progressively deploy a high-quality, customer focused and experienced sales organization dedicated to bringing innovative, highly-valued healthcare solutions to patients, payors and healthcare providers, including progressively building a targeted hospital-directed salesforce of approximately 65 people in the United States; •conduct post-approval clinical trials for Zalviso; •establish Zalviso as the product of choice for traditional post-operative PCA; and •expand the market through deployment of Zalviso for 24-hour stay patients, and other in-hospital acute pain conditions. Collaborative Arrangements Grünenthal Collaboration In December 2013, we announced a commercial collaboration with Grünenthal for Zalviso covering the countries of the European Union, Switzerland,Liechtenstein, Iceland, Norway and Australia, or the Territory, for human use in pain treatment within or dispensed by hospitals hospices, nursing homesand other medically-supervised settings, or the Field. The collaboration included a License Agreement and a Supply Agreement. License Agreement. Under the terms of the License Agreement, Grünenthal has the exclusive right to commercialize Zalviso in the Field in the Territory.AcelRx retains control of clinical development, while Grünenthal will be responsible for certain development activities pursuant to a development planto be agreed between the parties. Grünenthal is exclusively responsible for marketing approval applications and other regulatory filings relating to thesufentanil sublingual tablet drug cartridge for Zalviso in the Field in the Territory, while we are responsible for the CE Mark and other regulatory filingsrelating to device portions of Zalviso. Grünenthal will have a right of first negotiation with respect to proposed exploitation in the Territory of Zalviso outside of the Field or the proposedexploitation in the Territory of another pharmaceutical product delivered with a PCA device for transmucosal application. Either party has the right toremove Australia from the Territory for purposes of the collaboration if Grünenthal’s marketing approval or commercialization activities do not meetspecified timelines set forth in the GRT License Agreement. Under the terms of the License Agreement, we received an upfront cash payment of $30.0 million in December 2013, and in the third quarter of 2014, wereceived a milestone payment of $5.0 million related to the MAA submission. We are eligible to receive an additional $15.0 million milestone paymentupon the approval of the MAA. If approved, we are eligible to receive approximately $200.0 million in additional milestone payments, based uponsuccessful regulatory and product development efforts and net sales target achievements. Grünenthal will also make tiered royalty, supply and trademarkfee payments in the mid-teens up to the mid-twenties percent range, on net sales of Zalviso in the Territory. Grünenthal will be responsible for all commercial activities for Zalviso, including obtaining and maintaining pharmaceutical product regulatory approvalin the Territory. We will be responsible for obtaining and maintaining device regulatory approval in the Territory and manufacturing and supply ofZalviso to Grünenthal for commercial sales. A CE Mark (#611742) for Zalviso was obtained in the fourth quarter 2014 which specifies AcelRx as thedevice design authority and manufacturer. Unless earlier terminated, the License Agreement continues in effect until the expiration of the obligation of Grünenthal to make royalty and supply andtrademark fee payments, which supply and trademark fee continues for so long as AcelRx continues to supply Zalviso to Grünenthal. The LicenseAgreement is subject to earlier termination in the event the parties mutually agree, by a party in the event of an uncured material breach by the otherparty, upon the bankruptcy or insolvency of either party, or by Grünenthal for convenience. Manufacturing Agreement. Under the terms of the Manufacturing Agreement, we will manufacture and supply Zalviso for use in the Field for the Territoryexclusively for Grünenthal. Grünenthal shall purchase from AcelRx, during the first five years after the effective date of the Manufacturing Agreement,100% and thereafter 80% of Grünenthal’s and its sublicensees’ and distributors’ requirements of Zalviso for use in the Field for the Territory. Zalviso willbe supplied at our fully burdened manufacturing cost (as defined in the Manufacturing Agreement). The Manufacturing Agreement requires us to usecommercially reasonable efforts to enter stand-by contracts with third parties providing significant supply and manufacturing services and under certainspecified conditions permits Grünenthal to use a third party back-up manufacturer to manufacture Zalviso for Grünenthal’s commercial sale in theTerritory. 23 Unless earlier terminated, the Manufacturing Agreement continues in effect until the later of the expiration of the obligation of Grünenthal to makeroyalty and supply and trademark fee payments or the end of any transition period for manufacturing obligations due to the expiration or termination ofthe License Agreement. The Manufacturing Agreement is subject to earlier termination in connection with certain termination events in the LicenseAgreement, in the event the parties mutually agree, by a party in the event of an uncured material breach by the other party or upon the bankruptcy orinsolvency of either party. Intellectual Property We seek patent protection in the United States and internationally for our product candidates. Our policy is to pursue, maintain and defend patent rightsdeveloped internally and to protect the technology, inventions and improvements that are commercially important to the development of our business.We cannot be sure that patents will be granted with respect to any of our pending patent applications or with respect to any patent applications filed by usin the future, nor can we be sure that any of our existing patents or any patents granted to us in the future will be commercially useful in protecting ourtechnology. We also rely on trade secrets to protect our product candidates. Our commercial success also depends in part on our non-infringement of thepatents or proprietary rights of third parties. For a more comprehensive discussion of the risks related to our intellectual property, please see “Risk Factors—Risks Related to Our Intellectual Property” appearing elsewhere in this Form 10-K. Our success will depend significantly on our ability to: •obtain and maintain patent and other proprietary protection for our product candidates; •defend our patents; •preserve the confidentiality of our trade secrets; and •operate our business without infringing the patents and proprietary rights of third parties. We have established and continue to build proprietary positions for our product candidates and related technology in the United States and abroad. As of December 31, 2014, we are the owner of record of 16 issued U.S. patents, which provide coverage for sufentanil sublingual tablets, the devicecomponents of Zalviso and of ARX-02, ARX-03 and ARX-04 Tablet Single Dose Applicator, or SDA. These patents provide coverage through at least2027. We also hold four issued European patents, each valid in at least six countries in Europe. In addition, we own five patents in Japan, four in Chinaand three in Korea, and a number of other international patents which provide coverage through at least 2027. We are also pursuing a number of U.S. andforeign patent applications. The patent applications that we have filed and have not yet been granted may fail to result in issued patents in the UnitedStates or in foreign countries. Even if the patents do successfully issue, third parties may challenge the patents. We continue to seek and expand our patent protection for both compositions of matter and delivery devices, as well as methods of treatment related to ourproduct candidates. In particular, we are pursuing additional patent protection for our ARX-01, ARX-02, ARX-03 and ARX-04 sufentanil sublingualtablets and sufentanil/triazolam sublingual tablets and formulations, our Zalviso device, the combination of drugs and our Zalviso device, our ARX-02,ARX-03 and ARX-04 SDA, as well as to methods of treatment using such drug and device compositions. We have filed for additional patent coverage in the United States, Europe as well as many other foreign jurisdictions including, Japan, China, India,Canada and Korea. If issued, and if the appropriate maintenance, renewal, annuity or other governmental fees are paid, we expect that these patents willexpire between 2027 and 2030, excluding any additional term for patent term adjustments or patent term extensions in the United States. We note that thepatent laws of foreign countries differ from those in United States, and the degree of protection afforded by foreign patents may be different from theprotection offered by U.S. patents. Further, we seek trademark protection in the United States and internationally where available and when appropriate. We have registered our ACELRXmark in Class 5, “Pharmaceutical preparations for treating pain; pharmaceutical preparations for treating anxiety,” and Class 10, “Drug delivery systems;medical device, namely, a mechanical and electronic device used to administer medications, perform timed medication delivery, and to provide secureaccess to and delivery of medications,” in the United States. Our ACELRX mark is also registered in the European Community, Canada, and India. We have also registered the mark ACCELERATE. INNOVATE.ALLEVIATE. in the United States. 24 Competition Our industry is highly competitive and subject to rapid and significant technological change. Our potential competitors include large pharmaceutical andbiotechnology companies, specialty pharmaceutical and generic drug companies, and medical technology companies. We believe the key competitivefactors that will affect the development and commercial success of our product candidates are the safety, efficacy and tolerability profile, the patient andhealthcare professional satisfaction with using our product candidates in relation to available alternatives and the reliability, convenience of dosing,price and reimbursement of our product candidates. Many of our potential competitors, including many of the organizations named below, have substantially greater financial, technical and humanresources than we do and significantly greater experience in the development of product candidates, obtaining FDA and other regulatory approvals ofproducts and the commercialization of those products. Accordingly, our competitors may be more successful than we may be in obtaining FDA approvalfor drugs and achieving widespread market acceptance. Our competitors’ drugs may be more effective, or may be more effectively marketed and sold, thanany drug we may commercialize, which may render our product candidates obsolete or non-competitive before we can recover our losses. We anticipatethat we will face intense and increasing competition as new drugs enter the market and advanced technologies become available. Potential Competition for Zalviso We are developing Zalviso for the management of moderate-to-severe acute pain in adult patients during hospitalization. We believe that Zalviso wouldcompete with a number of opioid-based and non-opioid based treatment options that are currently available, as well as some products that are indevelopment. These products can be grouped into three classes – PCA-based systems, most commonly using an opioid as the pain control agent; nonPCA-based systems that require nurse delivery of oral or parenteral opioids; and other non-opioid based treatment modalities. Due to the difficulty ofmanaging moderate-to-severe pain, healthcare professionals will often use a combination of PCA opioids, parenteral or oral opioids and non-opioid basedtreatments to manage pain. The primary competition for Zalviso is the IV PCA pump, which is widely used in the management of moderate-to-severe acute pain in the hospitalsetting. Leading manufacturers of IV PCA pumps include Hospira Inc. (recently acquired by Pfizer), CareFusion Corporation (recently purchased byBecton Dickinson & Co.), Baxter International Inc., Curlin Medical, Inc. and Smiths Medical. The most common opioids used to treat moderate-to-severeacute pain are morphine, hydromorphone and fentanyl, all of which are available as generics both from generic product manufacturers as well as fromcompounding pharmacies. In addition, branded manufacturers (e.g., Hospira, Inc.) sell pre-filled glass syringes of morphine to fit their IV PCA pumpsystems. Also available on the market is the Avancen Medication on Demand, or MOD, Oral PCA Device developed by Avancen MOD Corporation. Oral opioidsand other agents can be used in this system. In addition, oral and parenteral opioids administered by the nurse are used to manage moderate-to-severeacute pain in the hospital, available both as branded and generic products. These oral opioids, as well as IV PCA opioids, are often used as part of a multi-modal analgesia approach, which might include, in addition to the opioid, NSAIDs, acetaminophen, gabapentanoids and other pain managementmodalities, as well as local anesthetic blocks to provide temporary blockage of the pain signal, either as a wound infiltration agent or as a nerve block.These local anesthetic agents such as bupivacaine can also utilize controlled-release formulations such as Pacira’s EXPAREL In addition, Halyard Health,Inc. has developed a medical device, the ON-Q* Pain Relief System, which is a non-narcotic elastomeric pump that automatically and continuouslydelivers a regulated flow of local anesthetic to a patient’s surgical site or in close proximity to nerves, providing targeted pain relief for up to five days. Additional potential competitors for Zalviso include products in development, including the fentanyl iontophoretic transdermal system, IONSYS,originally developed by ALZA Corporation and Ortho-McNeil Pharmaceutical, Inc., both Johnson & Johnson subsidiaries, and now under developmentby The Medicines Company. The Medicines Company has reported that IONSYS has a PDUFA date of April 30, 2015. If approved on this date, IONSYSmay be marketed prior to the potential approval of Zalviso which may provide a first-to-market advantage for IONSYS. Cara Therapeutics is developing akappa opioid agonist, CR845, as an IV agent for the management of post-operative moderate-to-severe pain. Trevena is developing TRV130, anintravenous G protein biased ligand that targets the mu opioid receptor for the treatment of moderate-to-severe acute pain where intravenous therapy ispreferred, with a clinical development focus in acute postoperative pain. In January 2015, Trevena initiated a Phase 2b clinical study of TRV130. RecroPharma is developing an intranasal form of dexmedetomidine as a potential agent for the management of post-operative pain. Finally, Innocoll isdeveloping XARACOLL, a controlled-release resorbable implant containing bupivacaine, and Durect has been developing POSIDUR, a controlled-release bupivacaine product candidate utilizing Durect’s SABER technology. Potential Competition for ARX-04 Within the civilian environment, there are a wide variety of approved injectable and oral opioid products to treat moderate-to-severe acute pain,including IV opioids such as morphine, fentanyl, hydromorphone and meperidine or oral opioids such as oxycodone and hydrocodone. Morespecifically, competitors for ARX-04 in the emergency department are likely to include generic injectable intravenous opioids such as morphine,hydromorphone and fentanyl. In this environment, ARX-04 may also compete with other branded non-invasive products such as Eagalet’s SPRIX,Hospira’s DYLOJECT, Pfizers OXECTA, Depomed’s NUCYNTA, BMS’s COMBUNOX, Purdue’s OXYFAST, Endo’s OPANA, or generic oral opioidswhich have moderate-to-severe acute pain labeling. In the short-stay or ambulatory surgery segment, ARX-04 will likely compete with these products inaddition to generic injectable local anesthetics such as bupivacaine, or branded formulations thereof, including Pacira’s EXPAREL. Within the militaryenvironment, and in certain civilian settings, ARX-04 competitors may also include intramuscular morphine injections which are marketed by a variety ofgeneric manufacturers. 25 Potential Competition for ARX-02 We are developing ARX-02, the Sufentanil Sublingual Tablet BTP Management System, for the treatment of breakthrough pain in opioid tolerantpatients, with an initial indication in cancer patients. The market for opioids for treatment of cancer breakthrough pain is large and competitive; however,currently there are no sufentanil products approved by the FDA for this indication. Our potential competitors for ARX-02 include products approved inthe United States for cancer breakthrough pain, including: ACTIQ and FENTORA, currently manufactured by Teva Pharmaceuticals; Onsolis, currentlymanufactured by BioDelivery Sciences International, Inc.; Abstral, currently manufactured by ProStrakan Group plc; Lazanda, currently manufactured byDepomed, Inc.; Subsys, currently manufactured by Insys Therapeutics, Inc., as well as products approved in Europe, including Instanyl, currentlymanufactured by Takeda Pharmaceuticals International GmbH. The active ingredient in all approved products for cancer breakthrough pain is fentanyl.Additional potential competitors for ARX-02 include products in late stage development for cancer breakthrough pain, such as: Fentanyl TAIFUN,currently manufactured by Akela Pharma, Inc. Potential Competition for ARX-03 We are developing ARX-03, the Sufentanil/Triazolam Sublingual Tablet, for use in diagnostic or therapeutic painful procedures of short duration in aphysician’s office. For these procedures, many practitioners rely primarily on local anesthetics injected to the procedural area to reduce the pain of theprocedure, and do not use IV sedatives to manage the anxiety of patients because of the cost of having additional trained staff to monitor the patients.Currently, we are not aware of any products on the market which combine an opioid with a benzodiazepine in a single dosage form to manage the anxietyand pain of procedures in a physician’s office. We are not aware of any approved or development stage non-IV sedative/analgesic products that wouldpresent competition to ARX-03. In the future, there may be products developed or approved for this market which could directly compete with ARX-03. Pharmaceutical Manufacturing and Supply We currently rely on contract manufacturers to produce sufentanil sublingual tablets and sufentanil/triazolam sublingual tablets for our clinical trialsunder current Good Manufacturing Practices, or cGMP, with oversight by our internal managers. Equipment specific to the pharmaceutical manufacturingprocess was purchased and customized by us and is currently owned by us. We plan to continue to rely on contract manufacturers and, potentially,collaboration partners to manufacture commercial quantities of our product candidates if and when approved for marketing by the FDA. We currently relyon a single manufacturer for the preclinical and clinical supplies of our drug product for each of our product candidates and do not currently haveagreements in place for redundant supply or a second source for any of our product candidates. We have identified other manufacturers that could satisfyour commercial supply and packaging requirements and we continue to evaluate those manufacturers. In January 2013, we entered into a Manufacturing Services Agreement, or the Services Agreement, with Patheon Pharmaceuticals, Inc., or Patheon,relating to the manufacture of sufentanil sublingual tablets for use with the Zalviso device. Under the terms of the Services Agreement, Patheon hasagreed to manufacture, supply, and provide certain validation and stability services with respect to Zalviso for sale in the United States, Canada, Mexicoand other countries, subject to agreement by the parties to any additional fees for such other countries. The term of the Services Agreement extends untilDecember 31, 2017, or the Initial Term, and will automatically renew thereafter for periods of two years, unless terminated by either party upon eighteenmonths’ prior written notice; provided, however, that the Services Agreement may not be terminated without cause prior to the end of the Initial Term. Inaddition, we entered into a related Amended and Restated Capital Expenditure and Equipment Agreement, or the Amended Capital Agreement, related toclinical and commercial production of our product candidates. Under the terms of the Amended Capital Agreement, we have made, and may make certainfuture modifications to Patheon’s Cincinnati facility. Device Manufacturing and Supply The device components of Zalviso are manufactured by contract manufacturers, component fabricators and secondary service providers. Suppliers ofcomponents, subassemblies and other materials are located in Korea, Japan, Germany, China, Taiwan, Canada and the United States. All contractmanufacturers and component suppliers have been selected for their specific competencies in the manufacturing processes and materials that make upZalviso. FDA regulations require that materials be produced under cGMPs or Quality System Regulation, or QSR. We outsource injection molding of allthe plastic parts for the cartridge and device and product sub-assemblies; tablet cartridge filling and packaging; and assembly, packaging and labeling ofthe dispenser and controller. 26 ARX-02 is manufactured by contract manufacturers, component fabricators and secondary service providers. Suppliers of components, subassemblies andother materials are located in Korea, Japan, China, Taiwan, Canada and the United States. All contract manufacturers and component suppliers have beenselected for their specific competencies in the manufacturing processes and materials that make up ARX-02. FDA regulations require that materials beproduced under cGMPs or QSR, as required for the respective unit operation within the manufacturing process. We outsource injection molding of all theplastic parts for the SDA and MSD and product sub-assemblies; and filling, packaging and labeling of SDAs. ARX-03 and ARX-04 both utilize SDAs in the delivery of the sufentanil/triazolam sublingual tablets and sufentanil sublingual tablets. FDA regulationsrequire that materials be produced under cGMPs or QSR, as required for the respective unit operation within the manufacturing process. We outsourceinjection molding of all the plastic parts for the SDA, and product sub-assemblies; and filling, packaging and labeling of SDAs. Government Regulation Government authorities in the United States at the federal, state and local level, and in other countries, extensively regulate, among other things, theresearch, development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution,marketing, export and import of products such as those we are developing. Our product candidates must be approved by the FDA through the NDAprocess before they may legally be marketed in the United States. In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and regulations. The process of obtainingregulatory approvals and complying with applicable laws and regulations requires the expenditure of substantial time and financial resources. Failure tocomply at any time during the product development and approval process, or after approval, may subject an applicant to administrative or judicialsanctions. These sanctions could include the FDA’s refusal to approve pending applications, withdrawal of an approval, a clinical hold, warning letters,product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution,disgorgement or civil or criminal penalties. The process required by the FDA before a drug product may be marketed in the United States generallyinvolves the following: •completion of non-clinical laboratory tests, animal trials and formulation studies according to Good Laboratory Practices regulations; •submission to the FDA of an investigational new drug, or IND, application which must become effective before human clinical trials maybegin; •performance of adequate and well-controlled human clinical trials according to Good Clinical Practices, or GCP, to establish the clinicalsafety and efficacy of the proposed drug product for its intended use; •submission to the FDA of an NDA for a new drug product; •satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the drug product and the drug substance(s)are produced to assess compliance with cGMP; •payment of user and facility fees; and •FDA review and approval of the NDA. The testing and approval process requires substantial time, effort and financial resources and we cannot be certain that any approvals for our productcandidates will be granted on a timely basis, if at all. Human clinical trials are typically conducted in three sequential phases that may overlap or be combined: •Phase 1. The product is initially introduced into healthy human subjects and tested for safety, dosage tolerance, absorption, metabolism,distribution and excretion. In the case of some products for severe or life-threatening diseases, especially when the product may be tooinherently toxic to ethically administer to healthy volunteers, the initial human testing is often conducted in patients. •Phase 2. Involves trials in a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate theefficacy of the product for specific targeted conditions and to determine dosage tolerance and optimal dosage and schedule. •Phase 3. Clinical trials are undertaken to further evaluate dosage, clinical safety and efficacy in an expanded patient population atgeographically dispersed clinical trial sites. These trials are intended to establish the overall risk/benefit ratio of the product and provide anadequate basis for product labeling. 27 Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and safety reports must be submitted to the FDAand the investigators for serious and unexpected adverse events. The FDA or the sponsor may suspend or terminate a clinical trial at any time on variousgrounds, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an institutional reviewboard, or IRB, can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with theIRB’s requirements or if the drug or biological product has been associated with unexpected serious harm to patients. Concurrent with clinical trials, companies usually complete additional animal trials and must also develop additional information about the chemistryand physical characteristics of the product and finalize a process for manufacturing the product in commercial quantities in accordance with cGMP andQSR for medical devices requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidateand, among other things, the manufacturer must develop methods for testing the identity, strength, quality and purity of the final product. Additionally,appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the product candidate does not undergounacceptable deterioration over its shelf life. Our product candidates, Zalviso, ARX-02, ARX-03 and ARX-04, are regulated under IND applications for clinical development and in the case ofZalviso, all device related information is filed under the Chemistry, Manufacturing and Controls Section, or CMC, of an IND. The results of product development, preclinical trials and clinical trials, along with descriptions of the manufacturing process, analytical tests conductedon our drug products, proposed labeling and other relevant information, will be submitted to the FDA as part of an NDA for a new drug product,requesting approval to market the product in the United States. The submission of an NDA is subject to the payment of a substantial user fee; a waiver ofsuch fee may be obtained under certain limited circumstances. During its review of an NDA, FDA may inspect our manufacturers for GMP and QSRcompliance, and our pivotal clinical trial sites for GCP compliance. In addition, under the Pediatric Research Equity Act, an NDA or supplement to an NDA must contain data to assess the safety and effectiveness of thedrug product for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatricsubpopulation for which the product is safe and effective. The FDA may grant deferrals for submission of data or full or partial waivers. The approval process is lengthy and difficult and the FDA may refuse to approve an NDA if the applicable regulatory criteria are not satisfied or mayrequire additional clinical data or other data and information. Even if such data and information is submitted, the FDA may ultimately decide that theNDA does not satisfy the criteria for approval. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently thanwe interpret the same data. The FDA issues a Complete Response Letter at the conclusion of its review if the NDA is not yet deemed ready for approval. AComplete Response Letter generally outlines the deficiencies in the submission and may require substantial additional testing or information for the FDAto reconsider the application. If, or when, those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the NDA, the FDA willissue an approval letter. The FDA has committed to reviewing such resubmissions in two or six months depending on the type of information included. If one or more of our product candidates receive regulatory approval, the approval may be limited to specific conditions and dosages or the indicationsfor use may otherwise be limited, which could restrict the commercial value of the product. Our product candidates, if approved, will also require RiskEvaluations and Mitigation Strategies, or REMS, which can include a medication guide, patient package insert, a communication plan, elements to assuresafe use and implementation system, and must include a timetable for assessment of the REMS. Further, the FDA may require that certaincontraindications, warnings or precautions be included in the product labeling and may require testing and surveillance programs to monitor the safety ofapproved products that have been commercialized. In addition, the FDA may require post-approval testing which involves clinical trials designed tofurther assess a drug product’s safety and effectiveness after the NDA. Post-Approval Requirements Any drug products for which we receive FDA approvals are subject to continuing regulation by the FDA, including, among other things, record-keepingrequirements, reporting of adverse experiences with the product, providing the FDA with updated clinical safety and efficacy information, productsampling and distribution requirements, complying with certain electronic records and signature requirements and complying with FDA promotion andadvertising requirements. Phase 4 clinical trials are conducted after approval to gain additional experience from the treatment of patients in the intendedtherapeutic indication or when otherwise requested by the FDA in the form of postmarketing requirements or commitments. Failure to promptly conductany required Phase 4 clinical trials could result in withdrawal of NDA approval. The FDA strictly regulates labeling, advertising, promotion and othertypes of information on products that are placed on the market. Drug products may be promoted only for the approved indications and in accordance withthe provisions of the approved label. Further, manufacturers of drug products must continue to comply with cGMP requirements, which are extensive andrequire considerable time, resources and ongoing investment to ensure compliance. In addition, changes to the manufacturing process generally requireprior FDA approval before being implemented and other types of changes to the approved product, such as adding new indications and additionallabeling claims, are also subject to further FDA review and approval. 28 Drug product manufacturers and other entities involved in the manufacturing and distribution of approved drug products are required to register theirestablishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies forcompliance with cGMP and other laws. The cGMP requirements apply to all stages of the manufacturing process, including the production, processing,packaging, labeling, storage and shipment of the drug product. Manufacturers must establish validated systems to ensure that products meetspecifications and regulatory standards, and test each product batch or lot prior to its release. In the case of Zalviso, the device component must complywith FDA’s Quality Systems Regulation. We rely, and expect to continue to rely, on third parties for the production of clinical and commercial quantities of our products. Future FDA and stateinspections may identify compliance issues at the facilities of our contract manufacturers that may disrupt production or distribution or may requiresubstantial resources to correct. The FDA may withdraw a product approval if compliance with regulatory standards is not maintained or if problems occur after the product reaches themarket. Later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of theproduct from the market. Further, the failure to maintain compliance with regulatory requirements may result in administrative or judicial actions, such asfines, warning letters, holds on clinical trials, product recalls or seizures, product detention or refusal to permit the import or export of products, refusal toapprove pending applications or supplements, restrictions on marketing or manufacturing, injunctions or civil or criminal penalties. Foreign Regulation In addition to regulations in the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial sales anddistribution of our products to the extent we choose to sell any products outside of the United States. In October 2012, we received notice from theEuropean Medicines Agency, or EMA, that Zalviso was eligible for centralized marketing authorization application, or MAA, in the European Union, orEU. This regulatory procedure, reserved for novel products, biotechnology products and new chemical entities, allows for commercialization across 31EU and EFTA countries based on approval by EMA. In July 2014, Grünenthal filed an MAA with the EMA under the centralized procedure in the EU forZalviso for the management of moderate-to-severe acute pain in adult patients in a medically-supervised environment. In addition, since Zalviso isconsidered a drug-device combination product candidate, conformance to the European Medical Device Directive required Conformite Europeenne, orCE, Mark approval for the Zalviso device to enable commercialization in the EU. In December 2014, we announced that we had received CE Marking forZalviso. Outside of Europe, the requirements and approval process vary from country to country and the time may be longer or shorter than that requiredfor FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country tocountry. Controlled Substances Regulations Sufentanil, a Schedule II controlled substance, is the active pharmaceutical ingredient in Zalviso, ARX-02, ARX-03 and ARX-04. Triazolam, a ScheduleIV controlled substance, is also an active pharmaceutical ingredient in ARX-03. Controlled substances are governed by the Drug EnforcementAdministration, or DEA, of the U.S. Department of Justice. The handling of controlled substances and/or drug product by us, our contract manufacturers,analytical laboratories, packagers and distributors, are regulated by the Controlled Substances Act and regulations thereunder. The Drug Supply Chain Security Act imposes new obligations on manufacturers of pharmaceutical products, among others, related to product trackingand tracing. Among the requirements are that manufacturers will be required to provide certain information regarding the drug product to individuals andentities to which product ownership is transferred, label drug product with a product identifier, and keep certain records regarding the drug product.Further, manufacturers will have drug product investigation, quarantine, disposition, and notification responsibilities related to counterfeit, diverted,stolen, and intentionally adulterated products, as well as products that are the subject of fraudulent transactions or which are otherwise unfit fordistribution such that they would be reasonably likely to result in serious health consequences or death. 29 Unforeseen delays to the drug substance and drug product manufacture and supply chain may occur due to delays, errors or other unforeseen problemswith the permitting and quota process. Also, any one of our suppliers, contract manufacturers, laboratories, packagers and/or distributors could be thesubject of DEA violations and enforcement could lead to delays or even loss of DEA license by the contractors. Federal and State Fraud and Abuse and Data Privacy and Security and Transparency Laws and Regulations In addition to FDA restrictions on marketing of pharmaceutical products, federal and state healthcare laws restrict certain business practices in thepharmaceutical industry. These laws include, but are not limited to, anti-kickback, false claims, data privacy and security, and transparency statutes andregulations. The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration, directlyor indirectly, to induce, or in return for, purchasing, leasing, ordering or arranging for the purchase, lease or order of any good, facility, item or servicereimbursable under Medicare, Medicaid or other federal healthcare programs. The term “remuneration” has been broadly interpreted to include anythingof value, including for example, gifts, discounts, the furnishing of supplies or equipment, credit arrangements, payments of cash, waivers of payment,ownership interests and providing anything at less than its fair market value. The Anti-Kickback Statute has been interpreted to apply to arrangementsbetween pharmaceutical manufacturers on one hand and prescribers, purchasers and formulary managers on the other. Although there are a number ofstatutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawnnarrowly, and our practices may not in all cases meet all of the criteria for a statutory exception or safe harbor protection. Practices that involveremuneration that may be alleged to be intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualifyfor an exception or safe harbor. A claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false orfraudulent claim for purposes of the civil False Claims Act (discussed below). The federal false claims laws prohibit, among other things, any person or entity from knowingly presenting, or causing to be presented, a false orfraudulent claim for payment or approval to the federal government or knowingly making, using or causing to be made or used a false record or statementmaterial to a false or fraudulent claim to the federal government. Pharmaceutical and other healthcare companies have been prosecuted under these lawsfor, among other things, allegedly providing free product to customers with the expectation that the customers would bill federal programs for theproduct. Other companies have been prosecuted for causing false claims to be submitted because of the companies’ marketing of the product forunapproved, and thus non-reimbursable, uses. Further, civil monetary penalties statute imposes penalties against any person or entity who, among otherthings, is determined to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an itemor service that was not provided as claimed or is false or fraudulent. In addition, we may be subject to data privacy and security regulation by both the federal government and the states in which we conduct our business.HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and its implementing regulations, imposescertain requirements relating to the privacy, security and transmission of individually identifiable health information. Among other things, HITECHmakes HIPAA’s privacy and security standards directly applicable to business associates—independent contractors or agents of covered entities thatreceive or obtain protected health information in connection with providing a service on behalf of a covered entity. HITECH also created four new tiers ofcivil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys generalnew authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s fees and costsassociated with pursuing federal civil actions. In addition, state laws govern the privacy and security of health information in certain circumstances, manyof which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts. Additionally, the federal Physician Payments Sunshine Act within the PPACA, and its implementing regulations, require that certain manufacturers ofdrugs, devices, biologicals and medical supplies for which federal healthcare program payment is available to report information related to certainpayments or other transfers of value made or distributed to physicians and teaching hospitals, or to entities or individuals at the request of, or designatedon behalf of, the physicians and teaching hospitals and to report annually certain ownership and investment interests held by physicians and theirimmediate family members. Also, many states have similar healthcare statutes or regulations that apply to items and services reimbursed under Medicaid and other state programs, or,in several states, apply regardless of the payer. FDA and some states require the posting of information relating to clinical studies. In addition, Californiarequires pharmaceutical companies to implement a comprehensive compliance program that includes a limit on expenditures for, or payments to,individual medical or health professionals. If our operations are found to be in violation of any of the health regulatory laws described above or any otherlaws that apply to us, we may be subject to penalties, including potentially significant criminal, civil and/or administrative penalties, damages, fines,disgorgement, individual imprisonment, exclusion of products from reimbursement under government programs, contractual damages, reputational harm,administrative burdens, diminished profits and future earnings and the curtailment or restructuring of our operations, any of which could adversely affectour ability to operate our business and our results of operations. To the extent that any of our products will be sold in a foreign country, we may besubject to similar foreign laws and regulations, which may include, for instance, applicable post-marketing requirements, including safety surveillance,anti-fraud and abuse laws and implementation of corporate compliance programs and reporting of payments or transfers of value to healthcareprofessionals. 30 Pharmaceutical Coverage, Pricing and Reimbursement In both domestic and foreign markets, our sales of any approved products will depend in part on the availability of coverage and adequate reimbursementfrom third-party payers. Third-party payers include government health administrative authorities, managed care providers, private health insurers andother organizations. Sales of our products will depend substantially, both domestically and abroad, on the extent to which the costs of our products willbe paid by third-party payers. These third-party payers are increasingly focused on containing healthcare costs by challenging the price and examiningthe cost-effectiveness of medical products and services. In addition, significant uncertainty exists as to the coverage and reimbursement status of newlyapproved healthcare product candidates. Third-party payers may refuse to include a particular branded drug in their formularies or otherwise restrictpatient access to a branded drug when a less costly generic equivalent or other alternative is available. Because each third-party payer individuallyapproves coverage and reimbursement levels, obtaining coverage and adequate reimbursement is a time-consuming, costly and sometimes unpredictableprocess. We may be required to provide scientific and clinical support for the use of any product to each third-party payer separately with no assurancethat approval would be obtained, and we may need to conduct expensive pharmacoeconomic studies in order to demonstrate the cost-effectiveness of ourproducts. This process could delay the market acceptance of any product and could have a negative effect on our future revenues and operating results.We cannot be certain that our products and our product candidates will be considered cost-effective. Because coverage and reimbursement determinationsare made on a payer-by-payer basis, obtaining acceptable coverage and reimbursement from one payer does not guarantee that we will obtain similaracceptable coverage or reimbursement from another payer. If we are unable to obtain coverage of, and adequate reimbursement and payment levels for,our product candidates from third-party payers, physicians may limit how much or under what circumstances they will prescribe or administer them. Thisin turn could affect our ability to successfully commercialize our products and impact our profitability, results of operations, financial condition andfuture success. In addition, in many foreign countries, particularly the countries of the European Union, the pricing of prescription drugs is subject to governmentcontrol. In some non-U.S. jurisdictions, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governingdrug pricing vary widely from country to country. For example, the EU provides options for its member states to restrict the range of medicinal productsfor which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member statemay approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the companyplacing the medicinal product on the market. We may face competition for our product candidates from lower-priced products in foreign countries thathave placed price controls on pharmaceutical products. In addition, there may be importation of foreign products that compete with our own products,which could negatively impact our profitability. Healthcare Reform In the United States and foreign jurisdictions, there have been, and we expect there will continue to be, a number of legislative and regulatory changes tothe healthcare system that could affect our future results of operations as we begin to commercialize our products. In particular, there have been andcontinue to be a number of initiatives at the United States federal and state level that seek to reduce healthcare costs. Government payment for some ofthe costs of prescription drugs may increase demand for our products for which we receive marketing approval. However, any negotiated prices for ourfuture products will likely be lower than the prices we might otherwise obtain from non-governmental payers. Moreover, private payers often followfederal healthcare coverage policy and payment limitations in setting their own payment rates. Furthermore, political, economic and regulatory influences are subjecting the healthcare industry in the United States to fundamental change. Initiativesto reduce the federal deficit and to reform healthcare delivery are increasing cost-containment efforts. We anticipate that Congress, state legislatures andthe private sector will continue to review and assess alternative benefits, controls on healthcare spending through limitations on the growth of privatehealth insurance premiums and Medicare and Medicaid spending, the creation of large insurance purchasing groups, price controls on pharmaceuticalsand other fundamental changes to the healthcare delivery system. Any proposed or actual changes could limit or eliminate our spending on developmentprojects and affect our ultimate profitability. In March 2010, PPACA was signed into law. Among other cost containment measures, PPACA establishedan annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents. In the future, there maycontinue to be additional proposals relating to the reform of the U.S. healthcare system, some of which could further limit the prices we are able to chargefor our products, or the amounts of reimbursement available for our products. If future legislation were to impose direct governmental price controls andaccess restrictions, it could have a significant adverse impact on our business. Managed care organizations, as well as Medicaid and other governmentagencies, continue to seek price discounts. Some states have implemented, and other states are considering, price controls or patient access constraintsunder the Medicaid program, and some states are considering price-control regimes that would apply to broader segments of their populations that are notMedicaid-eligible. Due to the volatility in the current economic and market dynamics, we are unable to predict the impact of any unforeseen or unknownlegislative, regulatory, payer or policy actions, which may include cost containment and healthcare reform measures. Such policy actions could have amaterial adverse impact on our profitability. 31 Research and Development Conducting research and development is central to our business model. We have invested and expect to continue to invest significant time and capital inour research and development operations. Our research and development expenses were $24.5 million, $26.3 million and $24.9 million during the yearsended December 31, 2014, 2013 and 2012, respectively. We plan to incur significant expenditures for the foreseeable future as we seek to continuecommercial preparations for Zalviso and development of ARX-04, and subsequently advance the development of ARX-02 and ARX-03 contingent uponadditional funding or identification of corporate partnership resources. Employees As of December 31, 2014, we employed 50 full-time employees. None of our employees are subject to a collective bargaining agreement. We consider ourrelationship with our employees to be good. Corporate Information We were originally incorporated as SuRx, Inc. in Delaware on July 13, 2005. We subsequently changed our name to AcelRx Pharmaceuticals, Inc. onAugust 13, 2006. We file electronically with the U.S. Securities and Exchange Commission, or SEC, our annual reports on Form 10-K, quarterly reports onForm 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities ExchangeAct of 1934, as amended, or the Exchange Act. We make available on our website at www.acelrx.com, free of charge, copies of these reports as soon asreasonably practicable after filing these reports with, or furnishing them to, the SEC. 32 Item 1A. Risk Factors This Form 10-K contains forward-looking information based on our current expectations. Because our actual results may differ materially fromany forward-looking statements made by or on behalf of us, this section includes a discussion of important factors that could affect our actual futureresults, including, but not limited to, our revenues, expenses, net loss and loss per share. We believe the risks described below are the risks that arematerial to us as of the date of this Form 10-K. If any of the following risks comes to fruition, our business, financial condition, results of operations andfuture growth prospects would likely be materially and adversely affected. Risks Related to Clinical Development and Regulatory Approval We depend substantially on the success of Zalviso, which may not receive regulatory approval or be successfully commercialized. Since our inception in 2005, we have focused primarily on development of our lead product candidate, Zalviso. Zalviso consists of sufentanilsublingual tablets delivered by the Zalviso System, a needle-free, handheld, patient-administered, pain management system (together, “Zalviso”). Thesuccess of our business depends primarily upon our ability to develop, receive regulatory approval for and commercialize Zalviso for the management ofmoderate-to-severe acute pain in adult patients in the hospital setting. We have not marketed, distributed or sold any products to date. Our Phase 3 program for Zalviso consisted of three Phase 3 clinical trials. We reported positive top-line data from each of these trials and submitted a NewDrug Application, or NDA, for Zalviso to the U.S. Food and Drug Administration, or FDA, on September 27, 2013, which the FDA then accepted for filingin December 2013. On July 25, 2014, the FDA issued a Complete Response Letter, or CRL, for our NDA for Zalviso. The CRL contains requests foradditional information on the Zalviso System to ensure proper use of the device. The requests include submission of data demonstrating a reduction inthe incidence of optical system errors, changes to address inadvertent dosing, among other items, and submission of additional data to support the shelflife of the product. In September 2014, we held a teleconference with representatives from the FDA to review our proposed response to the Zalviso CRL.We submitted a Briefing Document to the FDA ahead of the teleconference and received preliminary comments from the FDA on the Briefing Document.During the meeting, we discussed the resubmission of the Zalviso NDA and the steps necessary for the resubmission, including submission of protocolsfor the bench testing and Human Factors, or HF, studies for their review and comment. In addition, the FDA requested in the minutes of the meeting thatwe provide a risk assessment that analyzes the risks associated with inadvertent dosing and the rationale that bench testing and HF studies are sufficientto address the specific items included in the CRL. We submitted the protocols and this rationale in the fourth quarter of 2014. In January 2015, wereceived feedback from the FDA on the protocol and planned analysis of the results of the bench test. No modifications to the conduct of the bench testwere necessary; however, in response to the FDA’s request, we refined the planned analysis of the bench test results. In February 2015, we receivedfeedback from the FDA on the HF protocols. In this feedback, the FDA confirmed that the HF studies as proposed were acceptable to evaluate the designchanges related to inadvertent dispensing of tablets. In March 2015, we received additional correspondence from the FDA stating that in addition to thebench testing and two Human Factors studies we have performed in response to the issues identified in the CRL, an additional clinical study is needed toassess the risk of inadvertent dispensing and overall risk of dispensing failures. We plan to meet with the FDA to discuss and clarify the need for anadditional clinical study, and the potential design and objectives of such a study. As a result of this most recent FDA communication and the need forclarity with the FDA, resubmission of the NDA for Zalviso is on hold. As noted above, we plan to hold a meeting with the FDA to discuss the recent correspondence. However, there is no guarantee that we will be grantedsuch a meeting with the FDA and, even if granted, that it will occur on a timely basis. In addition, even if we are able to hold a meeting with the FDA,there is no guarantee that we will achieve clarity with respect to the FDA’s March 2015 request for additional clinical data, or that we will be able todefine the nature and scope of an additional clinical study to meet these requests. There is no guarantee that additional work we perform related toZalviso, including an additional human clinical trial, will be supportive of an NDA resubmission, nor does it guarantee we will be successful in obtainingFDA approval of Zalviso in a timely fashion, if at all. At any future point in time, the FDA could require us to complete further clinical, Human Factors,pharmaceutical, reprocessing or other studies, which could delay or preclude any approval of the NDA and would require us to obtain significantadditional funding. There is no guarantee such funding would be available to us on favorable terms, if at all. Our proposed trade name of Zalviso has been approved by the FDA, which must approve all drug trade names to avoid medication errors andmisbranding. However, the FDA may withdraw this approval in which case any brand recognition or goodwill that we establish with the name Zalvisoprior to commercialization may be worthless. Any delay in approval by the FDA of the Zalviso NDA may negatively impact our stock price and harm our business operations. Any delay in obtaining,or inability to obtain, regulatory approval would prevent us from commercializing Zalviso in the United States, generating revenues and achievingprofitability. If any of these events occur, we may be forced to delay or abandon our development efforts for Zalviso, which would have a material adverseeffect on our business and could potentially cause us to cease operations. Although we have received CE Mark approval permitting the commercial use of the Zalviso device in the European Union, Grünenthal may neverachieve regulatory approval for Zalviso in their licensed territories, including the EU and Australia, in which case, we would not receive development orsales milestones, or product royalties, which could have a material adverse effect on our business. 33TM Positive clinical results obtained to date for our product candidates may be disputed in FDA review, do not guarantee regulatory approval and maynot be obtained from future clinical trials. We have reported positive top-line data from each of our three Zalviso Phase 3 clinical trials, as well as our Phase 2 clinical trial for ARX-04. However,even if we believe that the data from clinical trials is positive, the FDA could analyze our data using alternative strategies and determine that the datafrom our trials was negative or inconclusive. Negative or inconclusive results of a clinical trial could cause the FDA to require us to repeat the trial orconduct additional clinical trials prior to obtaining approval for commercialization, and there is no guarantee that additional trials would achievepositive results. Any such determination by the FDA would delay the timing of our commercialization plan for Zalviso, or further development of ourother product candidates, and adversely affect our business operations. For example, although we had achieved the primary endpoints in each of our threePhase 3 clinical trials for Zalviso, which were included in our NDA filed in 2013, in March 2015, we received correspondence from the FDA stating thatin addition to the bench testing and two Human Factors studies we have performed in response to the issues identified in the CRL, an additional clinicalstudy is needed to assess the risk of inadvertent dispensing and overall risk of dispensing failures. Delays in clinical trials are common and have many causes, and any delay could result in increased costs to us and jeopardize or delay our ability toobtain regulatory approval and commence product sales. We have experienced and may in the future experience delays in clinical trials of our product candidates. While we have completed pre-commercial trialsfor Zalviso, and the Phase 2 clinical trial for ARX-04, current and potential future clinical trials, such as with the ARX-04 Phase 3 clinical program, maynot begin on time, have an effective design, enroll a sufficient number of patients or be completed on schedule, if at all. For example, in June 2014, wecompleted a pharmacokinetic study in support of the ARX-04 development program. In this study of healthy volunteers, it was shown that two sublingualadministrations of a Zalviso 15mcg sufentanil sublingual tablet dosed 20 minutes apart were equivalent to one sublingual administration of an ARX-0430mcg sufentanil sublingual tablet. Based on the results of this study, we have proposed the inclusion of approximately 300 patients from the Zalvisoclinical program in the ARX-04 safety database to the FDA and we have designed the two Phase 3 ARX-04 trials accordingly. The ARX-04 safetydatabase required by the FDA is 500 patients. We have confirmation from FDA that some of the Zalviso patients can be included in the overall ARX-04safety database; however, further discussion is needed to determine the exact number of such patients that can be used towards achieving the 500 patientminimum total safety exposure number required for ARX-04. Based on an ongoing pharmacokinetic analysis, we may need to increase enrollment in ourplanned Phase 3 clinical trial program to meet the FDA’s requested exposure requirements to ARX-04, which could delay the Phase 3 clinical programand increase our clinical trial expenses. Our clinical trials for any of our product candidates could be delayed for a variety of reasons, including: •inability to raise funding necessary to initiate or continue a trial; •delays in finalizing, or inability to complete, the contract negotiations with DoD for ARX-04 funding; •delays in obtaining regulatory approval to commence a trial; •delays in reaching agreement with the FDA on final trial design; •imposition of a clinical hold following an inspection of our clinical trial operations or trial sites by the FDA or other regulatory authorities; •delays in reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites; •delays in obtaining required institutional review board approval at each site; •delays in recruiting suitable patients to participate in a trial; •delays in the testing, validation, manufacturing and delivery of the device components of our product candidates; •delays in having patients complete participation in a trial or return for post-treatment follow-up; •clinical sites dropping out of a trial to the detriment of enrollment or being delayed in entering data to allow for clinical trial databaseclosure; •time required to add new clinical sites; or •delays by our contract manufacturers to produce and deliver sufficient supply of clinical trial materials. If any future clinical trials are delayed for any of the above reasons, our development costs may increase, our approval process could be delayed and ourability to commercialize and commence sales of our product candidates could be materially harmed, which could have a material adverse effect on ourbusiness. We have never responded to a Complete Response Letter nor resubmitted an NDA. Activities that we undertake to address issues raised in the CRL maybe deemed insufficient by the FDA. 34 We recently completed bench testing and additional Human Factors studies that we believed addressed certain items contained in the CRL. However,before the results from these studies were submitted as a part of the proposed NDA resubmission, the FDA, in March 2015, notified us of the need for anadditional clinical study prior to the resubmission of the Zalviso NDA. In March 2015, we received correspondence from the FDA stating that in addition to the bench testing and two Human Factors studies we have performedin response to the issues identified in the CRL, an additional clinical study is needed to assess the risk of inadvertent dispensing and overall risk ofdispensing failures. We plan to meet with the FDA to discuss and clarify the need for an additional clinical study, and the potential design and objectivesof such a study. As a result of this most recent correspondence, we may require additional funding in order to complete the additional clinical studyrequested by the FDA for Zalviso. Even if we have appropriate resources to conduct an additional clinical study, there is no guarantee that the studyresults would address the issues raised by the FDA. We may be unable to obtain additional funding on favorable terms, if at all. Any delay in obtaining, orinability to obtain, regulatory approval would prevent us from commercializing Zalviso in the United States, generating revenues and achievingprofitability. If any of these events occur, we may be forced to delay or abandon our development efforts for Zalviso, which would have a material adverseeffect on our business and could potentially cause us to cease operations. If we are able to resubmit an NDA for Zalviso with new clinical data, there is no guarantee that such data will be deemed sufficient by the FDA. Inaddition, the FDA may evaluate the recent HF studies and bench testing and may have concerns or issues with those protocols and/or their results. Whilewe designed the protocols for bench testing and the Human Factors studies to address the issues raised in the CRL, there is no guarantee that the FDA willdeem such protocols and results sufficient to address those issues when they are formally reviewed as a part of an NDA resubmission. Lastly, even if we believe that the test results from our bench testing and Human Factors studies are positive, and we are able to conduct and achievepositive results from the additional clinical trial the FDA has requested, the FDA may hold a different opinion and deem the results insufficient. The FDAmay provide review commentary at any time during the resubmission and review process which could adversely affect or even prevent the approval ofZalviso, which would adversely affect our business. We may not be able to identify appropriate remediations to issues that the FDA may raise, and wemay not have sufficient time nor financial resources to conduct future activities to remediate raised issues. Our product candidates may cause adverse effects or have other properties that could delay or prevent their regulatory approval or limit the scope ofany approved label or market acceptance. Adverse events, or AEs, caused by our product candidates could cause us, other reviewing entities, clinical trial sites or regulatory authorities to interrupt,delay or halt clinical trials and could result in the denial of regulatory approval. In our Phase 3 active comparator clinical trial (IAP309), 7.9% of Zalviso-treated patients dropped out of the trial prematurely due to an AE, and we observed one serious adverse event, or SAE, that was assessed as possibly orprobably related to Zalviso. In our Phase 3, double-blind, placebo-controlled, abdominal surgery trial (IAP310), adverse events reported in the trial weregenerally mild or moderate in nature and similar in both placebo and treatment groups. In addition, one patient in the trial, who was in the sufentanilsublingual tablet group, experienced an SAE, which was determined to be unrelated to the trial drug. In our Phase 3, double-blind, placebo-controlled,orthopedic surgery trial (IAP311), treatment-emergent adverse events were generally mild-to-moderate in nature and similar for the majority of adverseevents between sufentanil sublingual tablet- and placebo-treated patients. Two patients (one each in the sufentanil sublingual tablet group and placebogroup) experienced a serious adverse event considered possibly or probably related to the trial drug by the investigator. In our Phase 2 ARX-04 trial, two serious adverse events (SAEs), both in the 20 mcg-dose group, occurred one week after the study (surgical infections)and were deemed unrelated to study drug. All but two adverse events reported in the study were mild-to-moderate in nature with 58 patients(58%) reporting a total of 135 adverse events. The most frequently reported adverse events for all patients were nausea (30%), vomiting (17%), dizziness(14%) and somnolence (11%). Two patients discontinued treatment, one unrelated to study drug (anxiety/chest pain) and the other probably related tostudy drug (somnolence/respiratory depression); however, both patients recovered without medical intervention. 35 Phase 2 clinical trials conducted by us with our Zalviso, ARX-02, ARX-03 and ARX-04 product candidates have to date generated some AEs, but noSAEs, related to the trial drug. Further, if any of our future products, including Zalviso, cause serious or unexpected side effects after receiving marketing approval, a number ofpotentially significant negative consequences could result, including: •regulatory authorities may withdraw their approval of the product or impose restrictions on its distribution in the form of a modified RiskEvaluation and Mitigation Strategy, or REMS; •regulatory authorities may require the addition of labeling statements, such as warnings or contraindications; •we may be required to change the way the product is administered or conduct additional clinical trials; •we could be sued and held liable for harm caused to patients; or •our reputation may suffer. Any of these events could prevent us from achieving or maintaining market acceptance of the affected product candidate and could substantially increasethe costs of commercializing our product candidates. Additional time may be required to obtain regulatory approval for Zalviso because it is a drug/device combination. Zalviso is a combination product candidate with both drug and device components. Zalviso is viewed as a combination product by the FDA, and bothdrug and device components were required for review as part of our NDA submission. There are very few examples of the FDA approval process fordrug/device combination products such as Zalviso. As a result, we have in the past, and may in the future, experience delays in the development andcommercialization of Zalviso due to regulatory uncertainties in the product development and approval process, in particular as it relates to a drug/devicecombination product approval under an NDA. For example, the Zalviso CRL received from the FDA in July 2014 contains requests for additionalinformation on the Zalviso System to ensure proper use of the device. The requests include submission of data demonstrating a reduction in the incidenceof optical system errors, changes to address inadvertent dosing, among other items, and submission of additional data to support the shelf life of theproduct. Furthermore, in March 2015, we received correspondence from the FDA stating that in addition to the bench testing and two Human Factorsstudies we have performed in response to the issues identified in the CRL, an additional clinical study is needed to assess the risk of inadvertentdispensing and overall risk of dispensing failures. We plan to meet with the FDA to discuss and clarify the need for an additional clinical study, and thepotential design and objectives of such a study. We may be unable to come to an agreement with the FDA on the need, design or objectives of therequested clinical study. Even if we come to an agreement on the design and objectives of the clinical study and are able to complete the clinical study,the FDA may deem the results of the clinical study, as well as bench testing and/or the Human Factors studies inadequate, which could delay or precludeany approval of Zalviso. We cannot predict when we will obtain regulatory approval to commercialize any of our product candidates, if at all, and we cannot, therefore, predictthe timing of any future revenue. We cannot commercialize any of our product candidates, including Zalviso, until the appropriate regulatory authorities, such as the FDA or the EuropeanMedicines Agency, or EMA, have reviewed and approved the product candidate. The regulatory agencies may not complete their review processes in atimely manner, or we may be unable to obtain regulatory approval for our product candidates. We received a CRL for Zalviso on July 25, 2014, whichcontains requests for additional information on the Zalviso System and requires us to complete additional bench testing and Human Factors studies. Inthe CRL, the FDA acknowledged that it had not reviewed several of the amendments to the NDA we submitted to the FDA before the CRL was issued. Inaddition, in March 2015, we received correspondence from the FDA stating that in addition to the bench testing and two Human Factors studies we haveperformed in response to the issues identified in the CRL, an additional clinical study is needed to assess the risk of inadvertent dispensing and overallrisk of dispensing failures. We plan to meet with the FDA to discuss and clarify the need for an additional clinical study, and the potential design andobjectives of such a study. Additional delays may result if any of our product candidates is taken before an FDA Advisory Committee which mayrecommend restrictions on approval or recommend non-approval. In addition, we may experience delays or rejections based upon additional governmentregulation from future legislation or administrative action, or changes in regulatory agency policy during the period of product development, clinicaltrials and the review process. The FDA and other foreign regulatory agencies, such as the EMA, can delay, limit or deny marketing approval for many reasons, including: •a product candidate may not be considered safe or effective; •the manufacturing processes or facilities we have selected may not meet the applicable requirements; and •changes in their approval policies or adoption of new regulations may require additional work on our part. Part of the regulatory approval process includes compliance inspections of manufacturing facilities to ensure adherence to applicable regulations andguidelines. The regulatory agency may delay, limit or deny marketing approval of our product candidates as a result of such inspections. In June 2014,the FDA completed an inspection at our corporate offices. We received a single observation on a Form 483 as a result of the inspection. Although webelieve we have adequately addressed this observation in a revised standard operating procedure, we, our contract manufacturers, and their vendors are allsubject to preapproval inspections at any time. In addition, in January 2015, the EMA conducted a pre-approval inspection of our Zalviso contractmanufacturer’s manufacturing and packaging site, the formal results of which we have not yet received. The results of these inspections could impact ourability to obtain FDA or EMA approval for Zalviso, and, if approved, our ability to launch and successfully commercialize Zalviso.  36 Any delay in, or failure to receive or maintain, approval for any of our product candidates could prevent us from generating meaningful revenues orachieving profitability. Our product candidates may not be approved even if they achieve their endpoints in clinical trials. Regulatory agencies,including the FDA, or their advisors may disagree with our trial design and our interpretations of data from preclinical studies and clinical trials.Regulatory agencies may change requirements for approval even after a clinical trial design has been approved. The FDA exercises significant discretionover the regulation of combination products, including the discretion to require separate marketing applications for the drug and device components in acombination product. To date, our product candidates are being regulated as drug products under the NDA process administered by the FDA. The FDAcould in the future require additional regulation of our product candidates under the medical device provisions of the FDCA. Our systems are designed tocomply with the Quality Systems Regulation, or QSR, which sets forth the FDA’s current good manufacturing practice, or cGMP, requirements for medicaldevices, and other applicable government regulations and corresponding foreign standards for drug cGMPs. If we fail to comply with these regulations, itcould have a material adverse effect on our business and financial condition. Regulatory agencies also may approve a product candidate for fewer or more limited indications than requested or may grant approval subject to theperformance of post-marketing trials. In addition, regulatory agencies may not approve the labeling claims that are necessary or desirable for thesuccessful commercialization of our product candidates. For example, we intend to resubmit our NDA seeking approval of Zalviso for the management ofmoderate-to-severe acute pain in adult patients in the hospital setting; however, our clinical trial data was generated exclusively from the post-operativesegment of this population, and the FDA may restrict any approval to post-operative patients only, which would reduce our commercial opportunity. The process for obtaining approval of an NDA is time consuming, subject to unanticipated delays and costs, and requires the commitment ofsubstantial resources. If the FDA determines that any of the clinical work submitted, including the clinical trials, Human Factors studies and bench testing submitted for aproduct candidate in support of an NDA were not conducted in full compliance with the applicable protocols for these trials, studies and testing as well aswith applicable regulations and standards, or if the FDA does not agree with our interpretation of the results of such trials, studies and testing, the FDAmay reject the data and results. The FDA may audit some of our clinical trial sites to determine the integrity of our clinical data. The FDA may audit someof our Human Factors study sites to determine the integrity of our data and may audit the data and results of bench testing. Any rejection of any of ourdata would negatively impact our ability to obtain marketing authorization for a product candidate and would have a material adverse effect on ourbusiness and financial condition. In addition, an NDA may not be approved, or approval may be delayed, as a result of changes in FDA policies for drugapproval during the review period. For example, although many products have been approved by the FDA in recent years under Section 505(b)(2) of theFederal Food, Drug and Cosmetic Act, or FDCA, objections have been raised to the FDA’s interpretation of Section 505(b)(2). If challenges to the FDA’sinterpretation of Section 505(b)(2) are successful, the FDA may be required to change its interpretation, which could delay or prevent the approval of suchan NDA. Any significant delay in the acceptance, review or approval of an NDA that we have submitted would have a material adverse effect on ourbusiness and financial condition and would require us to obtain significant additional funding. Even if we obtain regulatory approval for Zalviso and our other product candidates, we and our collaborators face extensive regulatory requirementsand our products may face future development and regulatory difficulties. Even if we obtain regulatory approval in the United States, the FDA may impose significant restrictions on the indicated uses or marketing of our productcandidates, or impose ongoing requirements for potentially costly post-approval trials or post-market surveillance. Additionally, the labeling ultimatelyapproved for Zalviso and our other product candidates, if approved, will likely include restrictions on use due to the opioid nature of sufentanil. Zalviso and our other product candidates, if approved in the future, will also be subject to ongoing FDA requirements governing the labeling, packaging,storage, distribution, safety surveillance, advertising, promotion, record-keeping and reporting of safety and other post-market information. The holder ofan approved NDA is obligated to monitor and report AEs and any failure of a product to meet the specifications in the NDA. The holder of an approvedNDA must also submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling ormanufacturing process. Advertising and promotional materials must comply with FDA rules and are subject to FDA review, in addition to otherpotentially applicable federal and state laws. We must also register and obtain various state prescription drug distribution licenses and controlled substance permits, and any delay or failure to obtainor maintain these licenses or permits may limit our market and materially impact our business. In addition, manufacturers of drug products and theirfacilities are subject to payment of user fees and continual review and periodic inspections by the FDA and other regulatory authorities for compliancewith cGMPs and adherence to commitments made in the NDA. If we, or a regulatory agency, discover previously unknown problems with a product, suchas AEs of unanticipated severity or frequency, or problems with the facilities where the product is manufactured, a regulatory agency may imposerestrictions relative to that product or the manufacturing facilities, including requiring recall or withdrawal of the product from the market or suspensionof manufacturing. 37 If we fail to comply with applicable regulatory requirements following approval of our product candidates, a regulatory agency may: •issue a warning letter asserting that we are in violation of the law; •seek an injunction or impose civil or criminal penalties or monetary fines; •suspend or withdraw regulatory approval; •suspend any ongoing clinical trials; •refuse to approve a pending NDA or supplements to an NDA submitted by us; •seize product; or •refuse to allow us to enter into supply contracts, including government contracts. Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generatenegative publicity. The occurrence of any event or penalty described above may inhibit our ability to commercialize any future approved products andgenerate revenues. Even if we obtain FDA approval for Zalviso or any of our product candidates in the United States, we may never obtain approval for or commercializeour products outside of the United States, which would limit our ability to realize their full market potential. In order to market any products outside of the United States, we or our collaborators, including Grünenthal in Europe, must establish and comply withnumerous and varying regulatory requirements of other countries regarding safety and efficacy. For example, in October 2012, we received notice fromthe EMA that Zalviso was eligible for centralized European review, and in July 2014, Grünenthal filed a Marketing Authorization Application, or MAA,for Zalviso under the centralized procedure in the EU. In the fourth quarter of 2014, Grünenthal received 120-day questions from the EMA per the EMA’sstandard regulatory review process. We have been working with Grünenthal towards the submission of the response to the Day 120 questions. Grünenthalis currently working to complete the response and submit it to the EMA by the end of March 2015. As noted elsewhere, in March 2015, we receivedcorrespondence from the FDA stating that an additional clinical study is needed for Zalviso in order to assess the risk of inadvertent dispensing andoverall risk of dispensing failures. We do not know what impact, if any, this may have on the EMA’s regulatory review process of the Zalviso MAA. TheEMA may at anytime during its review process find issues with the MAA, and may require additional activities and data, including additional clinicaltrials, in order to support its review of the Zalviso MAA. Outside of Europe, clinical trials conducted in one country may not be accepted by regulatoryauthorities in other countries, and regulatory approval in one country does not mean that regulatory approval will be obtained in any other country.Approval processes vary among countries and can involve additional product testing and validation and additional administrative review periods.Seeking foreign regulatory approval could result in difficulties and costs for us and require additional non-clinical trials or clinical trials, which could becostly and time consuming. Regulatory requirements can vary widely from country-to-country and could delay or prevent the introduction of ourproducts in those countries. Our current clinical trial data may not be sufficient to support marketing approval in all territories. In addition, we lack thepersonnel, expertise and capabilities to gain regulatory approval of our product candidates on a global basis without a collaboration partner. If Zalviso isapproved for sale in Europe, we will rely on Grünenthal to commercialize it. While Grünenthal does have products approved in international markets, wedo not have any product candidates approved for sales in any jurisdiction, including international markets, and we do not have experience in obtainingregulatory approval in international markets. Grünenthal’s experience in international markets does not guarantee regulatory approval or compliancewith regulatory requirements in international markets. If we fail to comply with regulatory requirements in international markets or to obtain and maintainrequired approvals, or if regulatory approvals in international markets are delayed, our target market will be reduced and our ability to realize the fullmarket potential of our products will be harmed. Zalviso and our other product candidates will require Risk Evaluation and Mitigation Strategies. The FDA Amendments Act of 2007 implemented safety-related changes to product labeling and requires the adoption of REMS. Our product candidates,if approved, will require REMS. The REMS may include requirements for special labeling or medication guides for patients, special communication plansto health care professionals and restrictions on distribution and use. While we have received pre-clearance from the FDA regarding certain aspects of theproposed required REMS for Zalviso, we cannot predict the final REMS to be required as part of any FDA approval of Zalviso. Depending on the extentof the REMS requirements, the launch may be delayed, the costs to commercialize Zalviso may increase substantially and the potential commercialmarket could be restricted. ARX-02, ARX-03 and ARX-04, if approved, will also require REMS programs that may significantly increase our costs tocommercialize these product candidates. Furthermore, risks of sufentanil that are not adequately addressed through proposed REMS for our future productcandidates, if approved, may also prevent or delay their approval for commercialization. 38 Recently enacted and future legislation may increase the difficulty and cost for us to commercialize Zalviso and any of our product candidates thatmay obtain commercial approval in the future, and affect the prices we may obtain. In the United States and some foreign jurisdictions, the legislative landscape continues to evolve. There have been a number of legislative and regulatorychanges and proposed changes regarding healthcare systems that could prevent or delay marketing approval of our product candidates, includingZalviso, restrict or regulate post-approval activities and affect our ability to profitably sell any products for which we obtain marketing approval. In the United States, the Health Care Reform Law (as defined below) was enacted in an effort to, among other things, broaden access to health insurance,reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, impose new taxes and fees on the health industry andimpose additional health policy reforms. Aspects of the Health Care Reform Law that may impact our business include: •extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed careorganizations; •a deductible 2.3% excise tax, with limited exceptions, on the sale of certain medical devices by the manufacturer of the device; •new methodologies by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that areinhaled, infused, instilled, implanted or injected, and for drugs that areline extensions; •expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program; •expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additionalindividuals and by adding new mandatory eligibility categories for certain individuals with income at or below 133.0% of the FederalPoverty Level beginning in 2014, thereby potentially increasing manufacturers’ Medicaid rebate liability; •expansion of healthcare fraud and abuse laws, including the federal False Claims Act and the federal Anti-Kickback Statute, new governmentinvestigative powers and enhanced penalties for non-compliance; •a new requirement to annually report drug samples that manufacturers and distributors provide to physicians; •a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research,along with funding for such research; and •creation of the Independent Payment Advisory Board which has authority to recommend certain changes to the Medicare program that couldresult in reduced payments for prescription drugs. The Health Care Reform Law has the potential to substantially change health care financing and delivery by both governmental and private insurers, andmay also increase our regulatory burdens and operating costs. In addition, other legislative changes have been proposed and adopted in the United States since the Health Care Reform Law was enacted. On August 2,2011, the Budget Control Act of 2011 created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked withrecommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggeringthe legislation’s automatic reduction to several government programs. This included aggregate reductions of Medicare payments to providers of 2% perfiscal year, which went into effect on April 1, 2013 and will stay in effect through 2024 unless additional Congressional action is taken. On January 2,2013, the American Tax Payer Relief Act was signed into law, which, among other things, further reduced Medicare payments to several providers,including hospitals. Moreover, the recently enacted Drug Supply Chain Security Act of 2013, imposes new obligations on manufacturers of pharmaceutical products, amongothers, related to product tracking and tracing. Among the requirements of this new legislation, manufacturers will be required to provide certaininformation regarding the drug product to individuals and entities to which product ownership is transferred, label drug product with a product identifier,and keep certain records regarding the drug product. Legislative and regulatory proposals have been made to expand post-approval requirements and further restrict sales and promotional activities forpharmaceutical products. We are not sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance orinterpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. We expect that additional healthcare reform measures will be adopted within and outside the United States in the future, any of which could negativelyimpact our business. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare servicesto contain or reduce costs of healthcare may adversely affect the demand for any drug products for which we may obtain regulatory approval, our abilityto set a price that we believe is fair for our products, our ability to obtain coverage and reimbursement approval for a product, our ability to generaterevenues and achieve or maintain profitability, and the level of taxes that we are required to pay. 39 Risks Related to Our Financial Condition and Need for Additional Capital We have incurred significant losses since our inception, anticipate that we will continue to incur significant losses in 2015 and may continue to incurlosses for the foreseeable future. Since our inception in 2005, we have focused primarily on development of our lead product candidate, Zalviso. We have three additional productcandidates in development, the Sufentanil Sublingual Tablet BTP Management System, or ARX-02, the Sufentanil/Triazolam Sublingual Tablet, or ARX-03, and Sufentanil Sublingual Single-Dose Acute Pain Tablet, or ARX-04. We have incurred significant net losses in each year since our inception in July2005, and as of December 31, 2014, we had an accumulated deficit of $178.8 million. We have devoted most of our financial resources to research and development, including our non-clinical development activities and clinical trials. Todate, we have financed our operations primarily through the sale of equity securities, debt, government grant funding and proceeds from our collaborationwith Grünenthal. The size of our future net losses will depend, in part, on the rate of future expenditures and our ability to generate revenues. We expectto continue to incur substantial expenses as we continue our research and development activities for our product candidates, including addressing issuesraised by the FDA related to regulatory review of Zalviso, as well as to support manufacturing and supply for potential approval of Zalviso in Europe, inconnection with our collaboration with Grünenthal. To date, none of our product candidates have been commercialized, and if Zalviso or our otherproduct candidates are not successfully developed or commercialized, or if revenues are insufficient following marketing approval, we will not achieveprofitability and our business may fail. Our success is also dependent on obtaining regulatory approval to market our product candidates outside of theUnited States through current and future collaborations which may not materialize or prove to be successful. We have never generated product revenue and may never be profitable. Our ability to generate revenue from commercial sales and achieve profitability depends on our ability, alone or with collaborators, to successfullycomplete the development of, obtain the necessary regulatory approvals for, and commercialize our product candidates. We may never generate revenuesfrom sales of Zalviso or our other product candidates in the United States. While we have a collaboration with Grünenthal for potential commercializationof Zalviso in Europe and Australia, we may never achieve the development milestones associated with the collaboration, and Grünenthal may neverachieve regulatory approval or recognize commercial sales of Zalviso, for which we would receive sales milestone payments and product royalties. Inaddition, we do not anticipate generating revenues from our other product candidates for the foreseeable future, if ever. Our ability to generate futurerevenues from product sales depends heavily on our success in: •obtaining and maintaining regulatory approval for Zalviso; •launching and commercializing Zalviso, including building or contracting out, a hospital-directed sales force in the United States andcollaborating with third parties internationally, including Grünenthal, which may require additional funding; and •completing the clinical development of, obtaining regulatory approval for, and launching and commercializing ARX-04, ARX-02 and ARX-03, which may require additional funding or corporate partnership resources. Because of the numerous risks and uncertainties associated with pharmaceutical product development and the regulatory environment, we are unable topredict the timing or amount of increased expenses, or when, or if, we will be able to achieve or maintain profitability. Our expenses could increasebeyond expectations if we are delayed in receiving regulatory approval, or in launching Zalviso, or if we are required by the FDA to complete activities inaddition to those we currently anticipate or have already completed. Even if one or more of our product candidates is approved for commercial sale, we anticipate incurring significant costs associated with commercializingany approved product candidate. Even if we are able to generate revenues from the sale of any future approved products, we may not become profitableand may need to obtain additional funding to continue operations. We have a limited operating history that may make it difficult to predict our future performance or evaluate our business and prospects. We were incorporated in 2005. Since inception, our operations have been primarily limited to organizing and staffing our company, developing ourtechnology and undertaking pharmaceutical development and clinical trials for our product candidates, and more recently, preparing for thecommercialization of Zalviso. We have not yet obtained regulatory approval of any of our product candidates, including Zalviso. Consequently, anypredictions that are made about our future success, or viability, or evaluation of our business and prospects, may not be accurate. 40 We will require additional capital and may be unable to raise capital, which would force us to delay, reduce or eliminate our product developmentprograms and could cause us to cease operations. Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is expensive. We expect to incur significantexpenditures in connection with our ongoing activities, including conductingARX-04 Phase 3 clinical trials, development activities associated withZalviso to respond to issues raised by the FDA and other research and development activities to advance our product candidates. While we believe wehave sufficient capital resources to continue planned operations through at least the first quarter of 2016, we may need additional capital to continuedevelopment of Zalviso, ARX-04 and our other product candidates and will need additional capital to potentially pursue commercialization of any of ourproduct candidates. Future events and circumstances, including those beyond our control, may cause us to consume capital more rapidly than we currently anticipate. Forexample, in March 2015, we received correspondence from the FDA stating that we needed to complete an additional clinical study. Such developmentactivities can be time consuming and costly. Even if we have sufficient resources to complete an additional clinical study for Zalviso, and we may notdepending on the size, scope and potential outcome of the trial, regulatory review for Zalviso, and a potential launch of a commercial product isexpensive. In addition, commercialization costs for Zalviso in the United States may be significantly higher than estimated. We may experience technicaldifficulties in our commercialization efforts or otherwise, which could substantially increase the costs of commercialization. Revenues may be lower thanexpected and accordingly costs to produce such revenues may exceed those revenues. We will need to seek additional capital to continue operations.Such capital demands could be substantial. To raise capital, we may seek to sell additional equity or debt securities, monetize certain assets includingfuture royalty streams and milestones, obtain a credit facility, or enter into product development, license or distribution agreements with third parties, ordivest one or more of our product candidates. Such arrangements may not be available on favorable terms, if at all. Furthermore, any productdevelopment, licensing, distribution or sale agreements that we enter into may require us to relinquish valuable rights. We may not be able to obtainsufficient additional funding or enter into a strategic transaction in a timely manner. If adequate funds are not available, we would be required to reduceour workforce, delay, reduce the scope of, or eliminate, one or more of our research and development programs in advance of the date on which weexhaust our cash resources to ensure that we have sufficient capital to meet our obligations and continue on a path designed to preserve stockholdervalue. Securing additional financing may divert our management from our day-to-day activities, which may adversely affect our ability to develop andcommercialize our product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on termsacceptable to us, if at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to: •significantly delay, scale back or discontinue the development or commercialization of our product candidates; •seek additional corporate partners for Zalviso on terms that might be less favorable than might otherwise be available; or •relinquish, or license on unfavorable terms, our rights to technologies or product candidates that we otherwise would seek to develop orcommercialize ourselves. We may sell additional equity or debt securities to fund our operations, which may result in dilution to our stockholders and impose restrictions on ourbusiness. In order to raise additional funds to support our operations, we may sell additional equity or debt securities which would result in dilution to ourstockholders or impose restrictive covenants that may adversely impact our business. The sale of additional equity or convertible debt securities wouldresult in the issuance of additional shares of our capital stock and dilution to all of our stockholders. The incurrence of indebtedness would result inincreased fixed payment obligations and could also result in certain restrictive covenants, such as limitations on our ability to incur additional debt,limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability toconduct our business. If we are unable to expand our operations or otherwise capitalize on our business opportunities, our business, financial conditionand results of operations could be materially adversely affected and we may not be able to meet our debt service obligations. We might be unable to service our existing debt due to a lack of cash flow and might be subject to default. In December 2013, we entered into an amended loan and security agreement, or the Amended Loan Agreement, with Hercules Technology II, L.P. andHercules Technology Growth Capital, Inc., collectively referred to as Hercules, under which we may borrow up to $40.0 million in three tranches,represented by secured convertible promissory notes. We drew the first tranche of $15.0 million at the closing of the new credit facility and the secondtranche of $10 million on June 16, 2014. We will not have access to the third tranche of up to $15.0 million under the current agreement, as it isconditioned upon FDA approval to market Zalviso in the United States by August 1, 2015. We begin making principal payments in April 2015. Thescheduled maturity date is October 1, 2017. 41 We granted Hercules a first priority security interest in substantially all of our assets, with the exception of our intellectual property, where the securityinterest is limited to proceeds of intellectual property if it is licensed or sold. If we do not make the required payments when due, either at maturity, or at applicable installment payment dates, or if we breach the agreement orbecome insolvent, Hercules could elect to declare all amounts outstanding, together with accrued and unpaid interest and penalty, to be immediately dueand payable. Additional capital may not be available on terms acceptable to us, or at all. Even if we were able to repay the full amount in cash, any suchrepayment could leave us with little or no working capital for our business. If we are unable to repay those amounts, Hercules will have a first claim on ourassets pledged under the Amended Loan Agreement. If Hercules should attempt to foreclose on the collateral, it is unlikely that there would be any assetsremaining after repayment in full of such secured indebtedness. Any default under the Amended Loan Agreement and resulting foreclosure would have amaterial adverse effect on our financial condition and our ability to continue our operations. We may not secure additional funding from the Department of Defense for advancement ARX-04. In the latter half of 2014, we were notified by the DoD that we had been offered a contract to provide partial funding to support further development ofARX-04. We intend to initiate our first planned Phase 3 trial for ARX-04 by the end of March 2015, but we have postponed other development activitiesfor ARX-04 until we can finalize contract negotiations with the DoD. While we still anticipate receiving some funding to support ARX-04 from the DoD,we may not receive funding in a timely manner, we may receive funding at a level significantly less than our proposal, or we may not receive funding atall. In addition, even if we receive funding, such funding will be subject to audit by the DoD to ensure adherence to specific guidance, policies andprocedures. We currently do not have all such required policies and procedures in place as we have never received a government contract before. Even ifwe are able to implement all required procedures, the DoD may find deficiencies during the course of an audit which could jeopardize, or even eliminate,continued funding from the DoD, as well as require repayment of any funds they had provided us since inception of the contract. Continued delay fromthe DoD or lack of ARX-04 supportive funding, may adversely affect our ability to continue to advance the development of ARX-04. For example, theinitiation of the second planned Phase 3 trial for ARX-04 is contingent on DoD funding. Risks Related to Our Reliance on Third Parties We rely on third party manufacturers to produce our preclinical and clinical drug supplies and intend to rely on third parties to produce commercialsupplies of any approved product candidates. Reliance on third party manufacturers entails many risks including: •the inability to meet our product specifications and quality requirements consistently; •a delay or inability to procure or expand sufficient manufacturing capacity; •manufacturing and product quality issues related to scale-up of manufacturing; •costs and validation of new equipment and facilities required for scale-up; •a failure to comply with cGMP and similar foreign standards; •the inability to negotiate manufacturing agreements with third parties under commercially reasonable terms; •termination or nonrenewal of manufacturing agreements with third parties in a manner or at a time that is costly or damaging to us; •the reliance on a limited number of sources, and in some cases, single sources for product components, such that if we are unable to secure asufficient supply of these product components, we will be unable to manufacture and sell our product candidates in a timely fashion, insufficient quantities or under acceptable terms; •the lack of qualified backup suppliers for those components that are currently purchased from a sole or single source supplier; •operations of our third party manufacturers or suppliers could be disrupted by conditions unrelated to our business or operations, includingthe bankruptcy of the manufacturer or supplier; •carrier disruptions or increased costs that are beyond our control; and •the failure to deliver our products under specified storage conditions and in a timely manner. Any of these events could lead to stock outs, inability to successfully commercialize our products, clinical trial delays, or failure to obtain regulatoryapproval. Some of these events could be the basis for FDA action, including injunction, recall, seizure, or total or partial suspension of production. We rely on limited sources of supply for the drug component of our product candidates and any disruption in the chain of supply may cause delay indeveloping and commercializing our product candidates. Currently, we use two established suppliers of sufentanil citrate for our tablets. We only have one supplier qualified for our manufacture of Zalviso. Foreach product candidate, only one of the two suppliers will be qualified as a vendor with the FDA. If supply from the approved vendor is interrupted, therecould be a significant disruption in commercial supply. The alternative vendor would need to be qualified through an NDA supplement which couldresult in further delay. The FDA or other regulatory agencies outside of the United States may also require additional trials if a new sufentanil supplier isrelied upon for commercial production.  42 Manufacture of sufentanil sublingual tablets requires specialized equipment and expertise. Ethanol, which is used in the manufacturing process for our sufentanil sublingual tablets, is flammable, and sufentanil is a highly potent, Schedule IIcompound. These factors necessitate the use of specialized equipment and facilities for manufacture of sufentanil sublingual tablets. There are a limitednumber of facilities that can accommodate our manufacturing process and we need to use dedicated equipment throughout development and commercialmanufacturing to avoid the possibility of cross-contamination. If our equipment breaks down or needs to be repaired or replaced, it may cause significantdisruption in clinical or commercial supply, which could result in delay in the process of obtaining approval for or sale of our products. Furthermore, weare using one manufacturer to produce our sufentanil sublingual tablets and have not identified a back-up commercial facility to date. Any problems withour existing facility or equipment, including ongoing expansion, may delay or impair our ability to complete our clinical trials or commercialize ourproduct candidates and increase our cost. Manufacturing issues may arise that could delay or increase costs related to product and regulatory approval, and commercialization. As we scale up manufacturing of our product candidates and conduct required stability testing, product, packaging, equipment and process-related issuesmay require refinement or resolution in order to obtain regulatory approval for commercial marketing. In the past we have identified impurities in ourproduct candidates. In the future we may identify significant impurities, which could result in increased scrutiny by the regulatory agencies, delays inclinical program and regulatory approval, increases in our operating expenses, or failure to obtain or maintain approval for our products. Early development and clinical trial manufacturing of Zalviso was conducted at Patheon in Toronto, Canada. Because the DEA requires that sufentanil bemanufactured in the United States if our product candidates are marketed in the United States, we transferred our manufacturing capability in the thirdquarter of 2011 from Patheon in Toronto, Canada to Patheon’s production facility in Cincinnati, Ohio, where we have built out a suite within theirexisting buildings that will serve as a manufacturing facility for clinical and commercial supplies of sufentanil sublingual tablets. Late stage developmentand manufacture of registration stability lots, which were utilized in clinical trials, were manufactured at Patheon, Cincinnati. However, we have not yetproduced commercial supplies at this facility and we may encounter difficulties in production at the new facility, which may adversely affect our clinicaland commercial plans. In January 2013, we entered into a Manufacturing Services Agreement, or the Services Agreement, with Patheon under which Patheon has agreed tomanufacture, supply, and provide certain validation and stability services with respect to Zalviso for potential sales in the United States, Canada, Mexicoand other countries, subject to agreement by the parties to any additional fees for such other countries. There is no guarantee that Patheon’s services willbe satisfactory or that they will continue to meet the strict regulatory guidelines of the FDA or other regulatory agencies. In addition, in January 2013, weentered into an Amended and Restated Capital Expenditure and Equipment Agreement, or the Amended Capital Agreement, with Patheon, relating to themanufacture of sufentanil sublingual tablets. Under the terms of the Amended Capital Agreement, we have made and may make certain futuremodifications to Patheon’s Cincinnati facility. If Patheon cannot provide us with an adequate supply of sufentanil sublingual tablets, we may be required to pursue alternative sources of manufacturingcapacity. Switching or adding commercial manufacturing capability can involve substantial cost and require extensive management time and focus, aswell as additional regulatory filings. In addition, there is a natural transition period when a new manufacturing facility commences work. As a result,delays may occur, which can materially impact our ability to meet our desired commercial timelines, thereby increasing our costs and reducing our abilityto generate revenue. The facilities of any of our future manufacturers of sufentanil-containing sublingual tablets must be approved by the FDA before commercial distributionfrom such manufacturers occurs. We do not fully control the manufacturing process of sufentanil sublingual tablets and are completely dependent onthese third party manufacturing partners for compliance with the FDA’s requirements for manufacture. In addition, although our third party manufacturersare well established commercial manufacturers, we are dependent on their continued adherence to cGMP manufacturing and acceptable changes to theirprocess. If our manufacturers do not meet the FDA’s strict regulatory requirements, they will not be able to secure FDA approval for their manufacturingfacilities. If the FDA does not approve these facilities for the commercial manufacture of sufentanil sublingual tablets, we will need to find alternativesuppliers, which would result in significant delays in obtaining FDA approval for Zalviso. These challenges may have a material adverse impact on ourbusiness, results of operations, financial condition and prospects. 43 Related to the Zalviso device, we have conducted multiple Design Validation, Software Verification and Validation, Reprocessing and Human Factorsstudies, and have manufactured for and completed Phase 3 clinical trials using the intended commercial device. As mentioned above, the CRL from theFDA contains a request for additional information on the Zalviso System to ensure proper use of the device. In March 2015, we received correspondencefrom the FDA stating that in addition to the bench testing and two Human Factors studies we have performed in response to the issues identified in theCRL, an additional clinical study is needed to assess the risk of inadvertent dispensing and overall risk of dispensing failures. We have mademodifications to the design of the Zalviso device subsequent to the original submission of the Zalviso NDA, which we plan to include as a part of anyresubmitted NDA. If we are required to further modify the Zalviso device, we may incur higher costs and experience delays in the approval and ultimatecommercialization of Zalviso. Furthermore, if the identified changes to the device are substantial, the FDA may require us to perform further clinical trialsor studies in order to approve the device for commercial use. We have manufactured Zalviso devices and supplies on a small scale, including those needed for our Phase 3 clinical trials. We, however, have not yetmanufactured Zalviso devices and supplies on a large scale, for commercial purposes. We will not begin commercial scale production of the device untilafter approval by the FDA. We will continue to rely on contract manufacturers, component fabricators and third party service providers to produce thenecessary Zalviso devices for the commercial marketplace. We currently outsource manufacturing and packaging of the controller, dispenser andcartridge components of the Zalviso device to third parties and intend to continue to do so. These purchases and components were made and willcontinue to be made utilizing short-term purchase agreements and we may not be able to enter into long-term agreements for commercial supply ofZalviso devices with third party manufacturers, or may be unable to do so on acceptable terms. In addition, we may encounter production issues with ourcurrent or future contract manufacturers and other third party service providers, including the quality of the components produced, their inability to meetdemand or other unanticipated delays including the scale-up and automation process, which would adversely impact our ability to supply our customerswith Zalviso, if approved. We may not be able to establish additional sources of supply for device manufacture. Such suppliers are subject to FDA regulations requiring thatmaterials be produced under cGMPs or Quality System Regulations, or QSR, and subject to ongoing inspections by regulatory agencies. Failure by any ofour suppliers to comply with applicable regulations may result in delays and interruptions to our product candidate supply while we seek to secureanother supplier that meets all regulatory requirements. Reliance on third party manufacturers entails risks to which we would not be subject if we manufactured the product candidates ourselves, including thepossible breach of the manufacturing agreements by the third parties because of factors beyond our control; and the possibility of termination ornonrenewal of the agreements by the third parties because of our breach of the manufacturing agreement or based on their own business priorities. We rely on third parties to conduct, supervise and monitor our clinical trials, and if those third parties perform in an unsatisfactory manner, it mayharm our business. We utilized contract research organizations, or CROs, for the conduct of our Phase 3 clinical trials of Zalviso, the Phase 2 clinical trial of ARX-04, and ourongoing Phase 3 clinical program for ARX-04. We rely on CROs, as well as clinical trial sites, to ensure the proper and timely conduct of our clinicaltrials and document preparation. While we have agreements governing their activities, we have limited influence over their actual performance. We haverelied and plan to continue to rely upon CROs to monitor and manage data for our clinical programs for Zalviso and our other product candidates, as wellas the execution of nonclinical and clinical trials. We control only certain aspects of our CROs’ activities. Nevertheless, we are responsible for ensuringthat each of our trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards and our reliance on the CROsdoes not relieve us of our regulatory responsibilities. We, and our CROs, are required to comply with the FDA’s current good clinical practices, or cGCPs, which are regulations and guidelines enforced by theFDA for all of our product candidates in clinical development. The FDA enforces these cGCPs through periodic inspections of trial sponsors, principalinvestigators and clinical trial sites. If we or our CROs fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may bedeemed unreliable and the FDA may require us to perform additional clinical trials before approving our marketing applications. Upon inspection, theFDA may determine that our clinical trials do not comply with cGCPs. Accordingly, if our CROs or clinical trial sites fail to comply with theseregulations, we may be required to repeat clinical trials, which would delay the regulatory process. Our CROs are not our employees, and we cannot control whether or not they devote sufficient time and resources to our ongoing clinical and nonclinicalprograms. These CROs may also have relationships with other commercial entities, including our competitors, for whom they may also be conductingclinical trials, or other drug development activities which could harm our competitive position. We face the risk of potential unauthorized disclosure ormisappropriation of our intellectual property by CROs, which may allow our potential competitors to access our proprietary technology. If our CROs donot successfully carry out their contractual duties or obligations, fail to meet expected deadlines, or if the quality or accuracy of the clinical data theyobtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements, or for any other reasons, our clinical trials may beextended, delayed or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize Zalviso, or our other productcandidates. As a result, our financial results and the commercial prospects for Zalviso and any future product candidates for which we may obtainapproval would be harmed, our costs could increase, and our ability to generate revenues could be delayed. 44 Risks Related to Commercialization of Our Product Candidates The commercial success of Zalviso and our other product candidates, if approved, will depend upon the acceptance of these products by the medicalcommunity, including physicians, nurses, patients, and pharmacy and therapeutics committees. The degree of market acceptance of Zalviso and our other product candidates, if approved, will depend on a number of factors, including: •demonstration of clinical safety and efficacy compared to other products; •the relative convenience, ease of administration and acceptance by physicians, patients and health care payors; •the use of Zalviso for the management of moderate-to-severe acute pain in the hospital setting for patient types that were notspecifically studied in our Phase 3 trials; •the prevalence and severity of any AEs or SAEs; •overcoming the perception of sufentanil as a potentially unsafe drug due to its high potency; •limitations or warnings contained in the FDA-approved label for Zalviso; •restrictions or limitations placed on Zalviso due to the REMS; •availability of alternative treatments; •existing capital investment by hospitals in IV PCA technology; •pricing and cost-effectiveness; •the effectiveness of our or any future collaborators’ sales and marketing strategies; •our ability to obtain hospital formulary approval; •our ability to obtain and maintain sufficient third party coverage or reimbursement. If Zalviso is approved, but does not achieve an adequate level of acceptance by physicians, nurses, patients and pharmacy and therapeutics committees,or P&T Committees, we may not generate sufficient revenue from Zalviso and we may not become or remain profitable. If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our product candidates, wemay be unable to generate any revenue. In order to commercialize any products that may be approved, including Zalviso, we must build our internal sales, marketing, distribution, managerialand other capabilities or make arrangements with third parties to perform these services. We are currently building out our commercial capabilities,including internal sales, marketing, supply chain and medical affairs departments and are active in the recruitment process; however, if delays in, or theinability to, recruit and hire the appropriate individuals occurs, the potential success of approved product candidates, including Zalviso, could beadversely affected. In addition, we plan to enter into agreements with third parties for the distribution of approved product candidates, including Zalviso;however, if there are delays in establishing such relationships or those third parties do not perform as expected, our ability to effectively distributeproducts would suffer. We have entered into a collaboration with Grünenthal for the commercialization of Zalviso in Europe and Australia and intend to enter into additionalstrategic partnerships with third parties to commercialize our product candidates outside of the United States. We may also consider the option to enterinto strategic partnerships for our product candidates in the United States. We face significant competition in seeking appropriate strategic partners, andthese strategic partnerships can be intricate and time consuming to negotiate and document. We may not be able to negotiate future strategic partnerships on acceptable terms, or at all. We are unable to predict when, if ever, we will enter into anystrategic partnerships because of the numerous risks and uncertainties associated with establishing strategic partnerships. Our strategy for Zalviso is todevelop a hospital-directed sales force to promote the product to healthcare professionals in the United States. Our current or future collaborationpartners, if any, may not dedicate sufficient resources to the commercialization of Zalviso or our other product candidates, if approved, or may otherwisefail in their commercialization due to factors beyond our control. If we are unable to establish effective collaborations to enable the sale of Zalviso or ourproduct candidates, if approved, to healthcare professionals and in geographical regions, including the United States, that will not be covered by our ownmarketing and sales force, or if our potential future collaboration partners do not successfully commercialize our product candidates, if approved, ourability to generate revenues from product sales will be adversely affected. 45 If we are unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, we may not be able togenerate sufficient product revenue and may not become profitable. We will be competing with many companies that currently have extensive and well-funded marketing and sales operations. Without an internal team or the support of a third party to perform marketing and sales functions, we may beunable to compete successfully against these more established companies. A key part of our business strategy is to establish collaborative relationships to commercialize and fund development and approval of our productcandidates, particularly outside of the United States. We may not succeed in establishing and maintaining collaborative relationships, which maysignificantly limit our ability to develop and commercialize our products successfully, if at all. We will need to establish and maintain successful collaborative relationships to obtain international sales, marketing and distribution capabilities for ourproduct candidates. The process of establishing and maintaining collaborative relationships is difficult, time-consuming and involves significantuncertainty, including: •our partners may seek to renegotiate or terminate their relationships with us due to unsatisfactory clinical or regulatory results, manufacturingissues, a change in business strategy, a change of control or other reasons; •our contracts for collaborative arrangements are terminable at will on written notice and may otherwise expire or terminate and we may nothave alternatives available to achieve the potential for our products in those territories or markets; •our partners may choose to pursue alternative technologies, including those of our competitors; •we may have disputes with a partner that could lead to litigation or arbitration; •we have limited control over the decisions of our partners and they may change the priority of our programs in a manner that would result intermination of the agreement or add significant delays to the partnered program; •our ability to generate future payments and royalties from our partners depends upon the abilities of our partners to establish the safety andefficacy of our drug candidates, obtain regulatory approvals and our ability to successfully manufacture and achieve market acceptance ofproducts developed from our product candidates; •we or our partners may fail to properly initiate, maintain or defend our intellectual property rights, where applicable, or a party may use ourproprietary information in such a way as to invite litigation that could jeopardize or potentially invalidate our proprietary information orexpose us to potential liability; •our partners may not devote sufficient capital or resources towards our product candidates; and •our partners may not comply with applicable government regulatory requirements necessary to successfully market and sell our products. If any collaborator fails to fulfill its responsibilities in a timely manner, or at all, any research, clinical development, manufacturing or commercializationefforts pursuant to that collaboration could be delayed or terminated, or it may be necessary for us to assume responsibility for expenses or activities thatwould otherwise have been the responsibility of our collaborator. If we are unable to establish and maintain collaborative relationships on acceptableterms or to successfully and timely transition terminated collaborative agreements, we may have to delay or discontinue further development of one ormore of our product candidates, undertake development and commercialization activities at our own expense or find alternative sources of capital. If we obtain approval to commercialize our products outside of the United States, a variety of risks associated with international operations couldmaterially adversely affect our business. If any of our product candidates, including Zalviso, are approved for commercialization, we intend to enter into agreements with third parties to marketour product candidates outside the United States, which may require us to supply products to the third party such as our existing collaboration withGrünenthal for marketing Zalviso in European countries and Australia. We may be subject to additional risks related to entering into internationalbusiness relationships, including: •different regulatory requirements for drug approvals in foreign countries; •reduced protection for intellectual property rights; •unexpected changes in tariffs, trade barriers and regulatory requirements; 46 •economic weakness, including inflation, or political instability in particular foreign economies and markets; •compliance with tax, employment, immigration and labor laws for employees living or traveling abroad; •foreign taxes, including withholding of payroll taxes; •foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident todoing business in another country; •workforce uncertainty in countries where labor unrest is more common than in the United States; •production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and •business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters including earthquakes, typhoons,floods and fires. If we, or current and potential partners, are unable to compete effectively, our product candidates may not reach their commercial potential. The market for Zalviso and our other product candidates is characterized by intense competition and cost pressure. If our product candidates obtain FDAapproval, they will compete with a number of existing and future pharmaceuticals and drug delivery devices developed, manufactured and marketed byothers. We or our current and potential partners will compete against fully integrated pharmaceutical companies and smaller companies that arecollaborating with larger pharmaceutical companies. We believe that Zalviso would compete with a number of opioid-based and non-opioid based treatment options that are currently available, as well assome products that are in development. The hospital market for opioids for moderate-to-severe acute pain is large and competitive. The primarycompetition for Zalviso is the IV PCA pump, which is widely used in the moderate-to-severe acute pain in the hospital setting. Leading manufacturers ofIV PCA pumps include Hospira Inc. (recently acquired by Pfizer), CareFusion Corporation (recently purchased by Becton Dickinson & Co.), BaxterInternational Inc., Curlin Medical, Inc. and Smiths Medical. The most common opioids used to treat moderate-to-severe acute pain are morphine,hydromorphone and fentanyl, all of which are available as generics both from generic product manufacturers as well as from compounding pharmacies. Inaddition, branded manufacturers (e.g., Hospira, Inc.) sell pre-filled glass syringes of morphine to fit their IV PCA pump systems. Also available on the market is the Avancen Medication on Demand, or MOD, Oral PCA Device developed by Avancen MOD Corporation. Oral opioidsand other agents can be used in this system. In addition, oral and parenteral opioids administered by the nurse are used to manage moderate-to-severeacute pain in the hospital, available both as branded and generic products. These oral opioids, as well as IV PCA opioids, are often used as part of a multi-modal analgesia approach, which might include, in addition to the opioid, NSAIDs, acetaminophen, gabapentanoids and other pain managementmodalities, as well as local anesthetic blocks to provide temporary blockage of the pain signal, either as a wound infiltration agent or as a nerve block.These local anesthetic agents such as bupivacaine can also utilize controlled-release formulations such as Pacira’s EXPAREL. In addition, HalyardHealth, Inc. has developed a medical device, the ON-Q* Pain Relief System, which is a non-narcotic elastomeric pump that automatically andcontinuously delivers a regulated flow of local anesthetic to a patient’s surgical site or in close proximity to nerves, providing targeted pain relief for upto five days. Additional potential competitors for Zalviso include products in development, including the fentanyl iontophoretic transdermal system,IONSYS, originally developed by ALZA Corporation and Ortho-McNeil Pharmaceutical, Inc., both Johnson & Johnson subsidiaries, and currently underdevelopment by The Medicines Company. The Medicines Company has reported that IONSYS has a PDUFA date of April 30, 2015. If approved on thisdate, IONSYS may be marketed prior to the potential approval of Zalviso which may provide a first-to-market advantage for IONSYS. Cara Therapeutics isdeveloping a kappa opioid agonist, CR845, as an IV agent for the management of post-operative moderate-to-severe pain. Trevena is developingTRV130, an intravenous G protein biased ligand that targets the mu opioid receptor for the treatment of moderate-to-severe acute pain where intravenoustherapy is preferred, with a clinical development focus in acute postoperative pain. In January 2015, Trevena initiated a Phase 2b clinical study ofTRV130. Recro Pharma is developing an intranasal form of dexmedetomidine as a potential agent for the management of post-operative pain. Finally,Innocoll is developing XARACOLL a controlled-release resorbable implant containing bupivacaine, and Durect has been developing POSIDUR, acontrolled-release bupivacaine product candidate utilizing Durect’s SABER technology. Our potential competitors for ARX-02 include products approved in the United States for cancer breakthrough pain, including: ACTIQ and FENTORA,currently manufactured by Teva Pharmaceuticals; Onsolis, currently manufactured by BioDelivery Sciences International, Inc.; Abstral, currentlymanufactured by ProStrakan Group plc; Lazanda, currently manufactured by Depomed, Inc.; Subsys, currently manufactured by Insys Therapeutics, Inc.,as well as products approved in Europe, including Instanyl, currently manufactured by Takeda Pharmaceuticals International GmbH. The activeingredient in all approved products for cancer breakthrough pain is fentanyl. Additional potential competitors for ARX-02 include products in late stagedevelopment for cancer breakthrough pain, such as: Fentanyl TAIFUN, currently manufactured by Akela Pharma, Inc. 47 We are not aware of any approved or development stage non-IV sedative/analgesic products that would present competition to ARX-03. In the future,there may be products developed or approved for this market which could directly compete with ARX-03. There are a wide variety of approved injectable and oral opioid products to treat moderate-to-severe acute pain, including IV opioids such as morphine,fentanyl, hydromorphone and meperidine or oral opioids such as oxycodone and hydrocodone. More specifically, competitors for ARX-04 in theemergency department are likely to include generic injectable intravenous opioids such as morphine, hydromorphone and fentanyl. In this environment,ARX-04 may also compete with other branded non-invasive products such as Eagalet’s SPRIX, Hospira’s DYLOJECT, Pfizers OXECTA, Depomed’sNUCYNTA, BMS’s COMBUNOX, Purdue’s OXYFAST, Endo’s OPANA, or generic oral opioids which have moderate to severe acute pain labeling. In theshort-stay or ambulatory surgery segment, ARX-04 will likely compete with these products in addition to generic injectable local anesthetics such asbupivacaine, or branded formulations thereof, including Pacira’s EXPAREL. Within the military environment, and in certain civilian settings, ARX-04competitors may also include intramuscular morphine injections which are marketed by a variety of generic manufacturers. It is possible that any of these competitors could develop or improve technologies or products that would render our product candidates obsolete or non-competitive, which could adversely affect our revenue potential. Key competitive factors affecting the commercial success of our product candidates arelikely to be efficacy, safety profile, reliability, convenience of dosing, price and reimbursement. Many of our potential competitors have substantially greater financial, technical and human resources than we do and significantly greater experience inthe discovery and development of drug candidates, obtaining FDA and other regulatory approval of products and the commercialization of thoseproducts. Accordingly, our competitors may be more successful than we are in obtaining FDA approval for drugs and achieving widespread marketacceptance. Our competitors’ drugs or drug delivery systems may be more effective, have fewer adverse effects, be less expensive to develop andmanufacture, or be more effectively marketed and sold than any product candidate we may commercialize. This may render our product candidatesobsolete or non-competitive before we can recover our losses. We anticipate that we will face intense and increasing competition as new drugs enter themarket and additional technologies become available. These entities may also establish collaborative or licensing relationships with our competitors,which may adversely affect our competitive position. Finally, the development of different methods for the treatment of moderate-to-severe acute pain orbreakthrough pain could render Zalviso and ARX-02, respectively, non-competitive or obsolete. These and other risks may materially adversely affect ourability to attain or sustain profitable operations. Hospital formulary approval may not be available, or could be subject to certain restrictions for Zalviso and our other product candidates, whichcould make it difficult for us to sell our products profitably. Obtaining formulary approval can be an expensive and time-consuming process. We cannot be certain if and when we will obtain formulary approval toallow us to sell our products into our target markets. Failure to obtain timely formulary approval will limit our commercial success. If we are successful inobtaining formulary approval, we may need to complete evaluation programs whereby Zalviso is used on a limited basis for certain patient types.Hospitals may seek to obtain Zalviso devices at little or no cost during this evaluation period. Revenue generated from these hospitals during theevaluation period would be minimal. The evaluation period may last several months and there can be no assurance that use during the evaluation periodwill lead to formulary approval of Zalviso. Further, even successful formulary approval may be subject to certain restrictions based on patient type orhospital protocol. Failure to obtain timely formulary approval for Zalviso would materially adversely affect our ability to attain or sustain profitableoperations. Coverage and adequate reimbursement may not be available for Zalviso and our other product candidates, if approved, which could make it difficultfor us, or our partners, to sell our products profitably. Our ability to commercialize Zalviso or any of our other drug candidates, if approved, successfully will depend, in part, on the extent to which coverageand adequate reimbursement will be available from government payor programs at the federal and state levels authorities, including Medicare andMedicaid, private health insurers, managed care plans and other third-party payors. No uniform policy requirement for coverage and reimbursement for drug products exists among third-party payors in the United States. Therefore,coverage and reimbursement can differ significantly from payor to payor. As a result, the coverage determination process is often a time-consuming andcostly process that will require us to provide scientific and clinical support for the use of our products to each payor separately, with no assurance thatcoverage and adequate reimbursement will be applied consistently or obtained in the first instance. Our inability to promptly obtain coverage andadequate reimbursement rates from third party payors could significantly harm our operating results, our ability to raise capital needed to commercializeany future approved drugs and our overall financial condition. 48 A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and other third-party payors have attempted tocontrol costs by limiting coverage and the amount of reimbursement for particular medical products. There have been a number of legislative andregulatory proposals to change the healthcare system in the United States and in some foreign jurisdictions that could affect our ability to sell ourproducts profitably. These legislative and/or regulatory changes may negatively impact the reimbursement for our products, following approval. Theavailability of numerous generic pain medications may also substantially reduce the likelihood of reimbursement for Zalviso or any of our other productcandidates, if approved. The application of user fees to generic drug products may expedite the approval of additional pain medication generic drugs. Weexpect to experience pricing pressures in connection with the sale of Zalviso and any of our other product candidates, if approved, due to the trend towardmanaged healthcare, the increasing influence of health maintenance organizations and additional legislative changes. If we fail to successfully secure andmaintain reimbursement coverage for our products or are significantly delayed in doing so, we will have difficulty achieving market acceptance of ourproducts and our business will be harmed. Furthermore, market acceptance and sales of our product candidates, if approved, will depend on reimbursement policies and may be affected by futurehealthcare reform measures. Government authorities and third party payors, such as private health insurers, hospitals and health maintenanceorganizations, decide which drugs they will pay for and establish reimbursement levels. We cannot be sure that reimbursement will be available forZalviso, or any of our other product candidates, if approved. Also, reimbursement amounts may reduce the demand for, or the price of, our products. Ifreimbursement is not available, or is available only to limited levels, we may not be able to successfully commercialize Zalviso, or any of our otherproduct candidates, if approved. Additionally, the regulations that govern marketing approvals, pricing, coverage and reimbursement for new drugs vary widely from country to country.Current and future legislation may significantly change the approval requirements in ways that could involve additional costs and cause delays inobtaining approvals. Some countries require approval of the sale price of a product before it can be marketed. In many countries, the pricing review periodbegins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject tocontinuing governmental control even after initial approval is granted. As a result, we might obtain marketing approval for a product in a particularcountry, but then be subject to price regulations that delay commercial launch of the product, possibly for lengthy time periods, and negatively impactthe revenues able to be generated from the sale of the product in that country. Adverse pricing limitations may hinder our ability to recoup our investmentin Zalviso and/or our other drug candidates, even if those drug candidates obtain marketing approval. The FDA and other regulatory agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses. If we are found to have improperly promoted off-label uses of our product candidates, including Zalviso, if approved, we may become subject tosignificant liability. Such enforcement has become more common in the industry. The FDA and other regulatory agencies strictly regulate thepromotional claims that may be made about prescription drug products. In particular, a product may not be promoted for uses that are not approved by theFDA or such other regulatory agencies as reflected in the product’s approved labeling. If we receive marketing approval for our product candidates for ourproposed indications, physicians may nevertheless use our products for their patients in a manner that is inconsistent with the approved label, if thephysicians personally believe in their professional medical judgment it could be used in such manner. However, if the FDA determines that ourpromotional materials or training constitutes promotion of an off-label use, it could request that we modify our training or promotional materials orsubject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine or criminalpenalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our promotional or trainingmaterials to constitute promotion of an off-label use, which could result in significant civil, criminal and/or administrative penalties, damages, fines,disgorgement, individual imprisonment, exclusion from government-funded healthcare programs, such as Medicare and Medicaid, contractual damages,reputational harm, increased losses and diminished profits and the curtailment or restructuring of our operations, any of which could adversely affect ourability to operate our business and our financial results. The FDA or other regulatory authorities could also request that we enter into a consent decree or acorporate integrity agreement, or seek a permanent injunction against us under which specified promotional conduct is monitored, changed or curtailed.If we cannot successfully manage the promotion of our product candidates, including Zalviso, if approved, we could become subject to significantliability, which would materially adversely affect our business and financial condition. Guidelines and recommendations published by government agencies can reduce the use of our product candidates, including Zalviso, if approved. Government agencies promulgate regulations and guidelines applicable to certain drug classes which may include the product candidates that we aredeveloping. Recommendations of government agencies may relate to such matters as usage, dosage, route of administration and use of concomitanttherapies. Regulations or guidelines suggesting the reduced use of certain drug classes which may include the product candidates that we are developingor the use of competitive or alternative products as the standard of care to be followed by patients and healthcare providers could result in decreased useof our product candidates, or negatively impact our ability to gain market acceptance and market share. 49 If we are unable to establish relationships with group purchasing organizations any future revenues or future profitability could be jeopardized. Many end-users of pharmaceutical products have relationships with group purchasing organizations, or GPOs, whereby such GPOs provide such end-usersaccess to a broad range of pharmaceutical products from multiple suppliers at competitive prices and, in certain cases, exercise considerable influenceover the drug purchasing decisions of such end-users. Hospitals and other end-users contract with the GPO of their choice for their purchasing needs. Weexpect to derive revenue from end-user customers that are members of a small number of GPOs, if Zalviso is approved by the FDA. Establishing andmaintaining strong relationships with these GPOs will require us to be a reliable supplier, remain price competitive and comply with FDA regulations.The GPOs with whom we have relationships may have relationships with manufacturers that sell competing products, and such GPOs may earn highermargins from these products or combinations of competing products or may prefer products other than ours for other reasons. If we are unable to establishor maintain our GPO relationships, sales of our products and revenue could be negatively impacted. We intend to rely on a limited number of pharmaceutical wholesalers to distribute our product candidates, including Zalviso, if approved. We intend to rely upon pharmaceutical wholesalers in connection with the distribution of our product candidates, including Zalviso, if approved. If weare unable to establish or maintain our business relationships with these pharmaceutical wholesalers on commercially acceptable terms, it could have amaterial adverse effect on our sales and may prevent us from achieving profitability. Risks Related to Our Business Operations and Industry Failure to comply with the Drug Enforcement Administration regulations, or the cost of compliance with these regulations, may adversely affect ourbusiness. Our sufentanil-based products are subject to extensive regulation by the DEA, due to their status as scheduled drugs. Sufentanil is a Schedule II opioid,considered to present the highest risk of abuse. The manufacture, shipment, storage, sale and use of controlled substances are subject to a high degree ofregulation, including security, record-keeping and reporting obligations enforced by the DEA and also by comparable state agencies. This high degree ofregulation can result in significant costs in order to comply with the required regulations, which may have an adverse effect on the development andcommercialization of our product candidates. The DEA limits the availability and production of all Schedule II substances, including sufentanil, through a quota system. The DEA requires substantialevidence and documentation of expected legitimate medical and scientific needs before assigning quotas to manufacturers. Our contract manufacturershave applied annually for a quota on our behalf. We will need significantly greater amounts of sufentanil to implement our commercialization plans forany of our products that may be approved by the FDA in the future, including Zalviso. Any delay or refusal by the DEA in establishing the procurementquota or a reduction in our quota for sufentanil or a failure to increase it over time to meet anticipated increases in demand could delay or stop the clinicaldevelopment of any of our product candidates or the commercial sale of any approved products. For example, recently, the DEA has denied our Zalvisocontract manufacturer the commercial portion of our sufentanil quota. While it is common DEA practice to deny commercial quotas for productcandidates not yet approved by the FDA, and we will request commercial quota as we approach FDA approval, there is no guarantee that we will receivesuch quota in a timely manner or sufficient quantity, which could delay our Zalviso commercial launch. This, in turn, could have a material adverse effecton our business, results of operations, financial condition and prospects. 50 Our relationships with investigators, health care professionals, consultants, commercial partners, third-party payors, hospitals, and other customers aresubject to applicable anti-kickback, fraud and abuse and other healthcare laws, which could expose us to penalties. Healthcare providers, physicians and others play a primary role in the recommendation and prescribing of any products for which we may obtainmarketing approval. Our business operations and arrangements with investigators, healthcare professionals, consultants, commercial partners, hospitals,third-party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws. These laws may constrain the businessor financial arrangements and relationships through which we research, market, sell and distribute the products for which we obtain marketing approval.Restrictions under applicable federal and state healthcare laws, include, but are not limited to, the following: •the federal healthcare Anti-Kickback Statute prohibits, among other things, persons or entities from knowingly and willfully soliciting,offering, receiving or paying any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash orin kind, to induce or reward either the referral of an individual for, or the purchase, lease, order or recommendation of, any good, facility, itemor service, for which payment may be made, in whole or in part, under federal healthcare programs such as Medicare and Medicaid; •the federal civil and criminal false claims laws and civil monetary penalties, including civil whistleblower or qui tam actions, which prohibit,among other things, individuals or entities from knowingly presenting, or causing to be presented, to the federal government, claims forpayment or approval that are false or fraudulent or from knowingly making a false statement to improperly avoid, decrease or conceal anobligation to pay money to the federal government; •the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which, among other things, imposes criminal liability forknowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or to obtain, by means offalse or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, anyhealthcare benefit program, regardless of the payor (e.g., public or private) and knowingly or willfully falsifying, concealing, or covering upby any trick or device a material fact or making any materially false statement in connection with the delivery of, or payment for, healthcarebenefits, items or services relating to healthcare matters; •HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementingregulations, impose certain obligations, including mandatory contractual terms, on covered healthcare providers, health plans andclearinghouses, as well as their respective business associates that perform services for them that involve the use, or disclosure of,individually identifiable health information, with respect to safeguarding the privacy, security and transmission of individually identifiablehealth information; •the federal transparency law, enacted as part of the Patient Protection and Affordable Care Act, as amended by the Health Care and EducationReconciliation Act of 2010 (collectively, the Health Care Reform Law), and its implementing regulations, requires certain manufacturers ofdrugs, devices, biologicals and medical supplies to report to the U.S. Department of Health and Human Services information related topayments and other transfers of value provided to physicians and teaching hospitals, as well as ownership and investment interests held byphysicians and their immediate family members; and •analogous state laws that may apply to our business practices, including but not limited to, state laws that require pharmaceutical companiesto implement compliance programs and/or comply with the pharmaceutical industry’s voluntary compliance guidelines; state laws thatimpose restrictions on pharmaceutical companies’ marketing practices and require manufacturers to track and file reports relating to pricingand marketing information, which requires tracking and reporting gifts, compensation and other remuneration and items of value provided tohealthcare professionals and entities. Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws will involve substantial costs. It is possiblethat governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations, agency guidance orcase law involving applicable fraud and abuse or other healthcare laws. If our operations are found to be in violation of any of these or any otherhealthcare regulatory laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrativepenalties, damages, fines, disgorgement, individual imprisonment, exclusion from government funded healthcare programs, such as Medicare andMedicaid, contractual damages, reputational harm, increased losses and diminished profits and the curtailment or restructuring of our operations any ofwhich could adversely affect our ability to operate our business and our financial results. Any action against us for violation of these laws, even if wesuccessfully defend against it, could cause us to incur significant legal expenses or divert our management’s attention from the operation of our business. Business interruptions could delay us in the process of developing our products and could disrupt our sales. Our headquarters is located in the San Francisco Bay Area, near known earthquake fault zones and is vulnerable to significant damage from earthquakes.We are also vulnerable to other types of natural disasters and other events that could disrupt our operations. We do not carry insurance for earthquakes orother natural disasters and we may not carry sufficient business interruption insurance to compensate us for losses that may occur. Any losses or damageswe incur could have a material adverse effect on our business operations. 51 Our future success depends on our ability to retain key executives and to attract, retain and motivate qualified personnel. We are highly dependent on principal members of our executive team, the loss of whose services may adversely impact the achievement of our objectives.While we have entered into offer letters with each of our executive officers, any of them could leave our employment at any time, as all of our employeesare “at will” employees. Recruiting and retaining other qualified employees for our business, including scientific and technical personnel, will also becritical to our success. There is currently a shortage of skilled executives in our industry, which is likely to continue. As a result, competition for skilledpersonnel is intense and the turnover rate can be high. We may not be able to attract and retain personnel on acceptable terms given the competitionamong numerous pharmaceutical companies for individuals with similar skill sets. In addition, failure to succeed in clinical trials, or delays in theregulatory approval process, may make it more challenging to recruit and retain qualified personnel. The inability to recruit or loss of the services of anyexecutive or key employee might impede the progress of our research, development and commercialization objectives. On November 5, 2014, weannounced that the Board of Directors has initiated a search to replace Richard King, our President and Chief Executive Officer. On December 15, 2014,we entered into a separation agreement with Mr. King, under the terms of which Mr. King will remain employed with AcelRx in his current position ofCEO, until the earliest to occur of the following events: (i) the date that we hire a new Chief Executive Officer; or (ii) the Board requests his resignation;or (iii) March 31, 2015. Mr. King is currently serving as the Chief Commercial Officer as well. While Mr. King has agreed to continue as the President andChief Executive Officer as per the terms of the separation agreement, and will continue to fill the Chief Commercial Officer role, there can be no assurancethat a replacement will be found on a timely basis, or at all. Our inability to find a suitable replacement may have a detrimental impact on theorganization and impede the progress of our research, development and commercialization objectives. In the future, we will need to expand our organization, and we may experience difficulties in managing this growth, which could disrupt ouroperations. As of December 31, 2014, we had 50 full-time employees. As our product candidates mature and approach potential commercialization, we plan toexpand our employee base to increase our managerial, sales, marketing, operational, quality, engineering, financial and other resources and to hire moreconsultants and contractors. Current and future growth impose significant additional responsibilities on our management, including the need to identify,recruit, maintain, motivate and integrate additional employees, consultants and contractors. Also, our management may need to divert a disproportionateamount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. We may not beable to effectively manage the expansion of our operations, which may result in weaknesses in our infrastructure, give rise to operational mistakes, loss ofbusiness opportunities, loss of employees and reduced productivity among remaining employees. Our expected growth could require significant capitalexpenditures and may divert financial resources from other projects, such as the development of additional product candidates. If our management isunable to effectively manage our growth, our expenses may increase more than expected, our ability to generate and/or grow revenues could be reduced,and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize Zalviso and our otherproduct candidates and compete effectively will depend, in part, on our ability to effectively manage any future growth. We face potential product liability, and, if successful claims are brought against us, we may incur substantial liability. The use of our product candidates in clinical trials and the sale of any products for which we obtain marketing approval exposes us to the risk of productliability claims. Product liability claims might be brought against us by consumers, health care providers, pharmaceutical companies or others selling orotherwise coming into contact with our products. If we cannot successfully defend against product liability claims, we could incur substantial liabilityand costs. In addition, regardless of merit or eventual outcome, product liability claims may result in: •impairment of our business reputation; •withdrawal of clinical trial participants; •costs due to related litigation; •distraction of management’s attention from our primary business; •substantial monetary awards to patients or other claimants; •the inability to commercialize our product candidates; and •decreased demand for our product candidates, if approved for commercial sale. Our current product liability insurance coverage may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurancecoverage is becoming increasingly expensive and in the future we may not be able to maintain insurance coverage at a reasonable cost or in sufficientamounts to protect us against losses due to liability. If and when we obtain marketing approval for our product candidates, we intend to expand ourinsurance coverage to include the sale of commercial products; however, we may be unable to obtain product liability insurance on commerciallyreasonable terms or in adequate amounts. On occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipatedadverse effects. A successful product liability claim or series of claims brought against us could cause our stock price to decline and, if judgments exceedour insurance coverage, could adversely affect our results of operations and business. 52 Our employees, independent contractors, principal investigators, consultants, commercial partners and vendors may engage in misconduct or otherimproper activities, including non-compliance with regulatory standards and requirements and insider trading. We are exposed to the risk that our employees, independent contractors, investigators, consultants, commercial partners and vendors may engage infraudulent conduct or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct that violates (1) thelaws of the FDA and similar foreign regulatory bodies, including those laws requiring the reporting of true, complete and accurate information to suchregulatory bodies; (2) healthcare fraud and abuse laws of the United States and similar foreign fraudulent misconduct laws; and (3) laws requiring thereporting of financial information or data accurately. Specifically, the promotion, sales and marketing of healthcare items and services, as well as certainbusiness arrangements in the healthcare industry are subject to extensive laws designed to prevent misconduct, including fraud, kickbacks, self-dealingand other abusive practices. These laws may restrict or prohibit a wide range of pricing, discounting, marketing, structuring and commission(s), certaincustomer incentive programs and other business arrangements generally. Activities subject to these laws also involve the improper use of informationobtained in the course of patient recruitment for clinical trials. It is not always possible to identify and deter employee and other third-party misconduct.The precautions we take to detect and prevent inappropriate conduct may not be effective in controlling unknown or unmanaged risks or losses or inprotecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws. If any such actions areinstituted against us, and we are not successful in defending ourselves, those actions could have a significant impact on our business, including theimposition of civil, criminal and administrative penalties, damages, monetary fines, disgorgement, individual imprisonment, possible exclusion fromparticipation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and futureearnings, and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of operations. Risks Related to Our Intellectual Property If we cannot defend our issued patents from third party claims or if our pending patent applications fail to issue, our business could be adverselyaffected. To protect our proprietary technology, we rely on patents as well as other intellectual property protections including trade secrets, nondisclosureagreements, and confidentiality provisions. As of December 31, 2014, we are the owner of record of 37 issued patents worldwide. These issued patentscover AcelRx’s sufentanil sublingual tablet, medication delivery devices and platform technology. These issued patents are expected to provide coveragethrough 2027 – 2030. In addition, we are pursuing a number of U.S. non-provisional patent applications and foreign national applications directed to our product candidates.The patent applications that we have filed and have not yet been granted may fail to result in issued patents in the United States or in foreign countries.Even if the patents do successfully issue, third parties may challenge the patents. Our commercial success will depend in part on successfully defending our current patents against third party challenges and expanding our existingpatent portfolio to provide additional layers of patent protection, as well as extending patent protection. There can be no assurance that we will besuccessful in defending our existing and future patents against third party challenges, or that our pending patent applications will result in additionalissued patents. The patent positions of pharmaceutical companies, including us, can be highly uncertain and involve complex and evolving legal and factual questions.No consistent policy regarding the breadth of claims allowed in pharmaceutical patents has emerged to date in the United States. Legal developmentsmay preclude or limit the scope of available patent protection. There is also no assurance that any patents issued to us will not become the subject of adversarial proceedings such as opposition, inter partes review,post-grant review, reissue, re-examination or other post-issuance proceedings, will provide us with competitive advantages, will not be challenged by anythird parties, or that the patents of others will not prevent the commercialization of products incorporating our technology. Furthermore, there can be noguarantee that others will not independently develop similar products, duplicate any of our products, or design around our patents. 53 Litigation involving patents, patent applications and other proprietary rights is expensive and time consuming. If we are involved in such litigation, itcould cause delays in bringing our product candidates to market and interfere with our business. Our commercial success depends in part on not infringing patents and proprietary rights of third parties. Although we are not currently aware of litigationor other proceedings or third party claims of intellectual property infringement related to our product candidates, the pharmaceutical industry ischaracterized by extensive litigation regarding patents and other intellectual property rights. As we enter our target markets, it is possible that competitors or other third parties will claim that our products and/or processes infringe their intellectualproperty rights. These third parties may have obtained and may in the future obtain patents covering products or processes that are similar to, or mayinclude compositions or methods that encompass our technology, allowing them to claim that the use of our technologies infringes these patents. In a patent infringement claim against us, we may assert, as a defense, that we do not infringe the relevant patent claims, that the patent is invalid or both.The strength of our defenses will depend on the patents asserted, the interpretation of these patents, and our ability to invalidate the asserted patents.However, we could be unsuccessful in advancing non-infringement and/or invalidity arguments in our defense. In the United States, issued patents enjoya presumption of validity, and the party challenging the validity of a patent claim must present clear and convincing evidence of invalidity, which is ahigh burden of proof. Conversely, the patent owner need only prove infringement by a preponderance of the evidence, which is a lower burden of proof. If we were found by a court to have infringed a valid patent claim, we could be prevented from using the patented technology or be required to pay theowner of the patent for the right to license the patented technology. If we decide to pursue a license to one or more of these patents, we may not be able toobtain a license on commercially reasonable terms, if at all, or the license we obtain may require us to pay substantial royalties or grant cross licenses toour patent rights. For example, if the relevant patent is owned by a competitor, that competitor may choose not to license patent rights to us. If we decideto develop alternative technology, we may not be able to do so in a timely or cost-effective manner, if at all. In addition, because patent applications can take years to issue and are often afforded confidentiality for some period of time there may currently bepending applications, unknown to us, that later result in issued patents that could cover one or more of our products. It is possible that we may in the future receive, particularly as a public company, communications from competitors and other companies alleging that wemay be infringing their patents, trade secrets or other intellectual property rights, offering licenses to such intellectual property or threatening litigation.In addition to patent infringement claims, third parties may assert copyright, trademark or other proprietary rights against us. We may need to expendconsiderable resources to counter such claims and may not be able to successful in our defense. Our business may suffer if a finding of infringement isestablished. It is difficult and costly to protect our proprietary rights, and we may not be able to ensure their protection. The patent positions of pharmaceutical companies can be highly uncertain and involve complex legal and factual questions for which important legalprinciples remain unresolved. No consistent policy regarding the breadth of claims allowed in pharmaceutical patents has emerged to date in the UnitedStates. The pharmaceutical patent situation outside the United States is even more uncertain. Changes in either the patent laws or in interpretations ofpatent laws in the United States and other countries may diminish the value of our intellectual property. For example, on September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to United Statespatent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. The United StatesPatent Office has developed new regulations and procedures to govern the full implementation of the Leahy-Smith Act, and many of the substantivechanges to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, that became effective March 16, 2013. It is tooearly to tell what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementationcould increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, allof which could have a material adverse effect on our business and financial condition. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in the patents that may be issued from the applications we currentlyor may in the future own or license from third parties. Further, if any patent license we obtain is deemed invalid and/or unenforceable, it could impact ourability to commercialize or partner our technology. Competitors or third parties may infringe our patents. We may be required to file patent infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or that the third party’stechnology does not in fact infringe upon our patents. An adverse determination of any litigation or defense proceedings could put one or more of ourpatents at risk of being invalidated or interpreted narrowly and could put our related pending patent applications at risk of not issuing. Litigation may failand, even if successful, may result in substantial costs and be a distraction to our management. We may not be able to prevent misappropriation of ourproprietary rights, particularly in countries outside the United States where patent rights may be more difficult to enforce. Furthermore, because of thesubstantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential or sensitiveinformation could be compromised by disclosure in the event of litigation. In addition, during the course of litigation there could be publicannouncements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these resultsto be negative, it could have a substantial adverse effect on the price of our common stock. 54 The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that: •we were the first to make the inventions covered by each of our pending patent applications; •we were the first to file patent applications for these inventions; •others will not independently develop similar or alternative technologies or duplicate any of our technologies; •any patents issued to us or our collaborators will provide a basis for commercially viable products, will provide us with any competitiveadvantages or will not be challenged by third parties; or •the patents of others will not have an adverse effect on our business. If we do not adequately protect our proprietary rights, competitors may be able to use our technologies and erode or negate any competitive advantage wemay have, which could materially harm our business, negatively affect our position in the marketplace, limit our ability to commercialize our productcandidates, and delay or render impossible our achievement of profitability. We may be unable to adequately prevent disclosure of trade secrets and other proprietary information. We rely on trade secrets to protect our proprietary know-how and technological advances, especially where we do not believe patent protection isappropriate or obtainable. However, trade secrets are difficult to protect. We rely in part on confidentiality agreements with our employees, consultants,outside scientific collaborators, sponsored researchers and other advisors to protect our trade secrets and other proprietary information. These agreementsmay not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure ofconfidential information. In addition, others may independently discover our trade secrets and proprietary information. Costly and time-consuminglitigation could be necessary to enforce and determine the scope of our proprietary rights. Failure to obtain or maintain trade secret protection couldenable competitors to use our proprietary information to develop products that compete with our products or cause additional, material adverse effectsupon our competitive business position. Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and applications will be due to be paid to theUnited States Patent and Trademark Office and various foreign governmental patent agencies in several stages over the lifetime of the patents and/orapplications. We have systems in place, including use of third party vendors, to manage payment of periodic maintenance fees, renewal fees, annuity fees and variousother patent and application fees. The United States Patent and Trademark Office, or the USPTO, and various foreign governmental patent agenciesrequire compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. There aresituations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patentrights in the relevant jurisdiction. If this occurs, our competitors might be able to enter the market, which would have a material adverse effect on ourbusiness. We may not be able to enforce our intellectual property rights throughout the world. The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies haveencountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of somecountries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relatingto life sciences. This could make it difficult for us to stop the infringement of our patents or the misappropriation of our other intellectual property rights.For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, manycountries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patentsmay provide limited or no benefit. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects ofour business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law andlegal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and theenforcement of intellectual property. 55 We have not yet registered our trademarks in all of our potential markets, and failure to secure those registrations could adversely affect our business. We have registered our ACELRX mark in the United States, Canada, the European Union and India. We have also registered the mark ACCELERATE.INNOVATE. ALLEVIATE. in the United States. We have additionally applied for registration of our ZALVISO mark in the United States on an intent-to-use basis and that application has been allowed. In early 2014, the FDA accepted the ZALVISO mark as part of the NDA review process. Although we arenot currently aware of any oppositions to or cancellations of our registered trademarks or pending applications, it is possible that one or more of theapplications could be subject to opposition or cancellation after the marks are registered. The registrations will be subject to use and maintenancerequirements. It is also possible that we have not yet registered all of our trademarks in all of our potential markets, and that there are names or symbolsother than “ACELRX” that may be protectable marks for which we have not sought registration, and failure to secure those registrations could adverselyaffect our business. Opposition or cancellation proceedings may be filed against our trademarks and our trademarks may not survive such proceedings. Risks Related to Ownership of Our Common Stock The market price of our common stock may be highly volatile. Since our initial public offering, or IPO, in February 2011, the trading price of our common stock has experienced significant volatility and is likely to bevolatile in the future. For example, our stock price declined by more than 40% on July 28, 2014, the first trading day following the announcement of thereceipt of the CRL from the FDA. In addition, our stock price dropped by 37% on March 9, 2015, the day we announced the correspondence we receivedfrom the FDA requesting an additional clinical study for Zalviso. Our stock price could be subject to wide fluctuations in response to a variety of factors,including the following: •any delay in resubmitting the NDA for Zalviso, submitting an NDA for any of our other product candidates and any adverse development orperceived adverse development with respect to the FDA’s review of any NDA; •any adverse development or perceived adverse development with respect to the FDA’s regulatory review of Zalviso; •adverse results or delays in future clinical trials; •inability to obtain additional funding, including funding necessary for the planned potential commercialization and manufacturing ofZalviso in the United States and advancement of clinical trials for other product candidates; •failure to successfully develop and commercialize our product candidates; •changes in laws or regulations applicable to our products; •inability to obtain adequate product supply for our product candidates, or the inability to do so at acceptable prices; •adverse regulatory decisions; •introduction of new products, services or technologies by our competitors; •failure to meet or exceed financial projections we provide to the public; •failure to meet or exceed the estimates and projections of the investment community; •the perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community; •announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors; •disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protectionfor our technologies; •additions or departures of key scientific or management personnel; •significant lawsuits, including patent or stockholder litigation; •changes in the market valuations of similar companies; •sales of our common stock by us or our stockholders in the future; and •trading volume of our common stock. In addition, the stock market in general, and The NASDAQ Global Market, or NASDAQ, in particular, have experienced extreme price and volumefluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors maynegatively affect the market price of our common stock, regardless of our actual operating performance. 56 Historically, our common stock has thinly traded, and in the future may continue to be thinly traded, and our stockholders may be unable to sell at ornear asking prices, or at all if they need to sell their shares to raise money or otherwise desire to liquidate such shares. Historically, we have not had a high volume of daily trades in our common stock on NASDAQ. For example, the average daily trading volume in ourcommon stock on NASDAQ during the years ended December 31, 2014 and December 31, 2013, was approximately 700,000 and 540,000 shares per day,respectively. A more active market for our stock has only recently developed and may not be sustained. Our stockholders may be unable to sell theircommon stock at or near their asking prices, which may result in substantial losses to our investors. The market for our common stock may be characterized by significant price volatility when compared to seasoned issuers, and we expect that our shareprice will be more volatile than a seasoned issuer for the indefinite future. As noted above, our common stock may be sporadically and/or thinly traded.As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence theprice of those shares in either direction. The price for our shares could, for example, decline significantly in the event that a large number of our commonstock are sold on the market without commensurate demand, as compared to a seasoned issuer that could better absorb those sales without adverse impacton its share price. Our principal stockholders and management own a significant percentage of our stock and are able to exert significant control over matters subject tostockholder approval. Our executive officers and directors, together with the stockholders with whom our executive officers and directors are affiliated or associated,beneficially own a significant percentage of our voting stock. Therefore, these stockholders have the ability to influence us through this ownershipposition. These stockholders are able to determine all matters requiring stockholder approval. For example, these stockholders, acting together, are able tocontrol elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction.This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may believe are in your best interest as one ofour stockholders. We incur significant increased costs as a result of operating as a public company, and our management is required to devote substantial time to newcompliance initiatives. As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002, as amended, or theSarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, as well as the information and reportingrequirements of the Exchange Act and other federal securities laws, and rules subsequently implemented by the SEC and NASDAQ, have imposed variousrequirements on public companies. The costs of compliance with the Sarbanes-Oxley Act and of preparing and filing annual and quarterly reports, proxystatements and other information with the SEC, the Dodd-Frank Act, and regulations promulgated under these statutes, are significant. Our managementand other personnel need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations increase our legaland financial compliance costs and make some activities more time-consuming and costly. For example, these rules and regulations make it more difficultand more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain our currentlevels of such coverage. As a public company, we are subject to the requirements of Section 404 of the Sarbanes-Oxley Act. If we are unable to comply with Section 404 in atimely manner, it may affect the reliability of our internal control over financial reporting. Assessing our staffing and training procedures to improve ourinternal control over financial reporting is an ongoing process. We have been and will continue to be involved in a substantial effort to implement appropriate processes, document the system of internal control overkey processes, assess their design, remediate any deficiencies identified and test their operation. If we fail to comply with the requirements of Section 404,it may affect the reliability of our internal control over financial reporting and negatively impact the quality of disclosure to our stockholders. If we or ourindependent registered public accounting firm identify and report a material weakness, it could adversely affect our stock price. Sales of a substantial number of shares of our common stock in the public market by our existing stockholders could cause our stock price to fall. Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur, could depress the marketprice of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effectthat sales may have on the prevailing market price of our common stock. All of our shares of common stock outstanding are eligible for sale in the publicmarket, subject in some cases to the volume limitations and manner of sale requirements of Rule 144 under the Securities Act. Sales of stock by ourstockholders could have a material adverse effect on the trading price of our common stock. 57 In addition, certain holders of our securities are entitled to certain rights with respect to the registration of their shares of common stock under theSecurities Act. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under theSecurities Act. We registered for resale 3,070,000 shares of our common stock held by certain selling stockholders on a shelf registration statement thatbecame effective on June 12, 2014. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our commonstock. Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result inadditional dilution of the percentage ownership of our stockholders and could cause our stock price to fall. We expect that significant additional capital will be needed in the future to continue our planned operations. To the extent we raise additional capital byissuing equity securities, our stockholders may experience substantial dilution. We may sell common stock, convertible securities or other equitysecurities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible securities or otherequity securities in more than one transaction, investors may be materially diluted by subsequent sales. These sales may also result in material dilution toour existing stockholders, and new investors could gain rights superior to our existing stockholders. Pursuant to the 2011 Incentive Plan, our management is authorized to grant stock options and other equity-based awards to our employees, directors andconsultants. The number of shares available for future grant under our 2011 Incentive Plan will automatically increase each year by 4% of all shares of ourcapital stock outstanding as of December 31 of the prior calendar year, subject to the ability of our board of directors to take action to reduce the size ofthe increase in any given year. Currently, we plan to register the increased number of shares available for issuance under our 2011 Incentive Plan eachyear. If our board of directors elects to increase the number of shares available for future grant by the maximum amount each year, our stockholders mayexperience additional dilution, which could cause our stock price to fall. Our involvement in securities-related class action litigation could divert our resources and management's attention and harm our business. The stock markets have from time to time experienced significant price and volume fluctuations that have affected the market prices for the commonstock of pharmaceutical companies. These broad market fluctuations may cause the market price of our common stock to decline. In addition, the marketprice of our common stock may vary significantly based on AcelRx specific events, such as receipt of a CRL, negative clinical results, or other negativefeedback from the FDA or other regulatory agencies. In the past, securities-related class action litigation has often been brought against a companyfollowing a decline in the market price of its securities. This risk is especially relevant for us because biotechnology and biopharmaceutical companiesoften experience significant stock price volatility in connection with their investigational drug candidate development programs and the FDA's review oftheir NDAs. On October 1, 2014, a securities class action complaint was filed in the U.S. District Court for the Northern District of California against us and certain ofour current and former officers. The complaint alleges that between December 2, 2013 and September 25, 2014, we and certain of our officers violatedSections 10(b) and 20(a) of the Securities Exchange Act of 1934 in connection with statements related to our lead drug candidate, Zalviso. The complaintseeks unspecified damages, interest, attorneys’ fees, and other costs. On December 1, 2014, three purported shareholders filed motions to appoint leadplaintiff and to appoint lead counsel. On February 24, 2015, the court issued an order appointing the lead plaintiff and lead counsel in the matter. LeadPlaintiff has until April 10, 2015 to file an amended complaint. The last day for us to respond to the amended complaint is May 26, 2015. This lawsuitand any future related lawsuits are subject to inherent uncertainties, and the actual defense and disposition costs will depend upon many unknownfactors. The outcome of such lawsuits is necessarily uncertain. Securities-related class action litigation often is expensive and diverts management'sattention and our financial resources, which could adversely affect our business. Further, any negative outcome from such lawsuit could result inpayments of monetary damages, or adversely affect our products, and accordingly our business, financial condition, or results of operations could bematerially and adversely affected. There can be no assurance that a favorable final outcome will be obtained in this case or any subsequent related case. Defending any lawsuit is costly andcan impose a significant burden on management and employees. Any litigation to which we are a party may result in an onerous or unfavorable judgmentthat may not be reversed upon appeal or in payments of monetary damages not covered by insurance, or we may decide to settle lawsuits on unfavorableterms, which could adversely affect our business, financial conditions, or results of operations. Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited. Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” generally defined as a greaterthan 50% change (by value) in its equity ownership over a three year period, the corporation’s ability to use its pre-change net operating losscarryforwards and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited. The completion of theJuly 2013 public equity offering, together with our public equity offering in December 2012, our initial public offering, private placements and othertransactions that have occurred, have triggered such an ownership change. In addition, since we will need to raise substantial additional funding tofinance our operations, we may undergo further ownership changes in the future. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards to offset United States federal taxable income may be subject to limitations, which could potentially result inincreased future tax liability to us. 58 We do not intend to pay dividends on our common stock so any returns will be limited to the value of our stock. We have never declared or paid any cash dividends on our capital stock, and we are prohibited from doing so under the terms of our Amended LoanAgreement with Hercules. Regardless of the restrictions in our Amended Loan Agreement with Hercules or the terms of any potential future indebtedness,we anticipate that we will retain all available funds and any future earnings to support our operations and finance the growth and development of ourbusiness and, therefore, we do not expect to pay cash dividends in the foreseeable future. Any future determination related to our dividend policy will bemade at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results,contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant. Provisions in our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult fora third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders or remove our current management. Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even ifan acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or remove our current management.These provisions include: •authorizing the issuance of “blank check” preferred stock, the terms of which may be established and shares of which may be issued withoutstockholder approval; •limiting the removal of directors by the stockholders; •a staggered board of directors; •prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders; •eliminating the ability of stockholders to call a special meeting of stockholders; and •establishing advance notice requirements for nominations for election to our board of directors or for proposing matters that can be actedupon at stockholder meetings. These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult forstockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, we aresubject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad rangeof business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interestedstockholder, unless such transactions are approved by our board of directors. This provision could have the effect of delaying or preventing a change ofcontrol, whether or not it is desired by or beneficial to our stockholders. Further, other provisions of Delaware law may also discourage, delay or preventsomeone from acquiring us or merging with us. Item 1B. Unresolved Staff Comments None. Item 2. Properties We lease approximately 25,893 square feet of office and laboratory space in Redwood City, California under an agreement that expires in January 2018.We believe that our facilities are adequate to meet our current needs. Item 3. Legal Proceedings On October 1, 2014, a securities class action complaint was filed in the U.S. District Court for the Northern District of California against AcelRx andcertain of our current and former officers. The complaint alleges that between December 2, 2013 and September 25, 2014, AcelRx and certain of ourofficers violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 in connection with statements related to our lead drug candidate,Zalviso. The complaint seeks unspecified damages, interest, attorneys’ fees, and other costs. On December 1, 2014, three purported shareholders filedmotions to appoint lead plaintiff and to appoint lead counsel. On February 24, 2015, the court issued an order appointing the lead plaintiff and leadcounsel in the matter. Lead Plaintiff has until April 10, 2015 to file an amended complaint. The last day for the Company to respond to the amendedcomplaint is May 26, 2015. We believe that we have meritorious defenses and intend to defend against this lawsuit vigorously. 59 This lawsuit and any future related lawsuits are subject to inherent uncertainties, and the actual defense and disposition costs will depend upon manyunknown factors. The outcome of such lawsuits is necessarily uncertain. Securities-related class action litigation often is expensive and divertsmanagement's attention and our financial resources, which could adversely affect our business. Further, any negative outcome from such lawsuit couldresult in payments of monetary damages, or adversely affect our products, and accordingly our business, financial condition, or results of operations couldbe materially and adversely affected. There can be no assurance that a favorable final outcome will be obtained in this case or any subsequent related case. Defending any lawsuit is costly andcan impose a significant burden on management and employees. Any litigation to which we are a party may result in an onerous or unfavorable judgmentthat may not be reversed upon appeal or in payments of monetary damages not covered by insurance, or we may decide to settle lawsuits on unfavorableterms, which could adversely affect our business, financial conditions, or results of operations. From time to time we may be involved in additional legal proceedings arising in the ordinary course of business. Item 4. Mine Safety Disclosures Not Applicable. 60 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Our common stock has been trading on the NASDAQ Global Market under the symbol “ACRX” since our IPO on February 11, 2011. Prior to this date,there was no public market for our common stock. The following table sets forth the high and low intraday sales prices of our common stock for theperiods indicated as reported by the NASDAQ Global Market: Price High Low Year ended 2014 Fourth Quarter $7.46 $5.22 Third Quarter $11.65 $5.27 Second Quarter $12.35 $8.13 First Quarter $13.64 $9.91 Year ended 2013 Fourth Quarter $11.35 $6.04 Third Quarter $13.50 $8.94 Second Quarter $10.59 $4.66 First Quarter $5.97 $4.12 Stock Price Performance Graph The following graph illustrates a comparison of the total cumulative stockholder return on our common stock since February 11, 2011, which is the dateour common stock first began trading on the NASDAQ Global Market, to two indices: the NASDAQ Composite Index and the NASDAQ BiotechnologyIndex. The stockholder return shown in the graph below is not necessarily indicative of future performance, and we do not make or endorse anypredictions as to future stockholder returns.  The above Stock Price Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities andExchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or SecuritiesExchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing. 61 Holders of Record As of January 31, 2015, there were 16 holders of record of our common stock. This number does not include “street name” or beneficial holders, whoseshares are held of record by banks, brokers, financial institutions and other nominees. Dividend Policy We have never declared or paid any cash dividends on our capital stock, and we are prohibited from doing so under the terms of our loan and securityagreement with Hercules. Regardless of the restrictions in our loan and security agreement with Hercules or the terms of any potential future indebtedness,we anticipate that we will retain all available funds and any future earnings to support our operations and finance the growth and development of ourbusiness and, therefore, we do not expect to pay cash dividends in the foreseeable future. Any future determination related to our dividend policy will bemade at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results,contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant. Item 6. Selected Financial Data The selected financial data set forth below should be read together with the financial statements and related notes, “Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” and the other information contained in this Form 10-K. The selected financial data is notintended to replace our audited financial statements and the accompanying notes. Our historical results are not necessarily indicative of our future results. Year Ended December 31, 2014 2013 2012 2011 2010 (in thousands, except share and per share data) Statements of Operations Data: Revenue: Collaboration agreement $5,217 $27,370 $— $— $— Research grant — 2,132 2,394 1,072 — Total revenue 5,217 29,502 2,394 1,072 — Operating Expenses: Research and development $24,520 $26,292 $24,908 $13,624 $8,193 General and administrative 18,346 9,877 7,199 6,800 3,993 Total operating expenses 42,866 36,169 32,107 20,424 12,186 Loss from operations (37,649) (6,667) (29,713) (19,352) (12,186)Interest expense (2,639) (1,518) (2,283) (2,309) (1,397)Interest income and other income (expense), net 6,935 (15,241) (1,367) 1,560 (761)Net loss $(33,353) $(23,426) $(33,363) $(20,101) $(14,344)Net loss per share of common stock, basic $(0.77) $(0.59) $(1.51) $(1.16) $(21.84)Shares used in computing net loss per share of common stock,basic 43,427,111 39,746,678 22,124,637 17,344,727 656,650 Net loss per share of common stock, diluted – see Note 11 $(0.91) $(0.59) $(1.51) $(1.16) $(21.84)Shares used in computing net loss per share of common stock,diluted 44,322,297 39,746,678 22,124,637 17,344,727 656,650 62 As of December 31, 2014 2013 2012 2011 2010 (in thousands) Balance Sheet Data: Cash, cash equivalents and short-term investments $75,350 $103,663 $59,763 $35,785 $3,682 Working capital (deficit) 62,567 97,692 47,435 30,301 (7,632)Total assets 86,447 110,031 64,520 40,835 6,830 Total debt, net, including convertible notes 24,905 14,364 15,973 19,079 12,009 PIPE warrant liability 5,577 13,111 7,418 — — Convertible preferred stock warrant liability — — — — 2,529 Convertible preferred stock — — — — 55,941 Total stockholders’ equity (deficit) 46,656 73,159 33,847 17,468 (65,892) 63 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with our audited financial statements and the related notes that appear elsewherein this Annual Report on Form 10-K. This discussion contains forward-looking statements within the meaning of Section 21E of the Securities ExchangeAct of 1934, as amended. Such forward-looking statements involve risks, uncertainties and other factors that may cause our actual results, levels ofactivity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Ouractual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of severalfactors, including those set forth under “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K. Please refer to the section entitled“Forward-Looking Statements” in this Annual Report on Form 10-K. Overview We are a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for the treatment of acute pain.Our lead product candidate is Zalviso, formerly known as ARX-01. Zalviso is intended for the management of moderate-to-severe acute pain inhospitalized adult patients. Zalviso consists of sufentanil sublingual tablets delivered by the Zalviso System, a needle-free, handheld, patient-administered, pain management system (together, “Zalviso”). On July 25, 2014, the U.S. Food and Drug Administration, or FDA, issued a Complete Response Letter, or CRL, for our New Drug Application, or NDA,for Zalviso. The CRL contains requests for additional information on the Zalviso System to ensure proper use of the device. The requests includesubmission of data demonstrating a reduction in the incidence of optical system errors, changes to address inadvertent dosing, among other items, andsubmission of additional data to support the shelf life of the product. In the third quarter of 2014, we held a Type A meeting with the FDA to discuss theZalviso CRL received in July. During the meeting we discussed the resubmission of the Zalviso NDA and the steps necessary for the resubmission. Inadvance of resubmitting our Zalviso NDA, we agreed with the FDA to submit protocols for the bench testing and Human Factors, or HF, studies for theirreview and comment. In addition, the FDA requested in the minutes of the meeting that we provide a risk assessment that analyzes the risks associatedwith inadvertent dosing and the rationale that bench testing and HF studies are sufficient to address the specific items included in the CRL. We submittedthe protocols and this rationale in the fourth quarter of 2014. In January 2015, we received feedback from the FDA on the protocol and the plannedanalysis of the results of the bench test. No modifications to the conduct of the bench test were necessary; however, in response to the FDA’s request, werefined the planned analysis of the bench test results. In February 2015, we received feedback from the FDA on the HF protocols. In this feedback, theFDA confirmed that the HF studies as proposed were acceptable to evaluate the design changes related to inadvertent dispensing of tablets. In March2015, we received correspondence from the FDA stating that in addition to the bench testing and two Human Factors studies we have performed inresponse to the issues identified in the CRL, an additional clinical study is needed to assess the risk of inadvertent dispensing and overall risk ofdispensing failures. We plan to meet with the FDA to discuss and clarify the need for an additional clinical study, and the potential design and objectivesof such a study. As a result of this most recent FDA communication and the need for clarity with the FDA, the resubmission of the Zalviso NDA is on hold.We will provide an update on the timing of the resubmission of the Zalviso NDA after we obtain more information from the FDA. The FDA has preclearedcertain aspects of our proposed Risk Evaluation and Mitigation Strategy, or REMS, and indicated that they will continue discussion of our proposedREMS after the Zalviso NDA has been resubmitted. Zalviso Zalviso is an investigational, pre-programmed, non-invasive, system to allow hospital patients with moderate-to-severe acute pain to self-dose withsufentanil sublingual tablets to manage their pain. Zalviso is designed to help address certain problems associated with post-operative intravenouspatient-controlled analgesia, by offering: •A high therapeutic index opioid: Zalviso uses sufentanil, an opioid that has a high therapeutic index. The therapeutic index is the ratio of theeffective dose versus the lethal dose. In animal studies, the therapeutic index for sufentanil was approximately 100 times larger than fentanyland 300 times larger than morphine. •A non-invasive route of delivery: Zalviso utilizes a sufentanil tablet which allows for a sublingual (under the tongue) route of delivery.Sufentanil is highly lipophilic which provides for rapid absorption in the fatty cells (or mucosal tissue) found under the tongue, and for rapidtransit across the blood-brain barrier to reach the mu-opioid receptors in the brain. The sublingual delivery used by Zalviso provides rapidonset of analgesia. The sublingual delivery system also eliminates the risk of IV-related analgesic gaps and IV complications, such ascatheter-related infections. In addition, because patients do not require direct connection to an IV PCA infusion pump through IV tubing,Zalviso allows for ease of patient mobility. •A simple, pre-programmed PCA solution: Zalviso allows patients to self-dose sufentanil sublingual tablets via a pre-programmed, securesystem designed to eliminate the risk of programming errors. 64TM We submitted an NDA for Zalviso in September 2013 and, in December 2013 we announced that the FDA accepted for filing the Zalviso NDA. Asmentioned above, the FDA issued a CRL for Zalviso on July 25, 2014. As mentioned above, in March 2015, we received correspondence from the FDAstating that in addition to the bench testing and two Human Factors studies we have performed in response to the issues identified in the CRL, anadditional clinical study is needed to assess the risk of inadvertent dispensing and overall risk of dispensing failures. We plan to meet with the FDA todiscuss and clarify the need for an additional clinical study, and the potential design and objectives of such a study. ARX-04 We are also developing a Sufentanil Sublingual Single-Dose Tablet, or ARX-04, for the treatment of moderate-to-severe acute pain to be administered bya healthcare professional to a patient in medically supervised settings of acute pain, such as in the emergency room, or for post-operative patients who aretransitioning from the operating room to the recovery floor, or who are recovering from either short-stay or ambulatory surgery, and do not require morelong-term patient-controlled analgesia, as well as for battlefield casualty treatment, and by paramedics during patient transport. In December 2013, wecompleted an End-of-Phase 2 Meeting with the FDA to identify a Phase 3 program pathway forward for evaluation of ARX-04. We plan to initiate apivotal Phase 3 trial for ARX-04 in patients with post-operative pain following abdominal surgery by the end of March 2015. Pending completion ofenrollment, we anticipate data from this study in the fourth quarter of 2015. We have also been notified by the Department of Defense, or DoD, that they are preparing a contract to provide partial funding to support furtherdevelopment of ARX-04. We are currently engaged in the contracting process with the DoD to determine the nature, scope, amount and timing of thecontract. As noted above, we plan to initiate a Phase 3 trial by the end of March 2015 so as to not sustain additional delays in the development of ARX-04 while we continue contract negotiations with the DoD. We believe the DoD can be supportive of key aspects of the continued development of ARX-04but we do not currently have a timeline by which we may receive funding. In the first half of 2015, contingent on DoD funding, we plan to initiate our second planned Phase 3 clinical trial, an open-label safety study of patientswho present to the emergency room with moderate-to-severe pain due to trauma or injury. We expect top-line data from this trial in the second half of2015. Approximately 40 patients are planned to be enrolled in this study. Timing of this trial is currently pending finalization of the DoD contract.Should we have delays in such contract negotiations, we may elect to delay this Phase 3 trial beyond the first half of 2015. Financial Overview We have incurred net losses and generated negative cash flows from operations since inception and expect to incur losses in the future as we continue ourresearch and development activities and pre-commercialization activities. As we pursue development of our product candidates, including regulatoryreview and potential commercial development, subject to FDA approval, of our product candidates, we expect the business aspects of our company tobecome more complex. In the future, we plan to add personnel and incur additional costs related to the maturation of our business and the potentialcommercialization of Zalviso, our lead product candidate. In addition, we believe that continued investment in research and development is critical toattaining our strategic objectives. In order to develop our product candidates as commercially viable therapeutics, we expect to expend significantresources for expertise in manufacturing, regulatory affairs, clinical research and other aspects of pharmaceutical development. To date, we have funded our operations primarily through the issuance of equity securities, borrowings, payments from our corporate collaboration andour research grants. Our revenues to date have consisted primarily of revenues from our collaboration with Grünenthal and our research grant with the USAMRMC. We haverecognized in full, as revenue, our $5.6 million grant from the USAMRMC as of December 31, 2013. As mentioned above, we have been notified by the DoD that we have been offered a contract to provide partial funding to support further development ofARX-04. We are currently engaged in the contracting process with the DoD to determine the nature, scope, amount and timing of the contract. There can be no assurance that we will produce other collaborative agreement revenues or receive additional funding from USAMRMC or other research-related grant awards in the future. We expect revenues to continue to fluctuate from period-to–period. There can be no assurance that our existingcollaboration with Grünenthal will continue beyond the initial term, or that we will be able to meet the milestones specified in this agreement or that wewill obtain marketing approval for our product candidates and subsequently generate revenue from those product candidates in excess of our operatingexpenses. Our net losses were $33.4 million and $23.4 million during the years ended December 31, 2014 and 2013, respectively. As of December 31, 2014, we hadan accumulated deficit of $178.8 million. As of December 31, 2014, we had cash, cash equivalents and investments totaling $75.4 million compared to$103.7 million as of December 31, 2013. In December 2013, we entered into an amended loan and security agreement, or the Amended Loan Agreement, with Hercules Technology II, L.P. andHercules Technology Growth Capital, Inc., collectively referred to as Hercules, under which we may borrow up to $40.0 million in three tranches,represented by secured convertible promissory notes. The Amended Loan Agreement amends and restates the loan and security agreement with Herculesdated as of June 29, 2011, or the Original Loan Agreement. We borrowed the first tranche of $15.0 million upon closing of the transaction onDecember 16, 2013 and used approximately $8.6 million of the proceeds from the first tranche to repay our obligations under the Original LoanAgreement with Hercules. On June 16, 2014, we borrowed the second tranche of $10.0 million. On September 24, 2014, we entered into an amendment, orthe Amendment, to the Amended Loan Agreement with Hercules. The Amendment extends the time period under which we can draw down the thirdtranche, of up to $15.0 million, from March 15, 2015 to August 1, 2015, subject to our obtaining approval for Zalviso from the FDA. We do not believewe will receive FDA approval of Zalviso by August 1, 2015 and as such, will not have access to the third tranche under the current agreement. The interestrate for each tranche will be calculated at a rate equal to the greater of either (i) 9.10% plus the prime rate as reported from time to time in The Wall StreetJournal minus 5.25%, and (ii) 9.10%. Payments under the Amended Loan Agreement are interest only until April 1, 2015 followed by equal monthlypayments of principal and interest through the scheduled maturity date on October 1, 2017, or the Loan Maturity Date. In addition, a final payment equalto $1.7 million will be due on the Loan Maturity Date, or such earlier date specified in the Amended Loan Agreement. Our obligations under theAmended Loan Agreement are secured by a security interest in substantially all of our assets, other than our intellectual property. 65 As of December 31, 2014, the outstanding principal owed to Hercules was $25.0 million. In December 2013, we announced a commercial collaboration with Grünenthal, covering the territory of the European Union, certain other Europeancountries and Australia for Zalviso for use in the management of moderate-to-severe acute pain within a hospital, hospice, nursing home or othermedically supervised setting. We retain all rights in remaining countries, including the United States, Asia and Latin America. Under the terms of the agreement with Grünenthal, we received an upfront cash payment of $30.0 million in December 2013, and in the third quarter of2014, we received a milestone payment of $5.0 million related to the Marketing Authorization Application, or MAA submission to the EuropeanMedicines Agency, or EMA. We are eligible to receive an additional $15.0 million milestone payment upon the approval of the MAA. If approved, we areeligible to receive approximately $200.0 million in additional milestone payments, based upon successful regulatory and product development efforts($28.5 million) and net sales target achievements ($171.5 million). Grünenthal will also make tiered royalty, supply and trademark fee payments in themid-teens up to the mid-twenties percent range, on net sales of Zalviso in the Grünenthal territory. Grünenthal will be responsible for all commercial activities for Zalviso, including obtaining and maintaining pharmaceutical product regulatory approvalin the Grünenthal territory. We will be responsible for obtaining and maintaining device regulatory approval in the Grünenthal territory andmanufacturing and supply of Zalviso to Grünenthal for commercial sales. In July 2014, Grünenthal filed an MAA with the EMA under the centralized procedure in the European Union, or EU, for Zalviso for the management ofmoderate-to-severe acute pain in adult patients in a medically-supervised environment. In the fourth quarter of 2014, Grünenthal received 120-dayquestions from the EMA per the EMA’s standard regulatory review process. We have been working with Grunenthal towards the submission of theresponse to the 120-day questions. Grunenthal is currently working to complete the response and submit it to the EMA by the end of March 2015.Assuming the EMA accepts this filing, we anticipate a Committee for Medicinal Products for Human Use, or CHMP, opinion in the summer of 2015 and afinal decision by the EMA in the fall of 2015. Critical Accounting Estimates Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies,management believes that our financial statements are fairly stated in accordance with accounting principles generally accepted in the United States, andmeaningfully present our financial condition and results of operations. The accompanying discussion and analysis of our financial condition and results of operations are based upon our financial statements and the relateddisclosures, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of thesefinancial statements requires us to make estimates, assumptions and judgments that affect the reported amounts in our financial statements andaccompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under thecircumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates under different assumptions or conditions. To the extent that there are materialdifferences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flowswill be affected. Note 1 of Notes to Financial Statements describes the significant accounting policies used in the preparation of the financial statements.Certain of these significant accounting policies are considered to be critical accounting policies, as defined below. A critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires management to makedifficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, criticalaccounting estimates have the following attributes: (i) we are required to make assumptions about matters that are highly uncertain at the time of theestimate; and (ii) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a materialeffect on our financial condition or results of operations. We believe the following policies to be the most critical to an understanding of our financial condition and results of operations because they require usto make estimates, assumptions and judgments about matters that are inherently uncertain. Management has discussed the development, selection anddisclosure of the following estimates with the Audit Committee. 66 Revenue Recognition We recognize revenue when all of the following four basic revenue recognition criteria are met: (i) persuasive evidence of an arrangement exists; (ii)delivery has occurred or services have been rendered; (iii) the fee is fixed or determinable; and (iv) collectability is reasonably assured. Revenue generated from collaboration agreements typically includes upfront signing or license fees, cost reimbursements, development andmanufacturing services, milestone payments and royalties on future licensee’s product sales. Revenue from non-refundable license, technology access or other payments under license and collaborative agreements where we have a continuingobligation to perform is recognized as revenue over the expected period of the continuing performance obligation. We estimate the performance period atthe inception of the arrangement and re-evaluate it each reporting period. This re-evaluation may shorten or lengthen the period over which the remainingrevenue is recognized. Changes to these estimates are recorded on a prospective basis. We account for multiple-element arrangements, such as license and commercialization agreements in which a customer may purchase severaldeliverables, in accordance with ASC Topic 605-25, Revenue Recognition—Multiple-Element Arrangements, or ASC 605-25. We evaluate if thedeliverables in the arrangement represent separate units of accounting. In determining the units of accounting, we evaluate certain criteria, includingwhether the deliverables have value to our customers on a stand-alone basis. Factors considered in this determination include whether the deliverable isproprietary to us, whether the customer can use the license or other deliverables for their intended purpose without the receipt of the remaining elements,whether the value of the deliverable is dependent on the undelivered items, and whether there are other vendors that can provide the undelivered items.Deliverables that meet these criteria are considered a separate unit of accounting. Deliverables that do not meet these criteria are combined and accountedfor as a single unit of accounting. For revenue agreements with multiple-element arrangements, such as the collaboration and license agreement with Grünenthal, we allocate revenue toeach non-contingent element based on the relative selling price of each element. When applying the relative selling price method, we determine theselling price for each deliverable using vendor-specific objective evidence, or VSOE, of selling price or third-party evidence, or TPE, of selling price. Ifneither exists we use best estimated selling price, or BESP, for that deliverable. Revenue allocated is then recognized when the four basic revenuerecognition criteria, mentioned above, are met for each element. Additionally, we recognize milestone payments, which are subject to substantive contingencies, upon completion of specified milestones, whichrepresents the culmination of an earnings process, according to contract terms. Royalty revenues are generally recognized when earned and collectabilityof the related royalty payment is reasonably assured. We recognize cost reimbursement revenue under agreements, including our grant agreement with the USAMRMC, as the related research anddevelopment costs for services are rendered. Deferred revenue represents the portion of research or license payments received which have not been earned. Research and Development Expenses We expense research and development expenses as incurred. Research and development expenses consist primarily of direct and research-relatedallocated overhead costs such as facilities costs, salaries and related personnel costs, and material and supply costs. In addition, research and developmentexpenses include costs related to clinical trials to validate our testing processes and procedures and related overhead expenses. Expenses resulting fromclinical trials are recorded when incurred based in part on factors such as estimates of work performed, patient enrollment, progress of patient studies andother events. We make good faith estimates that we believe to be accurate, but the actual costs and timing of clinical trials are highly uncertain, subject torisks and may change depending upon a number of factors, including our clinical development plan. Share-Based Compensation We measure and recognize compensation expense for all share-based payment awards made to our employees and directors, including employee stockoptions and employee stock purchases related to the Employee Share Purchase Plan, or ESPP, on estimated fair values. The fair value of equity-basedawards is amortized over the vesting period of the award using a straight-line method. 67 To estimate the value of an award, we use the Black-Scholes option pricing model. This model requires inputs such as expected life, expected volatilityand risk-free interest rate. These inputs are subjective and generally require significant analysis and judgment to develop. Estimates of expected life areprimarily determined using the simplified method in accordance with guidance provided by the Securities and Exchange Commission, or SEC. Volatilityis derived from historical volatilities of several public companies within our industry that are deemed to be comparable to our business because we do nothave sufficient history on the volatility of our common stock relative to our expected life assumptions. The risk-free rate is based on the U.S. Treasuryyield curve in effect at the time of grant commensurate with the expected life assumption. We review our valuation assumptions quarterly and, as a result,it is likely we will change our valuation assumptions used to value share based awards granted in future periods. Further, we are required to estimateforfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data toestimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. If factors change anddifferent assumptions are employed in determining the fair value of stock based awards, the stock based compensation expense recorded in future periodsmay differ significantly from what was recorded in the current period. Liabilities Associated with Warrants Warrants to Purchase Common Stock In connection with the private placement equity financing in June 2012, or PIPE, we issued PIPE warrants to purchase up to 2,630,103 shares of commonstock. Under the terms of the PIPE warrants, upon certain transactions, including a merger, tender offer, sale of all or substantially all of the assets ofAcelRx or if a person or group shall become the owner of 50% of our issued and outstanding common stock, which is outside of our control, each PIPEwarrant holder may elect to receive a cash payment in exchange for the warrant, in an amount determined by application of the Black-Scholes option-pricing model. Accordingly, the PIPE warrants are recorded as a liability at fair value at the end of each reporting period, as determined by the Black-Scholes option-pricing model and changes to the fair value are recorded in interest income and other income (expense), net. The inputs for the Black-Scholes option-pricing model include exercise price of the PIPE warrants, market price of the underlying common shares, expected term, volatility basedon a group of our peers and the risk-free rate corresponding to the expected term of the PIPE warrants. These inputs are subjective and generally requiresignificant analysis and judgment to develop. Changes to the inputs could significantly impact the estimated fair value of the PIPE warrants, and sinceissuance of the PIPE warrants through December 31, 2014, changes in our stock price have had a significant impact to the estimated fair value of the PIPEwarrants. Warrants to Purchase Convertible Preferred Stock Freestanding warrants to purchase shares of our convertible preferred stock were classified as liabilities on our balance sheets at fair value because thewarrants could have conditionally obligated us to redeem the underlying convertible preferred stock. The warrants were subject to remeasurement at eachbalance sheet date, and any change in fair value was recognized as a component of interest income and other income (expense), net, in the statements ofcomprehensive loss. We estimated the fair value of these warrants at the respective balance sheet dates using the Black-Scholes option-pricing model. Weused assumptions to estimate the fair value of the warrants including the remaining contractual terms of the warrants, risk-free interest rates, expecteddividend yields and the fair value and expected volatility of the underlying stock. These assumptions were subjective and the fair value of the warrants topurchase convertible preferred stock could have differed significantly had we used different assumptions. Upon the completion of our IPO in February 2011, all of our warrants to purchase convertible preferred stock had been exercised or converted intowarrants to purchase common stock. At that time, the then-current aggregate fair value of these warrants was reclassified from liabilities to additionalpaid-in capital and we will no longer remeasure the liability associated with these warrants to purchase convertible preferred stock to fair value. Results of Operations Our results of operations have fluctuated from period to period and may continue to fluctuate in the future, based upon the progress of our research anddevelopment efforts and variations in the level of expenses related to developmental efforts during any given period. Results of operations for any periodmay be unrelated to results of operations for any other period. In addition, historical results should not be viewed as indicative of future operating results.We are subject to risks common to companies in our industry and at our stage of development, including risks inherent in our research and developmentefforts, reliance upon our collaborator, enforcement of our patent and proprietary rights, need for future capital, potential competition and uncertainty ofclinical trial results or regulatory approvals or clearances. In order for a product candidate to be commercialized based on our research, we and ourcollaborators must conduct preclinical tests and clinical trials, demonstrate the efficacy and safety of our product candidates, obtain regulatory approvalsor clearances and enter into manufacturing, distribution and marketing arrangements, as well as obtain market acceptance. 68 Years Ended December 31, 2014, 2013 and 2012 Revenue To date, we have not generated any commercial product revenue. We do not expect to receive any commercial sales revenue from any product candidatesthat we develop until we, or our collaborators, obtain regulatory approval and commercialize our products. During the year ended December 31, 2014, we recognized $4.6 million in revenue under our collaboration agreement with Grünenthal related to the MAAsubmission. In addition, we recognized $0.6 million of previously deferred revenue related to research and development services and our obligation toparticipate in the joint steering committee under the collaboration agreement during the year ended December 31, 2014. During the year ended December31, 2013, we recognized $27.4 million in revenue attributable to the Grünenthal license. Revenue for the year ended December 31, 2014 was $5.2 million, related to our collaboration agreement with Grünenthal. Revenue for the year endedDecember 31, 2013 was $29.5 million, $27.4 million of which related to our collaboration with Grünenthal and $2.1 million related to our grant with theUSAMRMC. Revenue for the year ended December 31, 2012 was $2.4 million, and was generated from our grant from the USAMRMC. Collaboration agreement In December 2013, we announced a commercial collaboration with Grünenthal, covering the territory of the European Union, certain other Europeancountries and Australia for Zalviso for potential use in pain treatment within or dispensed by a hospital, hospice, nursing home or other medicallysupervised setting. We retain all rights in remaining countries, including the United States, Asia and Central and South America. Under the terms of the agreement, we received an upfront cash payment of $30.0 million in December 2013, and a milestone payment of $5.0 millionrelated to the MAA submission in the third quarter of 2014. We are eligible to receive an additional $15.0 million milestone payment upon the approvalof the MAA. If approved, we are eligible to receive approximately $200.0 million in additional milestone payments, based upon successful regulatoryand product development efforts and net sales target achievements. Grünenthal will also make tiered royalty, supply and trademark fee payments in themid-teens up to the mid-twenties percent range, on net sales of Zalviso in the Grünenthal territory. Grünenthal will be responsible for all commercial activities for Zalviso, including obtaining and maintaining pharmaceutical product regulatory approvalin the Grünenthal territory. We will be responsible for obtaining and maintaining device regulatory approval in the Grünenthal territory andmanufacturing and supply of Zalviso to Grünenthal for commercial sales. A CE Mark (#611742) for Zalviso was obtained in the fourth quarter 2014which specifies AcelRx as the device design authority and manufacturer. Research Grant In May 2011, we received a grant award of $5.6 million from the USAMRMC for the development of ARX-04, a sufentanil sublingual tablet for thetreatment of moderate-to-severe acute pain. Revenue related to this grant award was recognized as the related research and development expenses wereincurred. As of December 31, 2013, we had completed all grant-supported research and development activities and the $5.6 million grant had beenrecognized in full. Research and Development Expenses Conducting research and development is central to our business model. The majority of our operating expenses to date have been for research anddevelopment activities related to Zalviso. Research and development expenses included the following: •expenses incurred under agreements with contract research organizations and clinical trial sites; •employee- and consultant-related expenses, which include salaries, benefits and stock-based compensation; •payments to third party pharmaceutical and engineering development contractors; •payments to third party manufacturers; and •depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities and equipment,and equipment and laboratory and other supply costs. Product candidates in late stages of clinical development generally have higher development costs than those in earlier stages of clinical development,primarily due to the increased size and duration of late stage clinical trials. We will incur substantial future expenditures as we seek to continuedevelopment of Zalviso, including activities to address issues raised by the FDA during their regulatory review process, as well as activities associatedwith potential preparation for commercialization of Zalviso, should we receive approval from the FDA. In addition, we plan to continue to incursignificant research and development expenses, including the expenses associated with the continued development of ARX-04. We do not plan tocontinue development of ARX-02 and ARX-03, unless additional funding or corporate partnership resources are available to support these programs. 69 We track external development expenses on a program-by-program basis. Our development resources are shared among all of our programs.Compensation and benefits, facilities, depreciation, stock-based compensation, and development support services are not allocated specifically toprojects and are considered research and development overhead. Below is a summary of our research and development expenses during the years endedDecember 31, 2014, 2013 and 2012 (in thousands): Years Ended December 31, 2014 2013 2012 Zalviso(formerly ARX-01) $10,638 $16,009 $17,100 ARX-04 3,068 1,957 1,547 Overhead 10,814 8,326 6,261 Total research and development expenses $24,520 $26,292 $24,908 Due to the inherently unpredictable nature of product development, development timelines and the probability of success, development costs can differmaterially from expectations. While we are currently focused on advancing Zalviso and the continued development of ARX-04, our future research anddevelopment expenses will depend on the clinical success of each product candidate as well as ongoing assessments of the commercial potential of ourproduct candidates. In addition, we cannot predict which product candidates may be subject to future collaborations, when these arrangements will besecured, if at all, and to what degree these arrangements would affect our development plans and capital requirements. Total research and development expenses for years ended December 31, 2014, 2013 and 2012 were as follows (in thousands, except percentages): Years Ended December 31, Increase/(Decrease) Increase/(Decrease) PercentageIncrease/(Decrease) PercentageIncrease/(Decrease) 2014 2013 2012 2014 vs.2013 2013 vs.2012 2014 vs.2013 2013 vs.2012 Research and development expenses $24,520 $26,292 $24,908 $(1,772) $1,384 (7)% 6% The $1.8 million decrease in research and development expenses during the year ended December 31, 2014, as compared to the year ended December 31,2013, was primarily attributable to a $5.4 million decrease related to our Zalviso Phase 3 clinical program conducted primarily in 2013, partially offset byan increase of $1.1 million related to our ARX-04 development program as we prepared for the Phase 3 clinical program and an increase of $2.5 million inoverhead expenses, primarily due to increased personnel-related expenses, including stock-based compensation, primarily related to an increase inheadcount to support continued development of Zalviso and ARX-04. The $1.4 million increase during the year ended December 31, 2013, as compared to the year ended December 31, 2012, was primarily attributable to anincrease of $2.1 million in headcount-related expenses, including bonus and stock-based compensation, due to an increase in headcount and a risingstock price, which created higher stock-based compensation expense. In addition, expenses related to ARX-04 increased $0.4 million due primarily toPhase 2 clinical trial expenses, which was completed in February 2013, and ongoing pharmaceutical development work. These increases were partiallyoffset by a $1.1 million decrease in expenses related to our Zalviso development program, as we had completed one of the three Phase 3 trials in 2012 andcompleted the second and third Phase 3 trials, which were initiated in 2012, by mid-2013. General and Administrative Expenses General and administrative expenses consisted primarily of salaries, benefits and stock-based compensation for personnel in administration, finance,marketing and business development activities. Other significant expenses included legal expenses to pursue patent protection of our intellectualproperty, allocated facility costs and professional fees for general legal, audit and consulting services. We expect general and administrative expenses tocontinue to increase as we continue to build our corporate infrastructure in support of a pre-commercial organization and continue the development ofour product candidates. 70 Total general and administrative expenses for the years ended December 31, 2014, 2013 and 2012 were as follows (in thousands, except percentages): Years Ended December 31, Increase/(Decrease) Increase/(Decrease) PercentageIncrease/(Decrease) PercentageIncrease/(Decrease) 2014 2013 2012 2014 vs.2013 2013 vs.2012 2014 vs.2013 2013 vs.2012 General and administrative expenses $18,346 $9,877 $7,199 $8,469 $2,678 86% 37% The $8.5 million increase in general and administrative expenses during the year ended December 31, 2014, as compared to the year ended December 31,2013, was primarily due to a $3.7 million increase in market research and use of outside services, primarily related to market research activities forZalviso, and an increase of $4.8 million, primarily in headcount-related expenses, including recruiting efforts, to support organizational growth for thepotential commercialization of Zalviso, and consulting and other professional services fees. The $2.7 million increase during the year ended December 31, 2013 was primarily due to an increase in consulting/outside services of $1.4 million,primarily related to market research activities for Zalviso, an increase of $1.1 million in headcount-related expenses, primarily due to stock-basedcompensation expense as a result of an increasing stock price, and other corporate-related expenses. Interest Expense Interest expense consisted primarily of interest accrued or paid on our debt obligation agreements and amortization of debt discounts. Total interestexpense for the years ended December 31, 2014, 2013 and 2012 was as follows (in thousands, except percentages): Years Ended December 31, Increase/(Decrease) Increase/(Decrease) PercentageIncrease/(Decrease) PercentageIncrease/(Decrease) 2014 2013 2012 2014 vs.2013 2013 vs.2012 2014 vs. 2013 2014 vs.2013 Interest expense $2,639 $1,518 $2,283 $1,121 $(765) 74% (34)% The $1.1 million increase in interest expense pertains to interest on our Amended Loan Agreement with Hercules, entered into in December 2013, whichamended and restated the Original Loan Agreement. The overall debt facility was increased from $20 million to $40.0 million, $25.0 million of whichwas outstanding as of December 31, 2014, and the maturity was extended to October 1, 2017. On June 16, 2014, we borrowed the second tranche of $10.0million. As a result, the amount of interest expense incurred during the year ended December 31, 2014, increased significantly as compared to the yearended December 31, 2013. The $0.8 million decrease in interest expense during the year ended December 31, 2013, as compared to the year ended December 31, 2012, was due to alower portion of our monthly payments attributable to interest due to the continued maturity of our Original Loan Agreement with Hercules, which wasscheduled to mature on December 1, 2014. As mentioned above, the loan agreement was amended with Hercules in December 2013. In December 2013,we drew the first tranche of $15.0 million and used a portion of the proceeds to pay down the remaining principal and accrued interest on the OriginalLoan Agreement with Hercules, which was $8.6 million. Interest and other income (expense), net Interest income and other income (expense), net, during the years ended December 31, 2014, 2013 and 2012 consisted primarily of the change in the fairvalue of our warrants, or PIPE warrants, issued in connection with our private placement of our common stock, which was completed in June 2012. Duringthe year ended December 31, 2013, we also recorded a loss of $1.2 million associated with extinguishment of our original loan agreement with Hercules,which we entered into in 2011, and amended in December 2013. Total interest income and other income (expense), net for the years ended December 31,2014, 2013 and 2012 was as follows (in thousands, except percentages): Years Ended December 31, Increase/(Decrease) Increase/(Decrease) 2014 2013 2012 2014 vs. 2013 2013 vs. 2012 Interest and other income (expense), net $6,935 $(15,241) $(1,367) $(22,176) $13,874 The decrease in interest income and other income (expense), net, during the year ended December 31, 2014, as compared to the year ended December 31,2013, of $22.2 million was primarily attributable to fewer PIPE warrants outstanding at December 31, 2014, compared to December 31, 2013, and adecrease in our stock price during the year ended December 31, 2014 as compared to a significant increase in our stock price during the year endedDecember 31, 2013, which is the primary driver in the Black-Scholes valuation model used to estimate the fair value of the PIPE warrants. 71 The $13.9 million increase in interest and other income (expense), net, during the year ended December 31, 2013 was primarily attributable to theincrease in the fair value of our PIPE warrants, which was recorded as an expense. The primary determinant of this expense was an increase in share priceduring 2013 and its resulting impact on the Black-Scholes valuation of these warrants. In addition, we recorded a $1.2 million loss related to entering intothe Amended Loan Agreement with Hercules. This transaction, under generally accepted accounting principles, was considered an extinguishment of theoriginal Hercules debt arrangement. Liquidity and Capital Resources Liquidity We have incurred losses and generated negative cash flows from operations since inception. We expect to continue to incur significant losses andnegative cash flows in 2014 and may incur significant losses and negative cash flows for the foreseeable future. We have funded our operations primarilythrough the issuance of equity securities and debt financings, and more recently through our collaboration agreement with Grünenthal, which we enteredinto in December 2013. As of December 31, 2014, we had cash, cash equivalents and investments totaling $75.4 million compared to $103.7 million as of December 31, 2013.The decrease was primarily attributable to cash required to fund our continuing operations, as we continue our research, development and pre-commercialization activities. We anticipate that our existing capital resources will permit us to meet our capital and operational requirements through atleast the first quarter of 2016, excluding any potential proceeds from sales or milestones associated with our collaboration with Grünenthal, additionalfinancings or other corporate partnerships. While we believe we have sufficient capital to meet our operational requirements through at least the firstquarter of 2016, our expectations may change depending on a number of factors. For example, based on potential future discussion with the FDAregarding an additional clinical study for Zalviso, the FDA may indicate a scope or design of clinical trial that is beyond what our current and estimatedfuture capital resources can support. In addition, completion of the ARX-04 development program is contingent on future funding from the DoD. We dohave sufficient resources to initiate and complete our pivotal Phase 3 trial for ARX-04 and we intend to initiate this trial by the end of the quarter endingMarch 31, 2015. Our existing capital resources may not be sufficient to fund our operations until such time as we may be able to generate sufficientrevenues to sustain our operations. In December 2013, we announced a commercial collaboration with Grünenthal, covering the territory of the European Union, certain other Europeancountries and Australia for Zalviso for potential use in pain treatment within or dispensed by a hospital, hospice, nursing home or other medicallysupervised setting. We retain all rights in remaining countries, including the United States, Asia and Latin America. Under the terms of the agreement, wereceived an upfront cash payment of $30.0 million, and a milestone payment of $5.0 million related to the MAA submission, which occurred in July2014. We are eligible to receive an additional $15.0 million milestone payment upon the approval of the MAA. If approved, we are eligible to receiveapproximately $200.0 million in additional milestone payments, based upon successful regulatory and product development efforts and net sales targetachievements. Grünenthal will also make tiered royalty, supply and trademark fee payments in the mid-teens up to the mid-twenties percent range, on netsales of Zalviso in the Grünenthal territory. In December 2013, we entered into an amended loan and security agreement, or the Amended Loan Agreement, with Hercules Technology II, L.P. andHercules Technology Growth Capital, Inc., collectively referred to as Hercules, under which we may borrow up to $40.0 million in three tranches,represented by secured convertible promissory notes. The agreement amends and restates the loan and security agreement with Hercules dated as ofJune 29, 2011, or the Original Loan Agreement. We borrowed the first tranche of $15.0 million upon closing of the transaction on December 16, 2013 andused approximately $8.6 million of the proceeds from the first tranche to repay our obligations under the Original Loan Agreement with Hercules. OnJune 16, 2014, we borrowed the second tranche of $10.0 million, which we plan to provide additional funding for the commercialization of Zalviso, as apotential source of funding for clinical trials for other development programs in our pipeline and for general corporate purposes. On September 24, 2014,we entered into an amendment, or the Amendment, to the Amended Loan Agreement with Hercules. The Amendment extends the time period under whichwe can draw down the third tranche, of up to $15.0 million, from March 15, 2015 to August 1, 2015, subject to obtaining approval for Zalviso from theFDA. We do not believe we will receive FDA approval of Zalviso by August 1, 2015 and as such, will not have access to the third tranche under thecurrent agreement. Our cash and investment balances are held in a variety of interest bearing instruments, including obligations of U.S. government agencies, money marketfunds and time deposits. Cash in excess of immediate requirements is invested with a view toward capital preservation and liquidity. 72 Cash Flows Years Ended December 31, 2014 2013 2012 (in thousands) Net cash used in operating activities $(34,456) $(487) $(24,582)Net cash (used in) provided by investing activities (5,776) (6,920) 14,955 Net cash provided by financing activities 11,869 47,876 49,765 Cash Flows from Operating Activities The primary use of cash for our operating activities during these periods was to fund the development of our product candidates, including commercialreadiness activities for our lead product candidate, Zalviso. Our cash used for operating activities also reflected changes in our working capital andadjustments for non-cash charges, such as depreciation and amortization of our fixed assets, stock-based compensation, interest expense related to ourdebt financings and the revaluation of our PIPE warrant liability and the contingent put option liability. Cash used in operating activities of $34.5 million during the year ended December 31, 2014, reflected a net loss of $33.4 million, partially offset byaggregate non-cash charges of $1.1 million. Non-cash charges included $4.4 million for stock-based compensation, partially offset by $7.0 million for thechange in fair value of our PIPE warrant liability and contingent put liability. Net cash used in operating activities of $0.5 million during the year ended December 31, 2013 reflected a net loss of $23.4 million, partially offset byaggregate non-cash charges of $20.0 million and a net change of $2.9 million in our net operating assets and liabilities. Non-cash charges primarilyincluded $14.1 million for the revaluation of the PIPE warrant liability and the contingent put option liability, $3.5 million in stock-based compensationand $1.2 million for the loss on extinguishment of debt associated with our original loan agreement with Hercules, which was amended in December2013. The net change in our operating assets and liabilities was primarily a result of an increase in deferred revenue of $2.6 million associated with ourcollaboration agreement with Grünenthal and a decrease in prepaid expenses of $1.1 million due to completion of our Phase 3 clinical trials for Zalviso in2013. Net cash used in operating activities of $24.6 million during the year ended December 31, 2012 reflected a net loss of $33.4 million, partially offset byaggregate non-cash charges of $5.3 million and a net change of $3.5 million in our net operating assets and liabilities. Non-cash charges primarilyincluded $2.2 million in stock-based compensation and $1.4 million for the revaluation of the PIPE warrant liability and the contingent put optionliability. The net change in our operating assets and liabilities was primarily a result of an increase in accounts payable and accrued liabilities of $2.7million due to increased research and development activities during 2012. Cash Flows from Investing Activities Our investing activities have consisted primarily of our capital expenditures and purchases and sales and maturities of our available-for-sale investments. During the year ended December 31, 2014, cash used in investing activities of $5.8 million was primarily as a result of $17.4 million for purchases ofinvestments and $5.5 million for purchases of property and equipment, partially offset by $17.2 million in proceeds from maturity of investments. During the year ended December 31, 2013, cash used in investing activities of $6.9 million was primarily a result of $28.0 million in purchases ofinvestments and $3.3 million in purchases of property and equipment, partially offset by $24.4 million in maturities of investments. During the year ended December 31, 2012, cash provided by investing activities of $15.0 million was primarily a result of $42.9 million in maturities ofinvestments, partially offset by $27.2 million in purchases of investments and $0.8 million in purchases of property and equipment. Cash Flows from Financing Activities Cash flows from financing activities primarily reflect proceeds from the sale of our securities, proceeds from our debt financings and payments made onsuch debt financings. As of December 31, 2014, we had outstanding debt of $25.0 million, net of $0.1 million in unamortized debt discounts. During the year ended December 31, 2014, cash provided by financing activities of $11.9 million was primarily due to the drawdown of the secondtranche of the Hercules debt of $10.0 million. 73 During the year ended December 31, 2013, cash provided by financing activities was primarily a result of the receipt of $47.9 million in proceeds from anunderwritten public offering in July 2013, net of offering costs and underwriting discounts, and proceeds of $15.0 million from our amended loanagreement with Hercules from December 2013, partially offset by payments of long-term debt of $16.3 million, including payment of the remainingprincipal of $8.5 million at the time of the amendment, and $7.8 million in principal payments made prior to the amendment. During the year ended December 31, 2012, cash provided by financing activities was primarily a result of the receipt of $44.1 million in proceeds from anunderwritten public offering in December 2012, net of offering costs and underwriting discounts, and proceeds of $9.1 million from a private placementof our common stock, in June 2012, net of offering costs. During the year ended December 31, 2012, we made payments of $3.7 million associated withour loan and security agreement with Hercules. Operating Capital and Capital Expenditure Requirements We expect our rate of cash usage to increase in the future, in particular to support our product development activities, including continued developmentof Zalviso, ARX-04 and the potential commercialization of our product candidates, if approved. We anticipate that our existing capital resources willpermit us to meet our capital and operational requirements through at least the first quarter of 2016. Our current operating plan includes the continueddevelopment of ARX-04, specifically initiation and completion of the pivotal Phase 3 clinical trial. These assumptions may change as a result of manyfactors. For example, we plan to meet with the FDA to understand the scope and design of the requested additional clinical study for Zalviso. Theoutcome of such discussion with the FDA will likely have a material impact to our operating spend. Our forecast of the period of time through which ourfinancial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual resultscould vary materially. Additional capital may not be available on terms acceptable to us, or at all. If adequate funds are not available, or if the termsunderlying potential funding sources are unfavorable, our business and our ability to develop our technology and product candidates would be harmed. Our future capital requirements may vary materially from our expectations based on numerous forward looking factors, including but not limited to thefollowing: •the outcome, timing and cost of regulatory approvals; •expenditures related to the activities required in support of our resubmission of the Zalviso NDA, including an additional clinical study forZalviso; •expenditures related to our commercialization preparation of Zalviso; •future manufacturing, selling and marketing costs related to Zalviso, if the product candidate is approved for marketing, including ourcontractual obligations to Grünenthal; •the initiation, progress, timing and completion of clinical trials for our product candidates, including ARX-04; •changes in the focus and direction of our business strategy and/or research and development programs; •milestone and royalty revenue we receive under our collaborative development and commercialization arrangements; •delays that may be caused by changing regulatory requirements; •the number of product candidates that we pursue; •the initiation, progress, timing and completion of clinical trials for our product candidates and potential product candidates; •the costs involved in filing and prosecuting patent applications and enforcing and defending patent claims; •the timing and terms of future in-licensing and out-licensing transactions; •the cost and timing of establishing sales, marketing, manufacturing and distribution capabilities; •the cost of procuring clinical and commercial supplies of our product candidates; •the extent to which we acquire or invest in businesses, products or technologies; and •the expenses associated with the pending securities lawsuit, as well as any other litigation. We will need substantial funds to: •commercialize any products we market, including Zalviso, if approved; •manufacture and market our product candidates; •conduct preclinical and clinical testing of our product candidates; and •conduct research and development programs.  74 Our existing capital resources may not be sufficient to fund our operations until such time as we may be able to generate sufficient revenues to sustain ouroperations. To the extent that our capital resources are insufficient to meet our future capital requirements, we will have to raise additional funds throughthe sale of our equity securities, monetization of current and future assets, issuance of debt or debt-like securities or from development and licensingarrangements to continue our development programs. We may be unable to raise such additional capital on favorable terms, or at all. If we raise additionalcapital by selling our equity or convertible debt securities, the issuance of such securities could result in dilution of our shareholders’ equity positions. Ifadequate funds are not available we may have to: •significantly curtail commercialization or development efforts of our product candidates or other operations; •obtain funds through entering into collaboration agreements on unattractive terms; and/or •delay, postpone or terminate planned clinical trials. Contractual Obligations The following table and disclosure summarizes our outstanding contractual obligations and commitments as of December 31, 2014 (in thousands): Payment by Period Contractual Obligations: Total Less than 1year 1-3 years Operating Lease $2,199 $683 $1,516 Principal Payments on Long-Term Debt 25,000 6,885 18,115 Interest Payments on Long-Term Debt 3,676 2,097 1,579 Total $30,875 $9,665 $21,210 Operating lease includes base rent for facilities we occupy in Redwood City, California. The loan and security agreement with Hercules also includes a $1.7 million balloon payment due on maturity of the loan, October 1, 2017, and is notincluded in the table above. Patheon In January 2013, we entered into a Services Agreement with Patheon Pharmaceuticals, Inc., or Patheon, relating to the manufacture of sufentanilsublingual tablets, for use with Zalviso. Under the terms of the Services Agreement, we have agreed to purchase, subject to Patheon’s continued materialcompliance with the terms of the Services Agreement, all of our sufentanil sublingual tablet requirements for the United States, Canada and Mexico fromPatheon during the Initial Term of the Services Agreement (as defined below), and at least eighty percent (80%) of its sufentanil sublingual tabletrequirements for such territories after the Initial Term. The term of the Services Agreement extends until December 31, 2017, or the Initial Term, and willautomatically renew thereafter for periods of two years, unless terminated by either party upon eighteen months’ prior written notice; provided, however,that the Services Agreement may not be terminated without cause prior to the end of the Initial Term. We also entered into an Amended and Restated Capital Agreement, or Amended Capital Agreement, with Patheon. Under the terms of the AmendedCapital Agreement, we have the option to make certain future modifications to Patheon’s Cincinnati facility, which would be our responsibility. Underthe Amended Capital Agreement, we made payments in 2012 and 2013 totaling $480,000 to Patheon to partially offset taxes incurred and paid byPatheon in connection with facility modifications already completed by Patheon. We can seek reimbursement from Patheon for these payments if wereceive approval from the U.S. Food and Drug Administration for Zalviso. The Amended Capital Agreement further requires that we pay a maximum“overhead fee” of $200,000 annually during the term of the Services Agreement, which amount may be reduced to $0 based on the amount of annualrevenues earned by Patheon under the Services Agreement and pre-existing development agreements with Patheon. No fee was due in 2013 or 2014 basedon the amount of revenues earned by Patheon from AcelRx in 2013 and 2014. Expenditures associated with the Services Agreement are primarily driven by the potential commercial requirements and demand for our products, noneof which are currently approved for commercial use; accordingly, the amounts and timing of such future expenditures cannot be determined at this time. Grünenthal On December 16, 2013, AcelRx Grünenthal entered into a Collaboration and License Agreement, or the License Agreement, and related Manufacture andSupply Agreement, or the Manufacturing Agreement, and together with the License Agreement, the Agreements. The License Agreement grantsGrünenthal rights to commercialize Zalviso, in the countries of the European Union, Switzerland, Liechtenstein, Iceland, Norway and Australia, or theTerritory, for human use in pain treatment within or dispensed by hospitals hospices, nursing homes and other medically-supervised settings, or the Field. 75(1)(2)(1)(2) Under the terms of the Manufacturing Agreement, we will manufacture and supply Zalviso, or the Product, for use in the Field for the Territoryexclusively for Grünenthal. Grünenthal shall purchase from us, during the first five years after the effective date of the Manufacturing Agreement, 100%and thereafter 80% of Grünenthal’s and its sublicensees’ and distributors’ requirements of Product for use in the Field for the Territory. The Product willbe supplied at our fully burdened manufacturing cost (as defined in the Manufacturing Agreement). The Manufacturing Agreement requires us to usecommercially reasonable efforts to enter stand-by contracts with third parties providing significant supply and manufacturing services and under certainspecified conditions permits Grünenthal to use a third party back-up manufacturer to manufacture the Product for Grünenthal’s commercial sale in theTerritory. Unless earlier terminated, the Manufacturing Agreement continues in effect until the later of the expiration of the obligation of Grünenthal to makeroyalty and supply and trademark fee payments or the end of any transition period for manufacturing obligations due to the expiration or termination ofthe License Agreement. The Manufacturing Agreement is subject to earlier termination in connection with certain termination events in the LicenseAgreement, in the event the parties mutually agree, by a party in the event of an uncured material breach by the other party or upon the bankruptcy orinsolvency of either party. Under the Supply Agreement, we will exclusively manufacture and supply the Product to Grünenthal for the Field in the Territory. Expenditures associated with the aforementioned agreements are primarily driven by the potential commercial requirements and demand for our products,and none of our product candidates are currently approved for commercial use; accordingly, the amounts and timing of such future expenditures cannotbe determined at this time. Off-Balance Sheet Arrangements Through December 31, 2014, we have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Our cash, cash equivalents and short-term investments as of December 31, 2014, consisted primarily of money market funds and U.S. government agencysecurities. We do not have any auction rate securities on our balance sheet, as they are not permitted by our investment policy. Our cash is invested inaccordance with an investment policy approved by our board of directors which specifies the categories, allocations, and ratings of securities we mayconsider for investment. We do not believe our cash, cash equivalents and short-term investments have significant risk of default or illiquidity. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, particularlybecause the majority of our investments are in short-term marketable debt securities. The primary objective of our investment activities is to preserveprincipal while at the same time maximizing the income we receive from our investments without significantly increasing risk. In an attempt to limitinterest rate risk, we follow guidelines to limit the average and longest single maturity dates, place our investments with high quality issuers and followinternally developed guidelines to limit the amount of credit exposure to any one issuer. Some of the securities that we invest in may be subject to marketrisk. This means that a change in prevailing interest rates may cause the value of the investment to fluctuate. For example, if we purchase a security thatwas issued with a fixed interest rate and the prevailing interest rate later rises, the value of our investment may decline. If a 10 percent change in interestrates were to have occurred on December 31, 2014, this change would not have had a material effect on the fair value of our investment portfolio as of thatdate. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate. In addition, domestic and international equity markets have experienced and may continue to experience heightened volatility and turmoil based ondomestic and international economic conditions and concerns. In the event these economic conditions and concerns continue and the markets continueto remain volatile, our results of operations could be adversely affected by those factors in many ways, including making it more difficult for us to raisefunds if necessary and our stock price may further decline. In addition, we maintain significant amounts of cash and cash equivalents that are not federallyinsured. If economic instability continues, we cannot provide assurance that we will not experience losses on these investments. Item 8. Financial Statements and Supplementary Data The financial statements required by this item are attached to this Form 10-K beginning with page F-1. 76 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures We have carried out an evaluation, under the supervision, and with the participation, of management including our principal executive officer andprincipal financial officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e)) of the Securities Exchange Act of 1934, as amended, orthe Exchange Act) as of the end of the period covered by this Annual Report on Form 10–K. Based on their evaluation, our principal executive officerand principal financial officer concluded that, subject to the limitations described below, our disclosure controls and procedures were effective as ofDecember 31, 2014. Limitations on the Effectiveness of Controls. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues, if any, within an organization have been detected. Accordingly, our disclosure controls and procedures aredesigned to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our principalexecutive officer and principal financial officer have concluded, based on their evaluation as of the end of the period covered by this report, that ourdisclosure controls and procedures were sufficiently effective to provide reasonable assurance that the objectives of our disclosure control system weremet. We continue to implement, improve and refine our disclosure controls and procedures and our internal control over financial reporting. Changes in Internal Control over Financial Reporting There have been no significant changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materiallyaffect, internal control over financial reporting during the fiscal quarter ended December 31, 2014. Management’s Annual Report on Internal Control over Financial Reporting The following report is provided by management in respect of AcelRx Pharmaceuticals’ internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act): 1. AcelRx Pharmaceuticals’ management is responsible for establishing and maintaining adequate internal control over financial reporting. 2. AcelRx Pharmaceuticals management has used the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, framework(2013 framework) to evaluate the effectiveness of internal control over financial reporting. Management believes that the COSO framework is asuitable framework for its evaluation of financial reporting because it is free from bias, permits reasonably consistent qualitative and quantitativemeasurements of AcelRx Pharmaceuticals’ internal control over financial reporting, is sufficiently complete so that those relevant factors that wouldalter a conclusion about the effectiveness of AcelRx Pharmaceuticals’ internal control over financial reporting are not omitted and is relevant to anevaluation of internal control over financial reporting. 3. Management has assessed the effectiveness of AcelRx Pharmaceuticals’ internal control over financial reporting as of December 31, 2014 and hasconcluded that such internal control over financial reporting was effective. Ernst & Young LLP, our independent registered public accounting firm, has attested to and issued a report on the effectiveness of our internal controlover financial reporting, which is included herein. 77 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of AcelRx Pharmaceuticals, Inc.: We have audited AcelRx Pharmaceuticals, Inc. internal control over financial reporting as of December 31, 2014, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (theCOSO criteria). AcelRx Pharmaceuticals, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for itsassessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control overFinancial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintainedin all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a materialweakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such otherprocedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recordedas necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expendituresof the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a materialeffect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate. In our opinion, AcelRx Pharmaceuticals, Inc. maintained, in all material respects, effective internal control over financial reporting as ofDecember 31, 2014, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets ofAcelRx Pharmaceuticals, Inc. as of December 31, 2014 and 2013, and the related statements of comprehensive loss, stockholders’ equity (deficit), andcash flows for each of the three years in the period ended December 31, 2014 of AcelRx Pharmaceuticals, Inc. and our report dated March 12, 2015expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Redwood City, CaliforniaMarch 12, 2015 Item 9B. Other Information None. 78 PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this item is hereby incorporated by reference from the information under the captions "Election of Directors," "Board ofDirectors Meetings and Committees—Board Committees" and "Executive Officers" contained in the Company's definitive Proxy Statement, to be filedwith the Securities and Exchange Commission no later than 120 days from the end of the Company's last fiscal year in connection with the solicitation ofproxies for its 2015 Annual Meeting of Stockholders. The information required by Section 16(a) is incorporated by reference from the information underthe caption "Security Ownership of Certain Beneficial Owners and Management—Section 16(a) Beneficial Ownership Reporting Compliance" in theProxy Statement. The Company has adopted a code of ethics that applies to its Chief Executive Officer, Chief Financial Officer, and to all of its other officers, directors,employees and agents. The code of ethics is available at the Corporate Governance section of the Investor Relations page on the Company's website atwww.acelrx.com. The Company intends to disclose future amendments to, or waivers from, certain provisions of its code of ethics on the above websitewithin five business days following the date of such amendment or waiver. Item 11. Executive Compensation The information required by this item is incorporated by reference from the information under the caption "Board of Directors Meetings and Committees—Compensation Committee Interlocks and Insider Participation," "Executive Compensation" and "Executive Compensation—Compensation CommitteeReport" in the Company's Proxy Statement referred to in Item 10 above. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Equity Compensation Plan Information The following table provides certain information with respect to our equity compensation plans in effect as of December 31, 2014. Column A Column B Column C Plan Category Number of securities to beissued upon exerciseof outstanding options,warrants and rights Weighted-average exerciseprice of outstanding options,warrants and rights Number of securities remainingavailable for future issuanceunder equity compensation plans(excluding securities reflected incolumn A) Equity compensation plans approved bysecurity holders 6,366,763 $5.74 485,384 Equity compensation plans not approvedby security holders — $— — Total 6,366,763 485,384 Consists of the 2006 Plan, the 2011 Plan and the ESPP. Consists of shares available for future issuance under the 2011 Incentive Plan, including shares that were previously available for future issuanceunder the 2006 Plan at the time of the execution and delivery of the underwriting agreement for our IPO, and the ESPP. As of December 31, 2014,98,366 shares of common stock were available for issuance under the 2011 Incentive Plan and 387,018 shares of common stock were available forissuance under the ESPP. The initial aggregate number of shares of our common stock that may be issued pursuant to stock awards under the 2011 Incentive Plan was1,875,000 shares, which number was the sum of (i) 51,693 shares remaining available for future grant under the 2006 Plan at the time of theexecution and delivery of the underwriting agreement for our IPO, and (ii) an additional 1,823,307 new shares. The number of shares of our commonstock reserved for issuance under the 2011 Incentive Plan will automatically increase on January 1st each year, starting on January 1, 2012 andcontinuing through January 1, 2020, by 4% of the total number of shares of our common stock outstanding on December 31 of the precedingcalendar year, or such lesser number of shares of common stock as determined by our board of directors. The initial aggregate number of shares ofcommon stock that may be issued pursuant to purchase rights granted to our employees or to employees of any of our designated affiliates under theESPP was 250,000 shares. The number of shares of our common stock reserved for issuance will automatically increase on January 1st each year,starting January 1, 2012 and continuing through January 1, 2020, in an amount equal to the lower of (i) 2% of the total number of shares of ourcommon stock outstanding on December 31 of the preceding calendar year, and (ii) a number of shares of common stock as determined by our boardof directors. The information required by this item is incorporated by reference from the information under the caption "Security Ownership of Certain BeneficialOwners and Management" in the Company's Proxy Statement referred to in Item 10 above. 79(3)(4)(1)(1)(2)(3) Item 13. Certain Relationships and Related Transactions and Director Independence The information required by this item is incorporated by reference from the information under the caption "Certain Relationships and RelatedTransactions" and "Board of Directors Meetings and Committees—Board Independence" in the Company's Proxy Statement referred to in Item 10 above. Item 14. Principal Accounting Fees and Services The information required by this item is incorporated by reference from the information under the caption "Ratification of Appointment of IndependentRegistered Public Accounting Firm" in the Company's Proxy Statement referred to in Item 10 above. PART IV Item 15. Exhibits, Financial Statement Schedules (a) The following documents are filed as part of this Form 10-K: 1.Financial Statements: See Index to Financial Statements in Item 8 of this Form 10-K. 2.Financial Statement Schedules: No schedules are provided because they are not applicable, not required under the instructions, or the requested information is shown in the financialstatements or related notes thereto. (b) Exhibits – The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Annual Report on Form 10-K 80 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized. Date: March 12, 2015AcelRx Pharmaceuticals, Inc. (Registrant) /s/ Richard A. King Richard A. KingChief Executive Officer and Director(Principal Executive Officer) /s/ Timothy E. Morris Timothy E. MorrisChief Financial Officer(Principal Financial and Accounting Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard A. King andTimothy E. Morris, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution for him or her, and in his orher name in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto andother documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each ofthem, full power and authority to do and perform each and every act and thing requisite and necessary to be done therewith, as fully to all intents andpurposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and any of them, his or hersubstitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated: SignatureTitle Date /s/ Richard A. KingChief Executive Officer and DirectorMarch 12, 2015Richard A. King(Principal Executive Officer) /s/ Timothy E. MorrisChief Financial OfficerMarch 12, 2015Timothy E. Morris(Principal Financial and Accounting Officer) /s/ Adrian AdamsChairmanMarch 12, 2015Adrian Adams /s/ Pamela P. Palmer, M.D., Ph.D.Chief Medical Officer and DirectorMarch 12, 2015Pamela P. Palmer, M.D., Ph.D. /s/ Mark G. EdwardsDirectorMarch 12, 2015Mark G. Edwards /s/ Stephen J. Hoffman, Ph.D., M.D.DirectorMarch 12, 2015Stephen J. Hoffman, Ph.D., M.D. /s/ Richard Afable, M.D.DirectorMarch 12, 2015Richard Afable, M.D. /s/ Howard B. RosenDirectorMarch 12, 2015Howard B. Rosen /s/ Mark WanDirectorMarch 12, 2015Mark Wan 81 ACELRX PHARMACEUTICALS, INC. INDEX TO FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting FirmF-2Balance Sheets at December 31, 2014 and 2013F-3Statements of Comprehensive Loss for each of the three years in the period ended December 31, 2014F-4Statements of Stockholders’ Equity (Deficit) for each of the three years in the period ended December 31, 2014F-5Statements of Cash Flows for each of the three years in the period ended December 31, 2014F-6Notes to Financial StatementsF-8 F-1 Report of Independent Registered Public Accounting Firm The Board of Directors and StockholdersAcelRx Pharmaceuticals, Inc. We have audited the accompanying balance sheets of AcelRx Pharmaceuticals, Inc. as of December 31, 2014 and 2013, and the related statementsof comprehensive loss, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2014. These financialstatements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on ouraudits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Anaudit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessingthe accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Webelieve that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AcelRx Pharmaceuticals,Inc. at December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2014in conformity with U.S. generally accepted accounting principles. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness ofAcelRx Pharmaceuticals, Inc. internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report datedMarch 12, 2015 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Redwood City, CaliforniaMarch 12, 2015 F-2 AcelRx Pharmaceuticals, Inc. Balance Sheets(in thousands, except share data) December 31,2014 December 31,2013 Assets Current Assets: Cash and cash equivalents $60,038 $88,401 Short-term investments 15,312 15,262 Prepaid expenses and other current assets 948 897 Total current assets 76,298 104,560 Property and equipment, net 9,818 5,179 Restricted cash 250 250 Other assets 81 42 Total Assets $86,447 $110,031 Liabilities and Stockholders’ Equity Current Liabilities: Accounts payable $2,431 $2,341 Accrued liabilities 3,654 3,904 Deferred revenue, current portion 787 623 Long-term debt, current portion 6,859 — Total current liabilities 13,731 6,868 Deferred rent 529 188 Long-term debt, net of current portion 18,046 14,364 Deferred revenue, net of current portion 1,626 2,007 Contingent put option liability 282 334 Warrant liability 5,577 13,111 Total liabilities 39,791 36,872 Stockholders’ Equity: Common stock, $0.001 par value—100,000,000 shares authorized as of December 31, 2014 and 2013;43,712,363 and 43,050,580 shares issued and outstanding as of December 31, 2014 and 2013 43 43 Additional paid-in capital 225,423 218,568 Accumulated deficit (178,806) (145,453)Accumulated other comprehensive income (loss) (4) 1 Total stockholders’ equity 46,656 73,159 Total Liabilities and Stockholders’ Equity $86,447 $110,031 See notes to financial statements. F-3 AcelRx Pharmaceuticals, Inc. Statements of Comprehensive Loss(in thousands, except share and per share data) Year Ended December 31, 2014 2013 2012 Revenue: Collaboration agreement $5,217 $27,370 $— Research grant — 2,132 2,394 Total revenue 5,217 29,502 2,394 Operating expenses: Research and development 24,520 26,292 24,908 General and administrative 18,346 9,877 7,199 Total operating expenses 42,866 36,169 32,107 Loss from operations (37,649) (6,667) (29,713)Interest expense (2,639) (1,518) (2,283)Interest income and other income (expense), net 6,935 (15,241) (1,367)Net loss (33,353) (23,426) (33,363)Other comprehensive income (loss): Unrealized gains (losses) on available for sale securities (5) — 1 Comprehensive loss $(33,358) $(23,426) $(33,362)Net loss per share of common stock, basic $(0.77) $(0.59) $(1.51)Net loss per share of common stock, diluted $(0.91) $(0.59) $(1.51)Shares used in computing net loss per share of common stock, basic 43,427,111 39,746,678 22,124,637 Shares used in computing net loss per share of common stock, diluted –see Note 11 44,322,297 39,746,678 22,124,637 See notes to financial statements. F-4 AcelRx Pharmaceuticals, Inc. Statements of Stockholders’ Equity (Deficit)(in thousands, except share data) Common Stock AdditionalPaid-inCapital AccumulatedDeficit OtherComprehensiveIncome (loss) TotalStockholders’Equity(Deficit) Shares Amount Balance as of December 31, 2011 19,567,778 $22 $106,110 $(88,664) $— $17,468 Stock-based compensation — — 2,150 — — 2,150 Issuance of common stock uponexercise of stock options and inconnection with restricted stock units 122,108 — 80 — — 80 Issuance of common stock upon ESPPpurchase 67,804 — 169 — — 169 Issuance of common stock upon privateplacement offering, net of offering-related costs of $0.9 million 2,922,337 1 3,245 — — 3,246 Issuance of common stock uponunderwritten public offering, net ofoffering-related costs of $3.5 million 14,375,000 14 44,082 — — 44,096 Change in unrealized gains and losseson investments — — — — 1 1 Net loss — — — (33,363) — (33,363)Balance as of December 31, 2012 37,055,027 37 155,836 (122,027) 1 33,847 Issuance of Warrants — — 1,130 — — 1,130 Stock-based compensation — — 3,479 — — 3,479 Issuance of common stock uponexercise of stock options and inconnection with restricted stock units 520,365 1 1,276 — — 1,277 Issuance of common stock uponexercise of stock warrants 1,050,062 1 8,689 — — 8,690 Issuance of common stock upon ESPPpurchase 55,126 — 219 — — 219 Issuance of common stock uponunderwritten public offering, net ofoffering-related costs of $3.0 million 4,370,000 4 47,939 — — 47,943 Change in unrealized gains and losseson investments — — — — — — Net loss — — — (23,426) — (23,426)Balance as of December 31, 2013 43,050,580 43 218,568 (145,453) 1 73,159 Stock-based compensation — — 4,440 — — 4,440 Issuance of common stock uponexercise of stock options and inconnection with restricted stock units 487,124 — 1,507 — — 1,507 Issuance of common stock uponexercise of stock warrants 91,488 — 546 — — 546 Issuance of common stock upon ESPPpurchase 83,171 — 362 — — 362 Change in unrealized gains and losseson investments — — — — (5) (5)Net loss — — — (33,353) — (33,353)Balance as of December 31, 2014 43,712,363 $43 $225,423 $(178,806) $(4) $46,656 See notes to financial statements. F-5 AcelRx Pharmaceuticals, Inc. Statements of Cash Flows(in thousands) Year Ended December 31, 2014 2013 2012 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(33,353) $(23,426) $(33,363)Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 866 593 605 Amortization of premium/discount on investments, net 216 202 380 Interest expense related to debt financing 553 442 647 Stock-based compensation 4,440 3,479 2,150 Revaluation of put option and PIPE warrant liabilities (7,040) 14,071 1,439 Loss on extinguishment of debt — 1,202 — Other — — 43 Changes in operating assets and liabilities: Prepaid expenses and other assets 137 1,132 429 Restricted cash — (45) — Accounts payable 90 106 705 Accrued liabilities (126) (760) 2,029 Deferred revenue (217) 2,630 — Deferred rent (22) (113) 354 Net cash used in operating activities (34,456) (487) (24,582)CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (5,505) (3,287) (826)Purchase of investments (17,430) (28,009) (27,167)Proceeds from maturities of investments 17,159 24,376 42,948 Net cash provided by (used in) investing activities (5,776) (6,920) 14,955 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock in equity offerings, net of offeringcosts — 47,943 53,174 Proceeds from the issuance of long-term debt 10,000 14,958 — Payment of long-term debt — (16,345) (3,655)Extinguishment of debt — (437) — Net proceeds from issuance of common stock through equity plans and exerciseof warrants 1,869 1,757 246 Net cash provided by financing activities 11,869 47,876 49,765 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (28,363) 40,469 40,138 CASH AND CASH EQUIVALENTS—Beginning of period 88,401 47,932 7,794 CASH AND CASH EQUIVALENTS—End of period $60,038 $88,401 $47,932 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $1,752 $1,105 $1,632 NONCASH INVESTING AND FINANCING ACTIVITIES: Issuance of common stock upon cashless exercise of warrants $546 $8,428 $— Issuance of warrants for common stock $— $1,130 $5,828 Tenant improvement allowance receivable $239 $— $— Contingent put option liability $— $334 $— Purchases of property and equipment in Accounts payable $182 $— $— Purchases of property and equipment in Accrued liabilities $23 $725 $— See notes to financial statements. F-6 AcelRx Pharmaceuticals, Inc. Notes to Financial Statements 1. Organization and Summary of Significant Accounting Policies The Company AcelRx Pharmaceuticals, Inc., or the Company or AcelRx, was incorporated in Delaware on July 13, 2005 as SuRx, Inc., and in January 2006, theCompany changed its name to AcelRx Pharmaceuticals, Inc. The Company’s operations are based in Redwood City, California. AcelRx is a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for the treatment of acutepain. AcelRx intends to commercialize its product candidates in the United States and license the development and commercialization rights to itsproduct candidates for sale outside of the United States through strategic partnerships and collaborations. On July 25, 2014, the U.S. Food and DrugAdministration, or FDA, issued a Complete Response Letter, or CRL, for the Company’s new drug application, or NDA, for Zalviso™ (sufentanilsublingual tablet system), formerly known as ARX-01. In March 2015, the Company announced the receipt of correspondence from the FDA stating thatin addition to the bench testing and two Human Factors studies it has performed, an additional clinical study is needed to assess the risk of inadvertentdispensing and overall risk of dispensing failures. The proposed indication for Zalviso is for the management of moderate-to-severe acute pain in adultpatients in the hospital setting. Zalviso consists of sufentanil sublingual tablets delivered by the Zalviso System, a needle-free, handheld, patient-administered, pain management system (together, “Zalviso”). The Company has incurred recurring operating losses and negative cash flows from operating activities since inception and expects to continue to incurnegative cash flows until its product candidates are approved for marketing in the United States and other countries, in which it has and intends to licenseits products, which may never occur. In previous years, prior to the completion of the clinical development program for Zalviso and the commercialcollaboration of Zalviso, AcelRx was considered a development stage company. The Company has one business activity, which is the development and commercialization of product candidates for the treatment of pain, and a singlereporting and operating unit structure. Basis of Presentation The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates andassumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to makeestimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management evaluates its estimates onan ongoing basis including critical accounting policies. Estimates are based on historical experience and on various other market-specific and otherrelevant assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgmentsabout the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. Concentration of Risk The Company invests cash that is currently not being used for operational purposes in accordance with its investment policy in debt securities of the U.S.Treasury and U.S. government sponsored agencies and overnight deposits. The Company is exposed to credit risk in the event of default by theinstitutions holding the cash equivalents and available-for-sale securities to the extent recorded on the balance sheet. Our cash and cash equivalentbalances can be in excess of federally insured amounts. Cash, Cash Equivalents and Marketable Securities The Company considers all highly liquid investments with an original maturity (at date of purchase) of three months or less to be cash equivalents. Cashand cash equivalents consist of cash on deposit with banks and money market instruments. All marketable securities are classified as available-for-sale and consist of U.S. Treasury and U.S. government sponsored enterprise debt securities. Thesesecurities are carried at estimated fair value, which is based on quoted market prices or observable market inputs of almost identical assets, withunrealized gains and losses included in accumulated other comprehensive income (loss). The amortized cost of securities is adjusted for amortization ofpremiums and accretion of discounts to maturity. Such amortization and accretion is included in interest income or expense. The cost of securities sold isbased on specific identification. The Company’s investments are subject to a periodic impairment review for other-than-temporary declines in fair value.The Company’s review includes the consideration of the cause of the impairment including the creditworthiness of the security issuers, the number ofsecurities in an unrealized loss position, the severity and duration of the unrealized losses and the Company’s intent and ability to hold the investmentfor a period of time sufficient to allow for any anticipated recovery in the market value. When the Company determines that the decline in fair value of aninvestment is below its accounting basis and this decline is other-than-temporary, it reduces the carrying value of the security it holds and records a lossin the amount of such decline. F-7 AcelRx Pharmaceuticals, Inc. Notes to Financial Statements Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method overthe estimated useful lives of the assets, generally three to five years. Leasehold improvements are amortized over the shorter of the estimated useful life ofthe improvements or the remaining lease term. Impairment of Long-Lived Assets The Company periodically assesses the impairment of long-lived assets and, if indicators of asset impairment exist, the Company assesses therecoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through an analysis of theundiscounted future expected operating cash flows. If impairment is indicated, the Company records the amount of such impairment for the excess of thecarrying value of the asset over its estimated fair value. For example, purchased equipment and manufacturing-related facility improvements theCompany has made at Patheon’s facility in Ohio, are utilized for continued research and development, and potential commercial manufacturing of ourproduct candidates. If the Company does not receive regulatory approval for our product candidates, the Company may determine that it is no longerprobable that the Company will realize the future economic benefit associated with the costs of these assets through future manufacturing activities, andif so, the Company would record an impairment charge associated with these assets. As of December 31, 2014, the Company has not written down any ofits long-lived assets as a result of impairment. Restricted Cash Under the Company’s facility lease and corporate credit card agreements, the Company is required to maintain letters of credit as security for performanceunder these agreements. The letters of credit are secured by certificates of deposit in amounts equal to the letters of credit, which are classified as restrictedcash on the balance sheet. Contingent put option The contingent put option associated with the Company’s loan and security agreement with Hercules Technology II, L.P. and Hercules TechnologyGrowth Capital, Inc., collectively referred to as Hercules, is recorded as a liability. Changes in the fair value of the contingent put option are recognized asinterest income and other income (expense), net in the Statements of Comprehensive Loss. For additional information regarding the contingent putoption, see Note 6 “Long Term Debt.” Warrants Warrants issued in connection with the Company’s Private Placement, completed in June 2012, are recorded as liabilities as they have the potential forcash settlement upon the occurrence of certain transactions (as defined in the warrant; see Note 7 “Warrants”). Changes in the fair value of the warrants arerecognized as interest income and other income (expense), net in the Statements of Comprehensive Loss. Revenue Recognition The Company recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred orservices have been rendered; the fee is fixed or determinable; and collectability is reasonably assured. Collaboration Revenue Collaboration revenue, which is earned under license agreements with third parties, may include nonrefundable license fees, cost reimbursements,research and development services, commercial manufacturing services, contingent development and commercial milestones and royalties. F-8 AcelRx Pharmaceuticals, Inc. Notes to Financial Statements AcelRx accounts for multiple-element arrangements in accordance with ASC Topic 605-25, Revenue Recognition—Multiple-Element Arrangements, orASC 605-25.The Company evaluates if the deliverables in the arrangement represent separate units of accounting. In determining the units of accounting,AcelRx evaluates certain criteria, including whether the deliverables have value to our customers on a stand-alone basis. Factors considered in thisdetermination include whether the deliverable is proprietary to the Company, whether the customer can use the license or other deliverables for theirintended purpose without the receipt of the remaining elements, whether the value of the deliverable is dependent on the undelivered items, and whetherthere are other vendors that can provide the undelivered items. Deliverables that meet these criteria are considered a separate unit of accounting.Deliverables that do not meet these criteria are combined and accounted for as a single unit of accounting. For revenue agreements with multiple-element arrangements, such as the collaboration and license agreement with Grünenthal, the Company allocatesrevenue to each non-contingent element based on the relative selling price of each element. When applying the relative selling price method, theCompany determines the selling price for each deliverable using vendor-specific objective evidence, or VSOE, of selling price or third-party evidence, orTPE, of selling price. If neither exists the Company uses best estimated selling price, or BESP, for that deliverable. Revenue allocated is then recognizedwhen the four basic revenue recognition criteria are met for each element. VSOE is based on the price charged when the element is sold separately and is the price actually charged for that deliverable. Establishing VSOE may notbe possible for the elements of a license arrangement because each arrangement is unique, an arrangement typically consists of multiple elements andAcelRx has limited history of entering into license arrangements. When VSOE cannot be established, AcelRx attempts to establish the selling price of theelements of a license arrangement based on TPE. TPE is determined based on a competitor’s price for similar deliverables when sold separately. AcelRxmay not be able to determine TPE for license arrangements, as they contain a significant level of differentiation such that the comparable pricing of acompetitor’s license arrangement with similar functionality cannot be obtained, and AcelRx is therefore unable to reliably determine what a similarcompetitor’s license arrangement’s selling price would be on a standalone basis. When AcelRx is unable to establish the selling price of an element using VSOE or TPE, BESP is utilized in the allocation of the elements of thearrangement. The objective of the BESP is to determine the price at which AcelRx would transact a sale if the element of the license arrangement weresold on a standalone basis. The process for determining BESPs involves management’s judgment. AcelRx’ process considers multiple factors such as discounted cash flows,estimated direct expenses and other costs and available data, which may vary over time, depending upon the circumstances, and relate to eachdeliverable. If the estimated obligation period of one or more deliverables should change, the future amortization of the revenue would also change. AcelRx recognizes a contingent milestone payment as revenue in its entirety upon our achievement of the milestone. A milestone is substantive if theconsideration earned from the achievement of the milestone (i) is consistent with performance required to achieve the milestone or the increase in value tothe delivered item, (ii) relates solely to past performance and (iii) is reasonable relative to all of the other deliverables and payments within thearrangement. Research Grant Revenue In May 2011, the Company entered into an award contract with the US Army Medical Research and Materiel Command, or USAMRMC, to support thedevelopment of the Company’s new product candidate, ARX-04, a sufentanil sublingual tablet for the treatment of moderate-to-severe acute pain. Thegrant provides for the reimbursement of qualified expenses for research and development activities as defined under the terms of the grant agreement.Revenue under the grant agreement is recognized when the related qualified research expenses are incurred. Research and Development Expenses Research and development costs are charged to expense when incurred. Research and development expenses include salaries, employee benefits,including stock-based compensation, consultant fees, laboratory supplies, costs associated with clinical trials and manufacturing, including contractresearch organization fees, other professional services and allocations of corporate costs. The Company reviews and accrues clinical trial expenses basedon work performed, which relies on estimates of total costs incurred based on patient enrollment, completion of patient studies and other events. F-9 AcelRx Pharmaceuticals, Inc. Notes to Financial Statements Comprehensive Loss Comprehensive loss is comprised of net loss and other comprehensive income (loss) and is disclosed in the Statement of Comprehensive Loss. For theCompany, other comprehensive income (loss) consists of changes in unrealized gains and losses on the Company’s investments. Fair Value of Financial Instruments The Company measures and reports its cash equivalents, investments and financial liabilities at fair value. Fair value is defined as the exchange price thatwould be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in anorderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use ofobservable inputs and minimize the use of unobservable inputs. The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fairvalue measurements as follows: Level I—Unadjusted quoted prices in active markets for identical assets or liabilities; Level II—Inputs other than quoted prices included within Level I that are observable, unadjusted quoted prices in markets that are not active, orother inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities;and Level III—Unobservable inputs that are supported by little or no market activity for the related assets or liabilities. The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair valuemeasurement. Income Taxes Deferred tax assets and liabilities are measured based on differences between the financial reporting and tax basis of assets and liabilities using enactedrates and laws that are expected to be in effect when the differences are expected to reverse. The Company records a valuation allowance for the fullamount of deferred assets, which would otherwise be recorded for tax benefits relating to operating loss and tax credit carryforwards, as realization of suchdeferred tax assets cannot be determined to be more likely than not. Stock-Based Compensation Compensation expense for all share-based payment awards made to employees and directors, including employee stock options, restricted stock units andemployee share purchases related to the 2011 Employee Stock Purchase Plan, or ESPP, is based on estimated fair values at grant date. The Companydetermines the grant date fair value of the awards using the Black-Scholes option-pricing model and generally recognizes the fair value as stock-basedcompensation expense on a straight-line basis over the vesting period of the respective awards. The Black-Scholes option pricing model requires inputs such as expected term, expected volatility and risk-free interest rate. These inputs are subjectiveand generally require significant analysis and judgment to develop. Estimates of expected life are primarily determined using the simplified method inaccordance with guidance provided by the SEC. Such method was utilized as the Company did not believe its historical option exercise experience,which was limited, provided a reasonable basis upon which to estimate expected term. Volatility is derived from historical volatilities of several publiccompanies within AcelRx’s industry that are deemed to be comparable to AcelRx’s business because AcelRx’s has insufficient history on the volatility ofits common stock relative to the expected life assumptions used by the Company. The risk-free rate is based on the U.S. Treasury yield curve in effect atthe time of grant commensurate with the expected life assumption. Further, the Company estimates forfeitures at the time of grant and revises thoseestimates in subsequent periods if actual forfeitures differ from those estimates. Net Loss per Share of Common Stock The Company’s basic net loss per share of common stock is calculated by dividing the net loss by the weighted average number of shares of commonstock outstanding for the period. The diluted net loss per share of common stock is computed by giving effect to all potential common stock equivalentsoutstanding for the period determined using the treasury stock method. For purposes of this calculation, convertible preferred stock, options to purchasecommon stock, restricted stock subject to repurchase, warrants to purchase convertible preferred stock and warrants to purchase common stock wereconsidered to be common stock equivalents. In periods with a reported net loss, such common stock equivalents are excluded from the calculation ofdiluted net loss per share of common stock if their effect is antidilutive. For additional information regarding the net loss per share, see Note 11 “Net Lossper Share of Common Stock.” F-10 AcelRx Pharmaceuticals, Inc. Notes to Financial Statements Segment Information The Company operates in one operating segment and has operations solely in the United States. Recently Issued Accounting Pronouncements In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-15, Disclosure of Uncertaintiesabout an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 will explicitly require management to assess an entity’s ability to continue as agoing concern, and to provide related footnote disclosure in certain circumstances. The new standard will be effective for AcelRx beginning in fiscal2017. Earlier adoption is permitted. The Company is currently evaluating the potential impact of the adoption of ASU 2014-15. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, issued as a new Topic, Accounting Standards Codification (ASC)Topic 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. Thecore principle of the guidance is that a Company should recognize revenue to depict the transfer of promised goods or services to customers in an amountthat reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective for AcelRxbeginning in fiscal 2017 and can be adopted by the Company either retrospectively or as a cumulative-effect adjustment as of the date of adoption. TheCompany is currently evaluating the effect that adopting this new accounting guidance will have on its results of operations, cash flows and financialposition. 2. Investments and Fair Value Measurement Investments The Company classifies its marketable securities as available-for-sale and records its investments at fair value. Available-for-sale securities are carried atestimated fair value based on quoted market prices or observable market inputs of almost identical assets, with the unrealized holding gains and lossesincluded in accumulated other comprehensive income. Marketable securities which have maturities beyond one year as of the end of the reporting periodare classified as non-current. The table below summarizes the Company’s cash, cash equivalents and investments (in thousands): As of December 31, 2014 AmortizedCost GrossUnrealizedGains GrossUnrealizedLosses FairValue Cash and cash equivalents: Cash $60,005 $— $— $60,005 Money market funds 33 — — 33 Total cash and cash equivalents 60,038 — — 60,038 Marketable securities: U.S. government agency securities 15,316 — (4) 15,312 Total marketable securities 15,316 — (4) 15,312 Total cash, cash equivalents and investments $75,354 $— $(4) $75,350 As of December 31, 2013 AmortizedCost GrossUnrealizedGains GrossUnrealizedLosses FairValue Cash and cash equivalents: Cash $88,390 $— $— $88,390 Money market funds 11 — — 11 Total cash and cash equivalents 88,401 — — 88,401 Marketable securities: U.S. government agency securities 15,261 1 — 15,262 Total marketable securities 15,261 1 — 15,262 Total cash, cash equivalents and investments $103,662 $1 $— $103,663 None of the available-for-sale securities held by the Company had material unrealized losses and there were no realized losses for the years endedDecember 31, 2014 and 2013. There were no other-than-temporary impairments for these securities as of December 31, 2014 or 2013. As of December 31, 2014 and 2013, the contractual maturity of all investments held was less than one year. F-11 AcelRx Pharmaceuticals, Inc. Notes to Financial Statements Fair Value Measurement The Company’s financial instruments consist of Level I and Level II assets and Level III liabilities. Level I securities include highly liquid money marketfunds and are valued based on quoted market prices. For Level II instruments, the Company estimates fair value by utilizing third party pricing services indeveloping fair value measurements where fair value is based on valuation methodologies such as models using observable market inputs, includingbenchmark yields, reported trades, broker/dealer quotes, bids, offers and other reference data. Such Level II instruments typically include U.S. treasury andU.S. government agency obligations. As of December 31, 2014 and December 31, 2013, the Company held, in addition to Level I and Level II assets, acontingent put option liability associated with the Company’s loan and security agreement with Hercules Technology II, L.P. and Hercules TechnologyGrowth Capital, Inc., collectively referred to as Hercules, which was classified as a Level III liability. The Company’s estimate of fair value of thecontingent put option liability was determined by using a risk-neutral valuation model, wherein the fair value of the underlying debt facility is estimatedboth with and without the presence of the default provisions, holding all other assumptions constant. The resulting difference between the two estimatedfair values is the estimated fair value of the default provisions, or the contingent put option. The fair value of the underlying debt facility is estimated bycalculating the expected cash flows in consideration of an estimated probability of default and expected recovery rate in default, and discounting suchcash flows back to the reporting date using a risk-free rate. As of December 31, 2014 and 2013, the Company also held a Level III liability associated withwarrants, or PIPE warrants, issued in connection with the Company’s private placement equity offering, completed in June 2012. For a detaileddescription, see Note 9 “Stockholders’ Equity.” The PIPE warrants are considered a liability and are valued using the Black-Scholes option-pricingmodel, the inputs for which include exercise price of the PIPE warrants, market price of the underlying common shares, expected term, volatility based ona group of the Company’s peers and the risk-free rate corresponding to the expected term of the PIPE warrants. Changes to any of these inputs can have asignificant impact to the estimated fair value of the PIPE warrants. The following table sets forth the fair value of the Company’s financial assets and liabilities by level within the fair value hierarchy (in thousands): As of December 31, 2014 Fair Value Level I Level II Level III Assets Money market funds $33 $33 $— $— U.S. government agency obligations 15,312 — 15,312 — Total assets measured at fair value $15,345 $33 $15,312 $— Liabilities PIPE warrant $5,577 $— $— $5,577 Contingent put option 282 — — 282 Total liabilities measured at fair value $5,859 $— $— $5,859 As of December 31, 2013 Fair Value Level I Level II Level III Assets Money market funds $11 $11 $— $— U.S. government agency obligations 15,262 — 15,262 — Total assets measured at fair value $15,273 $11 $15,262 $— Liabilities PIPE warrant $13,111 $— $— $13,111 Contingent put option 334 — — 334 Total liabilities measured at fair value $13,445 $— $— $13,445 F-12 The following table sets forth the assumptions used in the Black-Scholes option-pricing model to estimate the fair value of the PIPE warrants as ofDecember 31, 2014 and 2013: As ofDecember 31,2014 As ofDecember 31,2013 Market Price $6.73 $11.31 Exercise Price $3.40 $3.40 Risk-free interest rate 1.10% 1.27%Expected volatility 61.0% 69.0%Expected life (in years) 2.92 3.92 Expected dividend yield 0.0% 0.0% The following table sets forth a summary of the changes in the fair value of the Company’s Level III financial liabilities for the years ended December 31,2014 and 2013 (in thousands): Year EndedDecember 31,2014 Fair value—beginning of period $13,445 Change in fair value of PIPE warrants (7,534)Change in fair value of contingent put option associated with Amended Loan Agreement withHercules (52)Fair value—end of period $5,859 Year EndedDecember 31,2013 Fair value—beginning of period $7,500 Change in fair value of PIPE warrants 5,693 Change in fair value of contingent put option associated with 2011 loan and security agreementwith Hercules (82)Addition of contingent put option associated with 2013 loan and security agreement with Hercules 334 Fair value—end of period $13,445 3. Property and Equipment Property and equipment consist of the following (in thousands): As of December 31, 2014 2013 Research equipment $2,549 $2,014 Leasehold improvements 4,469 1,425 Computer equipment and software 334 189 Construction in process 4,844 3,277 Tooling 527 318 Furniture and fixtures 50 59 12,773 7,282 Less accumulated depreciation and amortization (2,955) (2,103)Property and equipment, net $9,818 $5,179 Depreciation and amortization expense was $0.9 million, $0.6 million and $0.5 million during the years ended December 31, 2014, 2013 and 2012,respectively. Property and equipment, net in the balance sheet at December 31, 2014, includes $3.8 million related to certain modifications the Companyhas made at Patheon Pharmaceutical Inc.’s, or Patheon’s, Cincinnati facility under the terms of the Capital Expenditure and Equipment Agreement, or theCapital Agreement. F-13 AcelRx Pharmaceuticals, Inc. Notes to Financial Statements 4. Research Grant In May 2011, AcelRx received a grant from the US Army Medical Research and Materiel Command, or USAMRMC, in which the USAMRMC granted$5.6 million to the Company in order to support the development of a new product candidate, ARX-04, a sufentanil sublingual tablet for the treatment ofmoderate-to-severe acute pain. Under the terms of the grant, the USAMRMC will reimburse the Company for development, manufacturing and clinicalcosts necessary to prepare for and complete the planned Phase 2 dose-finding trial in a study of acute moderate-to-severe pain, and to prepare to enterPhase 3 development. The grant gives the USAMRMC the option to extend the term of the grant and provide additional funding for the research. As ofDecember 31, 2013, the full amount of the grant, $5.6 million, had been recognized as revenue. Revenue is recognized based on expenses incurred by AcelRx in conducting research and development activities set forth in the agreement. Revenueattributable to the research and development performed under the USAMRMC grant was $0, $2.1 million and $2.4 million for the years endedDecember 31, 2014, 2013, and 2012, respectively. 5. Collaboration On December 16, 2013, AcelRx and Grünenthal GmbH, or Grünenthal, entered into a Collaboration and License Agreement, or the License Agreement,and related Manufacture and Supply Agreement, or the Manufacturing Agreement, and together with the License Agreement, or the Agreements. TheLicense Agreement grants Grünenthal rights to commercialize Zalviso the Company’s novel sublingual patient-controlled analgesia, or PCA, system, orthe Product, in the countries of the European Union, Switzerland, Liechtenstein, Iceland, Norway and Australia, or the Territory, for human use in paintreatment within or dispensed by hospitals hospices, nursing homes and other medically-supervised settings, or the Field. The Company retains rightswith respect to the Product in countries outside the Territory, including the United States, Asia and Latin America. Under the Supply Agreement, theCompany will exclusively manufacture and supply the Product to Grünenthal for the Field in the Territory. License Agreement Under the terms of the License Agreement, Grünenthal has the exclusive right to commercialize the Product in the Field in the Territory. The Companyretains control of clinical development, while Grünenthal and the Company will be responsible for certain development activities pursuant to adevelopment plan as agreed between the parties. The Company will not receive separate payment for such development activities. Grünenthal isexclusively responsible for marketing approval applications and other regulatory filings relating to the sufentanil sublingual tablet drug cartridge for theProduct in the Field in the Territory, while the Company is responsible for the CE Mark and other regulatory filings relating to device portions of theProduct. A CE Mark (#611742) for Zalviso was obtained in the fourth quarter 2014 which specifies AcelRx as the device design authority andmanufacturer. The Company received an upfront non-refundable cash payment of $30.0 million in December 2013, and a milestone payment of $5.0 million related tothe MAA submission in the third quarter of 2014. The Company is eligible to receive an additional $15.0 million milestone payment upon the approvalof the MAA, if approved. If the MAA is approved, the Company is eligible to receive approximately $200.0 million in additional milestone payments,based upon successful regulatory and product development efforts ($28.5 million) and net sales target achievements ($171.5 million). Grünenthal willalso make tiered royalty and supply and trademark fee payments in the mid-teens up to the mid-twenties percent range on net sales of Zalviso. Unless earlier terminated, the License Agreement continues in effect until the expiration of the obligation of Grünenthal to make royalty and supply andtrademark fee payments, which supply and trademark fee continues for so long as the Company continues to supply the Product to Grünenthal. TheLicense Agreement is subject to earlier termination in the event the parties mutually agree, by a party in the event of an uncured material breach by theother party, upon the bankruptcy or insolvency of either party, or by Grünenthal for convenience. Manufacturing Agreement Under the terms of the Manufacturing Agreement, the Company will manufacture and supply the Product for use in the Field for the Territory exclusivelyfor Grünenthal. Grünenthal shall purchase from AcelRx, during the first five years after the effective date of the Manufacturing Agreement, 100% andthereafter 80% of Grünenthal’s and its sublicensees’ and distributors’ requirements of Product for use in the Field for the Territory. The Product will besupplied at the Company’s fully burdened manufacturing cost (as defined in the Manufacturing Agreement). The Manufacturing Agreement requires theCompany to use commercially reasonable efforts to enter stand-by contracts with third parties providing significant supply and manufacturing servicesand under certain specified conditions permits Grünenthal to use a third party back-up manufacturer to manufacture the Product for Grünenthal’scommercial sale in the Territory. F-14 AcelRx Pharmaceuticals, Inc. Notes to Financial Statements Unless earlier terminated, the Manufacturing Agreement continues in effect until the later of the expiration of the obligation of Grünenthal to makeroyalty and supply and trademark fee payments or the end of any transition period for manufacturing obligations due to the expiration or termination ofthe License Agreement. The Manufacturing Agreement is subject to earlier termination in connection with certain termination events in the LicenseAgreement, in the event the parties mutually agree, by a party in the event of an uncured material breach by the other party or upon the bankruptcy orinsolvency of either party. The Company identified the following four significant non-contingent performance deliverables under the agreements: 1) intellectual property (license),2) the obligation to provide research and development services, 3) the significant and incremental discount on the manufacturing of Zalviso forcommercial purposes, and 4) the obligation to participate on the joint steering committee. The Company considered the provisions of the multiple-element arrangement guidance in determining whether the deliverables outlined above havestandalone value and thus should be treated as separate units of accounting. Company’s management determined that the license has standalone valueand represents a separate unit of accounting because the rights conveyed permit Grünenthal to perform all efforts necessary to commercialize and beginselling the product upon regulatory approval. In addition, Grünenthal has the appropriate development, regulatory and commercial expertise withproducts similar to the product licensed under the agreement and has the ability to engage third parties to manufacture the product allowing Grünenthalto realize the value of the license without receiving any of the remaining deliverables. Grünenthal can also sublicense its license rights to third parties.Also, the Company’s management determined that the research services, committee participation and implied discount associated with the manufacturingservices each represent individual units of accounting as Grünenthal could perform such services and/or could acquire these on a separate basis. The Company developed best estimates of selling prices for each deliverable in order to allocate the noncontingent arrangement consideration to the fourunits of accounting. The Company’s management determined the best estimate of selling price for the license based on Grünenthal’s estimated future cash flows arising fromthe arrangement. Embedded in the estimate were significant assumptions regarding regulatory expenses, revenue, including potential customer market forthe product and product price, costs to manufacture the product and the discount rate. The Company’s management determined the best estimate ofselling price of the research and development services and committee participation based on the nature and timing of the services to be performed and inconsideration of personnel and other costs incurred in the delivery of the services. For the discount on manufacturing services, Company’s managementestimated the selling price based on the market level of contract manufacturing margin it could have received if it were engaged to supply products to acustomer in a separate transaction. The Agreements entitle the Company to receive additional payments upon the achievement of certain development and sales milestones. Based on ASCTopic 605-28, Revenue Recognition — Milestone Method, the Company evaluates contingent milestones at inception of the agreement, and recognizesconsideration that is contingent upon the achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if themilestone is considered substantive in its entirety. Milestones are events which have the following characteristics: (i) they can be achieved based inwhole or in part on either the Company’s performance or on the occurrence of a specific outcome resulting from the Company’s performance, (ii) therewas substantive uncertainty at the date the agreement was entered into that the event would be achieved and, (iii) they would result in additionalpayments due to the Company. A milestone is considered substantive if the following criteria are met: (i) the consideration is commensurate with either(1) the entity’s performance to achieve the milestone, or (2) the enhancement of the value of the delivered item (s) as a result of a specific outcomeresulting from the entity’s performance to achieve the milestone, (ii) the consideration relates solely to past performance and, (iii) the consideration isreasonable relative to all of the other deliverables and payment terms, including other potential milestone consideration, within the arrangement. The substantive milestone payments will be recognized as revenue in their entirety upon the achievement of each substantive milestone. Based on thecriteria noted above, the identified substantive milestones in the agreement pertain to post approval product enhancements, expanded marketopportunities and manufacturing efficiencies for Zalviso. Each of these potential achievements is based primarily on the Company’s performance andinvolves substantive uncertainty as achievement of these milestones require future research, development and regulatory activities, which are inherentlyuncertain in nature. The Company determined that the consideration for each milestone was commensurate with the Company’s performance to achievethe milestone, including future research, development, manufacturing and regulatory activities and that the consideration is reasonable relative to all ofthe other deliverables and payments within the arrangement. Aggregate potential payments for these milestones total $28.5 million. F-15 AcelRx Pharmaceuticals, Inc. Notes to Financial Statements In addition to substantive milestones, two milestones associated with the Agreements were deemed not to be substantive. These milestones pertain toregulatory developments for Zalviso in Europe, which Company’s management deemed to be not substantive due to the level of performance associatedwith future achievement of these milestones. Aggregate potential payments for these milestones total $20.0 million. In July 2014, Grünenthal submitted aMarketing Authorization Application, or MAA, to the European Medicines Agency, or EMA, for Zalviso for the management of moderate-to-severe acutepain in adult patients in a medically supervised environment. Under the terms of the License Agreement with Grünenthal, the Company received a cashpayment of $5.0 million for the MAA submission in the third quarter of 2014. The Company is eligible to receive an additional $15.0 million milestonepayment upon the approval of the MAA. The Agreements also include milestone payments related to specified net sales targets, totaling $171.5 million. The sales-based milestones do not meetthe definition of a milestone under ASU 2010-17 because the achievement of these milestones is solely dependent on counter-party performance and noton any performance obligations of the Company. The Company allocated the $30.0 million upfront fee across the four deliverables based on estimated selling prices and during the year ended December31, 2013, recognized $27.4 million attributable to the license. As mentioned above, the Company received a milestone payment of $5.0 million related tothe MAA submission, of which $4.6 million was recognized during the year ended December 31, 2014. In addition, the Company recognized $0.6 millionof previously deferred revenue related to research and development services and its obligation to participate in the joint steering committee under thecollaboration agreement during the year ended December 31, 2014. As of December 31, 2014, the Company had a deferred revenue balance of$2.4 million. There were no other milestone payments received or recognized under these Agreements during the year ended December 31, 2014. 6. Long-Term Debt Hercules Loan and Security Agreements In June 2011, AcelRx entered into a loan and security agreement with Hercules, under which AcelRx borrowed $20.0 million in two tranches of $10.0million each, represented by secured convertible term promissory notes. The Company’s obligations associated with the agreement are secured by asecurity interest in substantially all of its assets, other than its intellectual property. The Company borrowed the first tranche of $10.0 million upon the closing of the transaction on June 29, 2011 and borrowed the second tranche of $10.0million in December 2011. The Company used a portion of the proceeds from the first tranche to repay the remaining obligations under that certain loanand security agreement between the Company and Pinnacle Ventures, L.L.C., or Pinnacle Ventures, dated September 16, 2008. The agreement withPinnacle Ventures is described further below. The interest rate for each tranche was 8.50%. In connection with the loan, the Company issued Herculesseven-year warrants to purchase an aggregate of 274,508 shares of common stock at a price of $3.06 per share. See Note 7 “Warrants,” for further description. On December 16, 2013, AcelRx entered into an Amended and Restated Loan and Security Agreement, or the Loan Agreement with Hercules TechnologyII, L.P. and Hercules Technology Growth Capital, Inc., together, the Lenders, under which the Company may borrow up to $40.0 million in three tranches.The loans are represented by secured convertible term promissory notes, collectively, the Notes. The Loan Agreement amends and restates the Loan andSecurity Agreement between the Company and the Lenders dated as of June 29, 2011, or the Original Loan Agreement, as noted above. The Companyborrowed the first tranche of $15.0 million upon closing of the transaction on December 16, 2013, and the second tranche of $10.0 million on June 16,2014. The Company used approximately $8.6 million of the proceeds from the first tranche to repay its obligations under the Original Loan Agreement.The Company recorded the new debt at an estimated fair value of $24.9 million and $14.3 million as of December 31, 2014 and December 31, 2013,respectively. F-16 AcelRx Pharmaceuticals, Inc. Notes to Financial Statements In accordance with ASC Topic No. 470, “Debt – Modifications and Extinguishments” (Topic No. 470), the amendment noted above was determined to bean extinguishment of the existing debt and an issuance of new debt. The Company reached this conclusion based on a comparison of discountedremaining cash flows of the original loan agreement compared to the amended loan agreement, the result of which was a greater than 10% difference indiscounted cash flows. The Company determined this difference to be significant and recorded the new debt at estimated fair value. As a result of the extinguishment, the Company recorded a $1.2 million loss on extinguishment of debt which was recorded as interest income and otherincome (expense), net on the Statements of Comprehensive Loss during the year ended December 31, 2013. The loss on extinguishment was a non-cashwrite off, consisting of deferred debt charges, the unamortized portion of the original issue discount related to the Original Loan Agreement and other feesassociated with extinguishing the debt, including the estimated fair value of warrants issued in connection with the amended loan agreement, facility andlegal fees associated with the amended loan agreement and the value of the contingent put option liability associated with the original loan agreement atthe time of the amendment. On September 24, 2014, the Company entered into an amendment, or the Amendment, to the Amended Loan Agreement with Hercules. The Amendmentextends the time period under which the Company can draw down the third tranche, of up to $15.0 million, from March 15, 2015 to August 1, 2015,subject to the Company obtaining approval for Zalviso from the U.S. Food and Drug Administration. The Company does not believe it will receive FDAapproval of Zalviso by August 1, 2015 and as such, will not have access to the third tranche under the current agreement. The interest rate for each tranche will be calculated at a rate equal to the greater of either (i) 9.10% plus the prime rate as reported from time to time in TheWall Street Journal minus 5.25%, and (ii) 9.10%. Payments under the Amended Loan Agreement are interest only until April 1, 2015 followed by equalmonthly payments of principal and interest through the scheduled maturity date on October 1, 2017, or the Loan Maturity Date. In addition, a finalpayment equal to $1.7 million will be due on the Loan Maturity Date, or such earlier date specified in the Amended Loan Agreement. The Company’sobligations under the Amended Loan Agreement are secured by a security interest in substantially all of its assets, other than its intellectual property. If the Company prepays the Amended Loan Agreement prior to maturity, it will pay Hercules a prepayment charge, based on a percentage of the thenoutstanding principal balance, equal to 3% if the prepayment occurs prior to December 16, 2014, 2% if the prepayment occurs after December 16, 2014,but prior to December 16, 2015, or 1% if the prepayment occurs after December 16, 2015. Subject to certain conditions and limitations set forth in the Amended Loan Agreement, the Company has the right to convert up to $5.0 million ofscheduled principal installments under the Notes into freely tradeable shares of the Company’s common stock, or Common Stock. The number of sharesof Common Stock that would be issued upon conversion of the Amended Notes would be equal to the number determined by dividing (x) the product of(A) the principal amount to be paid in shares of Common Stock and (B) 103%, by (y) $9.30 (subject to certain proportional adjustments as provided for inthe Amended Loan Agreement). The Amended Loan Agreement includes customary affirmative and restrictive covenants, but does not include any financial maintenance covenants, andalso includes standard events of default, including payment defaults, breaches of covenants following any applicable cure period, a material impairmentin the perfection or priority of Hercules’ security interest or in the value of the collateral, and events relating to bankruptcy or insolvency. Upon theoccurrence of an event of default, a default interest rate of an additional 5% may be applied to the outstanding loan balances, and Hercules may declareall outstanding obligations immediately due and payable and take such other actions as set forth in the Amended Loan Agreement. In connection with the Amended Loan Agreement, the Company issued a warrant to each Lender which, collectively, are exercisable for an aggregate of176,730 shares of common stock and each carry an exercise price of $6.79 per share. See Note 7 “Warrants,” for further description. Upon an event of default, including a change of control, Hercules has the option to accelerate repayment of the Amended Loan Agreement, includingpayment of any applicable prepayment charges, which range from 1%-3% of the outstanding loan balance and accrued interest, as well as a final paymentfee of $1.7 million. This option is considered a contingent put option liability, as the holder of the loan may exercise the option in the event of default,and is considered an embedded derivative, which must be valued and separately accounted for in the Company’s financial statements. As the amendmentof the loan agreement was considered an extinguishment, the contingent put option liability associated with the Original Loan Agreement, which had anestimated fair value of $32,000 at the time of the amendment, was written off as a part of the loss on extinguishment, and a new contingent put optionliability was established. As of December 31, 2014 and December 31, 2013, the estimated fair value of the contingent put option liability was $282,000and $334,000, respectively, which was determined by using a risk-neutral valuation model, wherein the fair value of the underlying debt facility isestimated both with and without the presence of the default provisions, holding all other assumptions constant. The resulting difference between the twoestimated fair values is the estimated fair value of the default provisions, or the contingent put option. The fair value of the underlying debt facility isestimated by calculating the expected cash flows in consideration of an estimated probability of default and expected recovery rate in default, anddiscounting such cash flows back to the reporting date using a risk-free rate. The contingent put option liability was recorded as a debt discount to theloan and consequently a reduction to the carrying value of the loan. The contingent put option liability is revalued at the end of each reporting periodand any change in the fair value is recognized in interest income and other income (expense), net in the Statements of Comprehensive Loss. F-17 AcelRx Pharmaceuticals, Inc. Notes to Financial Statements As of December 31, 2014, the Company had outstanding borrowings under the Amended Loan Agreement of $25.0 million. Interest expense related to theAmended Loan Agreement was $2.6 million for the year ended December 31, 2014, $0.5 million of which represented amortization of the debt discount. As of December 31, 2013, the Company had outstanding borrowings under the Amended Loan Agreement of $15.0 million. Amortization of the debtdiscount prior to amending the Hercules loan and security agreement in December 2013, which was recorded as interest expense, was $0.4 million for theyear ended December 31, 2013. As of December 31, 2012, the Company had outstanding borrowings under the Hercules loan and security agreement of $16.0 million, net of debtdiscount of $0.5 million. Amortization of the debt discount, which was recorded as interest expense, was $0.5 million for the year ended December 31,2012. Future Payments on Long-Term Debt The following table summarizes our outstanding future payments associated with the Company’s long-term debt as of December 31, 2014 (in thousands): 2015 $8,982 2016 11,218 2017 10,176 Total minimum payments 30,376 Less amount representing interest (3,676)Notes payable, gross 26,700 Balloon payment (1,700)Unamortized discount on notes payable (95) 24,905 Less current portion of notes payable, including unamortized discount 6,859 Notes payable, less current portion $18,046 7. Warrants Series A Warrants As of December 31, 2014, warrants to purchase 3,425 shares of common stock had not been exercised and were still outstanding. These warrants expire inMarch 2017. Pinnacle Warrants In February 2013, warrants to purchase 228,264 shares were net exercised, for 58,580 shares of common stock. As of December 31, 2014, no warrants topurchase shares of common stock issued to Pinnacle were outstanding. Hercules Warrants In connection with the Amended Loan Agreement, executed in December 2013, the Company issued warrants to Hercules which are exercisable for anaggregate of 176,730 shares of common stock with an exercise price of $6.79 per share (the “Warrants”). Each Warrant may be exercised on a cashlessbasis. The Warrants are exercisable for a term beginning on the date of issuance and ending on the earlier to occur of five years from the date of issuanceor the consummation of certain acquisitions of the Company as set forth in the Warrants. The number of shares for which the Warrants are exercisable andthe associated exercise price are subject to certain proportional adjustments as set forth in the Warrants. The Company estimated the fair value of thesewarrants as of the issuance date to be $1.1 million, which was used in the estimating the fair value of the amended debt instrument and was recorded asequity. The fair value of the warrants was calculated using the Black-Scholes option-valuation model, and was based on the strike price of $6.79, thestock price at issuance of $9.67, the five-year contractual term of the warrants, a risk-free interest rate of 1.55%, expected volatility of 71% and 0%expected dividend yield. F-18 AcelRx Pharmaceuticals, Inc. Notes to Financial Statements As of December 31, 2014, warrants to purchase 176,730 shares of common stock issued to Hercules had not been exercised and were still outstanding.These warrants expire in December 2018. In connection with the original loan and security agreement with Hercules, executed in June 2011, the Company issued to Hercules warrants to purchasean aggregate of 274,508 shares of common stock at a price of $3.06 per share. The warrants may be exercised on a cashless basis. The warrants areexercisable for a term beginning on the date of issuance and ending on the earlier to occur of seven years from the date of issuance or the consummationof certain acquisitions of the Company as set forth in the warrants. During June and July 2013, warrants to purchase 274,508 shares were net exercised, for183,404 shares of common stock. 2012 Private Placement Warrants In connection with the Private Placement, completed in June 2012, the Company issued PIPE warrants to purchase up to 2,630,103 shares of commonstock. The per share exercise price of the PIPE warrants was $3.40 which equals the closing consolidated bid price of the Company’s common stock onMay 29, 2012, the effective date of the Purchase Agreement. The PIPE warrants issued in the Private Placement became exercisable six months after theissuance date, and expire on the five year anniversary of the initial exercisability date. Under the terms of the PIPE warrants, upon certain transactions,including a merger, tender offer, sale of all or substantially all of the assets of the Company or if a person or group shall become the owner of 50% of theCompany’s issued and outstanding common stock, which is outside of the Company’s control, each PIPE warrant holder may elect to receive a cashpayment in exchange for the warrant, in an amount determined by application of the Black-Scholes option-pricing model. Accordingly, the PIPE warrantswere recorded as a liability at fair value, as determined by the Black-Scholes option-pricing model, and then marked to fair value each reporting period,with changes in estimated fair value recorded through the Statements of Comprehensive Loss in interest income and other income (expense), net. TheBlack-Scholes assumptions used to value the PIPE warrants are disclosed in Note 2 “Investments and Fair Value Measurement.” Upon execution of the Purchase Agreement, the fair value of the PIPE warrants was estimated to be $5.8 million, which was recorded as a liability. As ofDecember 31, 2014, the fair value of the PIPE warrants was estimated to be $5.6 million. The change in fair value for the year ended December 31, 2014,which was recorded as other income, was $7.0 million. The change in fair value for the year ended December 31, 2013, which was recorded as otherexpense, was $14.1 million. During the year ended December 31, 2014, PIPE warrants to purchase 135,000 shares were net exercised for 91,488 shares of common stock. During theyear ended December 31, 2013, warrants to purchase 1,135,589 shares were net exercised, for 808,078 shares of common stock. As of December 31, 2014,PIPE warrants to purchase 1,359,514 shares of common stock issued in connection with the Private Placement had not been exercised and wereoutstanding. These warrants expire in November 2017. 8. Commitments and Contingencies Operating Leases In December 2011, the Company entered into a non-cancelable lease agreement for approximately 13,787 square feet of office and laboratory facilities inRedwood City, California, which serve as the Company headquarters, effective April 2012. The lease agreement expires in May 2016. Rent expense fromthe facility lease is recognized on a straight-line basis from the inception of the lease in December 2011, the early access date, through the end of thelease. Prior to April 2012, the Company was subject to a non-cancelable lease agreement for approximately 11,305 square feet of office and laboratory facilitiesin Redwood City, California, which served as the Company headquarters for the duration of the lease term. The lease term commenced in April 2007 andexpired in April 2012. Rent expense from the facility lease was recognized on a straight-line basis from the inception of the lease in January 2007, theearly access date, through the end of the lease. F-19 AcelRx Pharmaceuticals, Inc. Notes to Financial Statements In May 2014, the Company entered into an amendment, or the Lease Amendment, to that certain lease dated December 21, 2011, with Metropolitan LifeInsurance Company, or the Existing Lease, for 13,787 square feet of space located at 301 Galveston Drive, Redwood City, California, or the CurrentPremises. Pursuant to the Lease Amendment, the term of the Existing Lease has been extended for a period of twenty (20) months and twenty-two (22)days and expiring January 31, 2018, or the Expiration Date, unless sooner terminated pursuant to the terms of the Existing Lease. In addition, the LeaseAmendment included a new lease on an additional 12,106 square feet of office space, or the Expansion Space, which is adjacent to the currentpremises. The new lease for the Expansion Space has a term of 42 months commencing on August 1, 2014, and expiring on the Expiration Date. TheCompany has an option to extend the term of the Lease Amendment for an additional five years, which would commence upon the Expiration Date, at amarket rate determined according to the Existing Lease. Rent expense was $0.5 million, $0.3 million and $0.3 million during the years ended December 31, 2014, 2013 and 2012, respectively. Future minimum payments under the lease agreement as of December 31, 2014 are as follows (in thousands): Year Ending December 31: 2015 $683 2016 717 2017 737 2018 62 Total minimum payments $2,199 In addition, the Company will pay the Landlord specified percentages of certain operating expenses and taxes related to the leased facility incurred bythe Landlord. Litigation On October 1, 2014, a securities class action complaint was filed in the U.S. District Court for the Northern District of California against AcelRx andcertain of the Company’s current and former officers. The complaint alleges that between December 2, 2013 and September 25, 2014, AcelRx and certainof the Company’s officers violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 in connection with statements related to theCompany’s lead drug candidate, Zalviso. The complaint seeks unspecified damages, interest, attorneys’ fees, and other costs. On December 1, 2014, threepurported shareholders filed motions to appoint lead plaintiff and to appoint lead counsel. On February 24, 2015, the court issued an order appointing thelead plaintiff and lead counsel in the matter. Lead Plaintiff has until April 10, 2015 to file an amended complaint. The last day for the Company torespond to the amended complaint is May 26, 2015. The Company believes that it has meritorious defenses and intends to defend against this lawsuitvigorously. From time to time the Company may be involved in additional legal proceedings arising in the ordinary course of business. The Company does not havecontingent liabilities established for any litigation matters. Manufacturing Agreements Patheon In January 2013, the Company and Patheon entered into a Manufacturing Services Agreement, or the Services Agreement, and a related Amended andRestated Capital Expenditure and Equipment Agreement, or the Amended Capital Agreement, relating to the manufacture of sufentanil sublingualtablets, or the Product, for use with the Company’s Zalviso System. Under the terms of the Services Agreement, the Company has agreed to purchase, subject to Patheon’s continued material compliance with the terms ofthe Services Agreement, all of its Product requirements for the United States, Canada and Mexico from Patheon during the Initial Term of the ServicesAgreement (as defined below), and at least eighty percent (80%) of its Product requirements for such territories after the Initial Term. F-20 AcelRx Pharmaceuticals, Inc. Notes to Financial Statements The term of the Services Agreement extends until December 31, 2017, or the Initial Term, and will automatically renew thereafter for periods of two years,unless terminated by either party upon eighteen months’ prior written notice; provided, however, that the Services Agreement may not be terminatedwithout cause prior to the end of the Initial Term. Under the terms of the Amended Capital Agreement, the Company has made and has the option to make certain future modifications to Patheon’sCincinnati facility and which would be the responsibility of the Company. If additional equipment and facility modifications are required to meet theCompany’s Product needs, the Company may be required to contribute to the cost of such additional equipment and facility modifications. The AmendedCapital Agreement also requires that the Company make payments in 2012 and 2013 totaling $480,000, which the Company made, to Patheon topartially offset taxes incurred and paid by Patheon in connection with facility modifications already completed by Patheon. There were no such paymentsdue in 2014. The Company can seek reimbursement from Patheon for these payments if it receives approval from the FDA for Zalviso. The AmendedCapital Agreement further requires that the Company pay a maximum “overhead fee” of $200,000 annually during the term of the Services Agreement,which amount may be reduced to $0 based on the amount of annual revenues earned by Patheon under the Services Agreement and the pre-existingdevelopment agreements. No fee was due in 2013 or 2014 based on the amount of revenues earned by Patheon from the Company. Expenditures associated with the aforementioned agreements are primarily driven by the potential commercial requirements and demand for theCompany’s products, none of which have been approved for commercialization; accordingly, the amounts and timing of such future expenditures cannotbe determined at this time. Grünenthal On December 16, 2013, the Company and Grünenthal GmbH, or Grünenthal, entered into a Collaboration and License Agreement, or the LicenseAgreement, and related Manufacture and Supply Agreement, or the Manufacturing Agreement, and together with the License Agreement, the Agreements.The License Agreement grants Grünenthal rights to commercialize Zalviso, the Company’s novel sublingual patient-controlled analgesia, or PCA,system, or the Product, in the countries of the European Union, Switzerland, Liechtenstein, Iceland, Norway and Australia, or the Territory, for human usein pain treatment within or dispensed by hospitals hospices, nursing homes and other medically-supervised settings, or the Field. Under the terms of the Manufacturing Agreement, the Company will manufacture and supply the Product for use in the Field for the Territory exclusivelyfor Grünenthal. Grünenthal shall purchase from AcelRx, during the first five years after the effective date of the Manufacturing Agreement, 100% andthereafter 80% of Grünenthal’s and its sublicensees’ and distributors’ requirements of Product for use in the Field for the Territory. The Product will besupplied at the Company’s fully burdened manufacturing cost (as defined in the Manufacturing Agreement). The Manufacturing Agreement requires theCompany to use commercially reasonable efforts to enter stand-by contracts with third parties providing significant supply and manufacturing servicesand under certain specified conditions permits Grünenthal to use a third party back-up manufacturer to manufacture the Product for Grünenthal’scommercial sale in the Territory. Unless earlier terminated, the Manufacturing Agreement continues in effect until the later of the expiration of the obligation of Grünenthal to makeroyalty and supply and trademark fee payments or the end of any transition period for manufacturing obligations due to the expiration or termination ofthe License Agreement. The Manufacturing Agreement is subject to earlier termination in connection with certain termination events in the LicenseAgreement, in the event the parties mutually agree, by a party in the event of an uncured material breach by the other party or upon the bankruptcy orinsolvency of either party. Under the Supply Agreement, the Company will exclusively manufacture and supply the Product to Grünenthal for the Field in the Territory. Expenditures associated with the aforementioned agreements are primarily driven by the potential commercial requirements and demand for theCompany’s products, none of which are currently approved for commercial use; accordingly, the amounts and timing of such future expenditures cannotbe determined at this time. 9. Stockholders’ Equity Common Stock Public Offerings On May 19, 2014, the Company filed with the Securities and Exchange Commission, or SEC, a shelf Registration Statement on Form S-3, as amended onForm S-3/A on July 6, 2014. The shelf Registration Statement (File Number 333-196089) was declared effective by the SEC on July 12, 2014, providingthe Company with the ability to offer and sell up to an aggregate of $150 million of common stock from time to time in one or more offerings. The termsof any such future offering would be established at the time of such offering. F-21 AcelRx Pharmaceuticals, Inc. Notes to Financial Statements On July 23, 2013, AcelRx completed an underwritten public offering of 4,370,000 shares of common stock, at a price of $11.65 per share to the public.The total gross proceeds of this offering were $50.9 million with net proceeds to AcelRx of $47.9 million after deducting underwriting discounts andcommissions and other expenses payable by AcelRx. In December 2012, AcelRx completed an underwritten public offering, in which the Company sold an aggregate of 14,375,000 shares of its commonstock at a public offering price of $3.31 per share, resulting in net proceeds of $44.1 million, after deducting underwriting discounts and commissions andother offering related expenses totaling $3.5 million. Private Placement Offering On June 1, 2012, or the Issuance Date, the Company issued an aggregate of 2,922,337 shares of common stock and warrants to purchase up to 2,630,103shares of common stock, or the PIPE warrants, for aggregate gross proceeds of $10.0 million, or the Private Placement. Costs related to the offering were$0.9 million. The shares of common stock and PIPE warrants issued in the Private Placement were sold pursuant to a Securities Purchase Agreement, orPurchase Agreement, dated May 29, 2012, between the Company and certain purchasers, including certain entities affiliated with Mark Wan and StephenJ. Hoffman, members of the Company’s board of directors. Pursuant to the Purchase Agreement, AcelRx sold shares of common stock and PIPE warrants topurchase common stock in immediately separable “Units,” with each Unit consisting of (i) one share of common stock and (ii) a PIPE warrant to purchase0.9 of a share of common stock. The per share exercise price of the PIPE warrants was $3.40. The offering price per Unit was $3.40 for non-affiliatedinvestors, and $3.5125 for affiliated investors, which equals the sum of (i) $3.40, the closing consolidated bid price of the Company’s common stock onMay 29, 2012, plus (ii) $0.1125 (which is equal to $0.125 per PIPE warrant share, multiplied by 0.9), for an aggregate amount of $10.0 million. The PIPEwarrants issued in the Private Placement became exercisable six months after the Issuance Date, and expire on the five year anniversary of the initialexercisability date. In connection with the Private Placement, the Company filed a registration statement with the U.S. Securities and Exchange Commission, or SEC,registering for resale the shares of common stock and shares of common stock issuable upon exercise of the warrants sold in the Private Placement. Theregistration statement was declared effective by the SEC in July 2012. Stock Plans 2011 Equity Incentive Plan In January 2011, the board of directors adopted, and the Company’s stockholders approved, the 2011 Equity Incentive Plan, or 2011 Incentive Plan, as asuccessor to the 2006 Plan. The 2011 Incentive Plan became effective immediately upon the execution and delivery of the underwriting agreement for theIPO on February 10, 2011. As of February 10, 2011, no more awards may be granted under the 2006 Plan, although all outstanding stock options andother stock awards previously granted under the 2006 Plan will continue to remain subject to the terms of the 2006 Plan. The 51,693 shares reservedunder the 2006 Plan that remained available for future grant at the time of the IPO were transferred to the share reserve of the 2011 Incentive Plan. The initial aggregate number of shares of the Company’s common stock that may be issued pursuant to stock awards under the 2011 Incentive Plan is1,875,000 shares, which number was the sum of (i) 51,693 shares remaining available for future grant under the 2006 Plan at the time of the execution anddelivery of the underwriting agreement for the Company’s IPO, and (ii) an additional 1,823,307 new shares. Then, the number of shares of common stockreserved for issuance under the 2011 Incentive Plan will automatically increase on January 1st each year, starting on January 1, 2012 and continuingthrough January 1, 2020, by 4% of the total number of shares of the Company’s common stock outstanding on December 31 of the preceding calendaryear, or such lesser number of shares of common stock as determined by the board of directors. On March 17, 2014, the Company filed a Form S-8 (File Number 333-194634) with the SEC registering 1,722,023 shares of common stock, par value$0.001 per share, under the 2011 Equity Incentive Plan. On March 12, 2013, the Company filed a Form S-8 (File Number 333-187206) with the SEC registering 1,482,201 shares of common stock, par value$0.001 per share, under the 2011 Equity Incentive Plan. On March 26, 2012, the Company filed a Form S-8 (File Number 333-180334) with the SEC registering 782,711 shares of common stock, par value$0.001 per share, under the 2011 Equity Incentive Plan. F-22 AcelRx Pharmaceuticals, Inc. Notes to Financial Statements 2011 Employee Stock Purchase Plan Additionally, in January 2011, the board of directors adopted, and the Company’s stockholders approved, the 2011 Employee Stock Purchase Plan, or theESPP, which also became effective immediately upon the execution and delivery of the underwriting agreement for the IPO. Initially, 250,000 shares of the Company’s common stock were authorized for issuance under the ESPP pursuant to purchase rights granted to theCompany’s employees or to employees of any of its designated affiliates. The number of shares of the Company’s common stock reserved for issuancewill automatically increase on January 1st each year, starting January 1, 2012 and continuing through January 1, 2020, in an amount equal to the lower of(1) 2% of the total number of shares of the Company’s common stock outstanding on December 31 of the preceding calendar year, or (2) a number ofshares of common stock as determined by the board of directors. If a purchase right granted under the ESPP terminates without having been exercised, theshares of the Company’s common stock not purchased under such purchase right will be available for issuance under the ESPP. On March 26, 2012, the Company filed a Form S-8 (File Number 333-180334) with the SEC registering 391,355 shares of common stock, par value$0.001 per share, under the 2011 Employee Stock Purchase Plan. As of December 31, 2014, 254,337 shares have been issued to employees and there are 387,018 shares available for issuance under the ESPP. Theweighted average fair value of shares issued under the ESPP in 2014, 2013 and 2012 was $4.35, $3.97 and $2.45 per share, respectively. 2006 Stock Plan In August 2006, the Company established the 2006 Plan in which 342,000 shares of common stock were originally reserved for the issuance of incentivestock options, or ISOs, and nonstatutory stock options, or NSOs, to employees, directors or consultants of the Company. In February 2008, an additional375,000 shares of common stock were reserved for issuance under the 2006 Plan and, in November 2009, an additional 1,376,059 shares of common stockwere reserved for issuance under the 2006 Plan. Per the 2006 Plan, the exercise price of ISOs and NSOs granted to a stockholder who at the time of grantowns stock representing more than 10% of the voting power of all classes of the stock of the Company could not be less than 110% of the fair value pershare of the underlying common stock on the date of grant. Effective upon the execution and delivery of the underwriting agreement for the Company’sIPO, no additional stock options or other stock awards may be granted under the 2006 Plan. 10. Stock-Based Compensation The Company recorded total stock-based compensation expense for stock options, stock awards and the ESPP as follows (in thousands): Year Ended December 31, 2014 2013 2012 Research and development $2,252 $1,657 $998 General and administrative 2,188 1,822 1,152 Total $4,440 $3,479 $2,150 The following table summarizes option activity under the 2011 Plan and 2006 Plan: Numberof StockOptionsOutstanding Weighted-AverageExercisePrice Weighted-AverageRemainingContractualLife (Years) AggregateIntrinsicValue (in thousands) December 31, 2011 2,395,968 $3.08 Granted 1,213,391 3.36 Forfeited (165,781) 3.23 Exercised (43,767) 2.32 December 31, 2012 3,399,811 $3.18 Granted 1,958,727 5.99 Forfeited (17,917) 8.82 Exercised (431,216) 3.03 December 31, 2013 4,909,405 $4.29 Granted 2,512,500 8.74 Forfeited (615,854) 7.76 Exercised (439,288) 3.9 December 31, 2014 6,366,763 $5.74 8.1 $11,106 Vested and exercisable options—December 31, 2014 2,920,611 $3.79 7 $8,856 Vested and expected to vest—December 31, 2014 6,128,922 $5.67 8.1 $11,006 F-23 AcelRx Pharmaceuticals, Inc. Notes to Financial Statements As of December 31, 2014, there were 98,366 shares available for future grant under the 2011 Plan. In January 2015, an additional 1,748,495 shares wereauthorized for issuance under the 2011 Incentive Plan. Additional information regarding the Company’s stock options outstanding and vested and exercisable as of December 31, 2014 is summarized below: Options Outstanding Options Vested and Exercisable Exercise Prices Number ofStock OptionsOutstanding Weighted-AverageRemainingContractual Life(Years) Weighted-AverageExercise Price perShare Shares Subjectto StockOptions Weighted-AverageExercise Price perShare $1.20-$2.56 995,304 7.3 $2.39 995,303 $2.39 $3.11-$5.31 2,850,209 7.4 $4.44 1,745,726 $4.20 $5.45-$8.18 1,190,000 9.4 $6.52 110,207 $5.64 $10.22-$11.71 1,331,250 9.3 $10.32 69,375 $10.46 6,366,763 8.1 $5.74 2,920,611 $3.79 The weighted average grant-date fair value of options granted during the years ended December 31, 2014, 2013 and 2012 was $5.57, $4.15 and $2.25 pershare, respectively. As of December 31, 2014, total stock-based compensation expense related to unvested options to be recognized in future periods was$13.3 million which is expected to be recognized over a weighted-average period of 3.0 years. The grant date fair value of shares vested during the yearsended December 31, 2014, 2013 and 2012 was $3.2 million, $1.9 million and $1.3 million, respectively. The total intrinsic value of options exercisedduring the years ended December 31, 2014, 2013 and 2012 was $2.3 million, $3.6 million and $85,000, respectively. The Company used the following assumptions to calculate the fair value of each employee stock option: Year Ended December 31, 2014 2013 2012 Expected term (in years) 5.25-6.25 5.75-6.25 5.75-6.25 Risk-free interest rate 1.76%-1.92% 1.02%-2.96% 0.6%-1.74% Expected volatility 69-72% 80% 80% Expected dividend rate 0% 0% 0% Restricted Stock Units In March 2011, the Company granted 343,815 Restricted Stock Units, or RSUs, to employees and directors under the 2011 Plan at a grant date fair valueof $3.45. The fair value of the RSUs was determined on the date of grant based on the market price of the Company’s common stock. RSUs are recognizedas expense ratably over the vesting period and the Company’s RSU’s generally vest over three years as follows: 25% on the 6 month anniversary of thevesting commencement date, 25% on the 12 month anniversary of the vesting commencement date, 25% on the 24 month anniversary of the vestingcommencement date and 25% on the 36 month anniversary of the vesting commencement date, so long as the RSU recipient continues to provideservices to the Company. As of December 31, 2014, there were no RSUs outstanding. The expense related to RSUs during the years ended December 31,2014, 2013 and 2012 was $56,000, $290,000 and $315,000, respectively. F-24 AcelRx Pharmaceuticals, Inc. Notes to Financial Statements A summary of restricted stock unit award activity under the 2011 Plan is as follows: Number ofRestrictedStock Units WeightedAverageGrant DateFair Value Restricted stock units outstanding December 31, 2012 161,096 $3.45 Granted — — Vested (95,331) (3.45)Forfeited — — Restricted stock units outstanding, December 31, 2013 65,765 $3.45 Granted — — Vested (65,765) (3.45)Forfeited — — Restricted stock units outstanding, December 31, 2014 — $— 11. Net Loss per Share of Common Stock The Company’s basic net loss per share of common stock is calculated by dividing the net loss by the weighted average number of shares of commonstock outstanding for the period. The diluted net loss per share of common stock is computed by giving effect to all potential common stock equivalentsoutstanding for the period determined using the treasury stock method. For purposes of this calculation, options to purchase common stock and warrantsto purchase common stock were considered to be common stock equivalents. In periods with a reported net loss, common stock equivalents are excludedfrom the calculation of diluted net loss per share of common stock if their effect is antidilutive. During the year ended December 31, 2014, the PIPE warrants had a dilutive impact to net loss per share due to a lower share price at December 31, 2014,compared to the closing share price on December 31, 2013. The decrease in share price created a lower Black-Scholes value and lower liability for thePIPE warrants, which resulted in other income during the year ended December 31, 2014. The calculation of diluted net loss per share requires that, to theextent the average market price of the underlying shares for the reporting period exceeds the exercise price of the PIPE warrants and the presumed exerciseof such securities are dilutive to loss per share for the period, adjustments to net loss used in the calculation are required to remove the change in fairvalue of the PIPE warrants for the period. Likewise, adjustments to the denominator are required to reflect the related dilutive shares. The following table is a reconciliation of the numerators and denominators used in the calculation of basic and diluted net loss per share computations forthe years ended December 31, 2014, 2013 and 2012: Years Ended December 31, 2014 2013 2012 (in thousands, except share and per share amounts) Numerator: Net loss used to compute net loss per share Basic $(33,353) $(23,426) $(33,363)Adjustments for change in fair value of warrant liability (6,988) — — Diluted $(40,341) $(23,426) $(33,363)Denominator: Weighted average shares outstanding used to compute net loss per share: Basic 43,427,111 39,746,678 22,124,637 Dilutive effect of warrants 895,186 — — Diluted 44,322,297 39,746,678 22,124,637 Net loss per share—basic $(0.77) $(0.59) $(1.51)Net loss per share—diluted $(0.91) $(0.59) $(1.51) F-25 AcelRx Pharmaceuticals, Inc. Notes to Financial Statements The following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share of common stock for theperiods presented because including them would have been antidilutive: Year Ended December 31, 2014 2013 2012 Stock options to purchase common stock 6,366,763 4,909,405 3,399,811 Restricted Stock Units — 65,765 161,096 Common stock warrants 180,155 1,674,669 3,136,300 12. Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities consist of the following (in thousands): December 31, 2014 2013 Accounts payable $2,249 $2,341 Accounts payable associated with property and equipment 182 — Accrued compensation and employee benefits 2,540 2,397 Accrued research and development expenses 124 248 Accrued liabilities associated with property and equipment 23 725 Accrued liabilities associated with Grünenthal collaboration 499 — Professional fees 139 230 Interest payable 196 61 Other 133 243 Total accounts payable and accrued liabilities $6,085 $6,245 13. 401(k) Plan The Company sponsors a 401(k) plan that stipulates that eligible employees can elect to contribute to the 401(k) plan, subject to certain limitations.Pursuant to the 401(k) plan, the Company makes a discretionary safe harbor contribution equal to 3% of the related compensation. Eligible employees are100% vested in this safe harbor contribution regardless of whether they make salary deferrals into the 401(k) plan. Company contributions were$201,000, $143,000 and $120,000 for the years ended December 31, 2014, 2013 and 2012, respectively. 14. Income Taxes The Company did not record a provision for income taxes during the years ended December 31, 2014, 2013 and 2012. Net deferred tax assets as ofDecember 31, 2014 and 2013 consist of the following (in thousands): December 31,2014 December 31,2013 Deferred tax assets: Accruals and other $4,446 $2,172 Research credits 4,413 3,553 Net operating loss carryforward 42,330 36,279 Section 59(e) R&D expenditures 17,083 10,339 Total deferred tax assets 68,272 52,343 Valuation allowance $(68,272) $(52,343)Net deferred tax assets $— $— F-26 AcelRx Pharmaceuticals, Inc. Notes to Financial Statements Reconciliations of the statutory federal income tax to the Company’s effective tax during the years ended December 31, 2014, 2013 and 2012 are asfollows (in thousands): Year Ended December 31, 2014 2013 2012 Tax at statutory federal rate $(11,392) $(7,965) $(11,343)State tax—net of federal benefit (2,501) (716) (1,953)PIPE Warrant liability (2,393) 4,898 540 General Business credits (628) (1,326) — Stock Options 543 — — Other 20 (80) 807 Change in valuation allowance 16,351 5,189 11,949 Provision (benefit) for income taxes $— $— $— ASC 740 requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent thatmanagement assesses that realization is “more likely than not.” Realization of deferred tax assets is dependent on future taxable income, if any, the timingand the amount of which are uncertain. Accordingly, the deferred tax assets have been fully offset by a valuation allowance. The valuation allowanceincreased by $16.4 million, $4.8 million and $11.9 million during the years ended December 31, 2014, 2013 and 2012, respectively. The amount of thevaluation allowance for deferred tax assets associated with excess tax deduction from stock based compensation arrangement that is allocated tocontributed capital if the future tax benefits are subsequently recognized is $2.8 million. As of December 31, 2014, the Company had federal net operating loss carryforwards of $109.1 million, which begin to expire in 2025. As ofDecember 31, 2014, the Company had state net operating loss carryforwards of $109.1 million, which begin to expire in 2015. As of December 31, 2014, the Company had federal research credit carryovers of $3.3 million, which begin to expire in 2026. As of December 31, 2014,the Company had state research credit carryovers of $1.7 million, which will carryforward indefinitely. Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change”, generally defined as a greaterthan 50% change (by value) in its equity ownership over a three year period, the corporation’s ability to use its pre-change net operating losscarryforwards and other pre-change tax attributes, such as research credits, to offset its post-change income may be limited. Based on an analysisperformed by the Company as of December 31, 2014, it was determined that two ownership changes have occurred since inception of the Company. Thefirst ownership change occurred in 2006 at the time of the Series A financing and, as a result of the change, $1.4 million in federal and state net operatingloss carryforwards will expire unutilized. In addition, $26,000 in federal and state research and development credits will expire unutilized. The secondownership change occurred in July 2013 at the time of the underwritten public offering; however, the Company believes the resulting annual imposedlimitation on use of pre-change tax attributes is sufficiently high that the limit itself will not result in unutilized pre-change tax attributes. Uncertain Tax Positions A reconciliation of the beginning and ending balances of the unrecognized tax benefits during the years ended December 31, 2014, 2013 and 2012 is asfollows (in thousands): Year Ended December 31, 2014 2013 2012 Unrecognized benefit—beginning of period $1,341 $810 $748 Gross decreases—prior period tax positions — 221 (17)Gross increases—current period tax positions 326 310 79 Unrecognized benefit—end of period $1,667 $1,341 $810 The entire amount of the unrecognized tax benefits would not impact the Company’s effective tax rate if recognized. Accrued interest and penalties related to unrecognized tax benefits are classified as income tax expense and were immaterial. The Company files incometax returns in the United States and in California. The tax years 2007 through 2013 remain open in both jurisdictions. The Company is not currentlyunder examination by income tax authorities in federal, state or other foreign jurisdictions. F-27 AcelRx Pharmaceuticals, Inc. Notes to Financial Statements 15. Subsequent Events In March 2015, the Company announced that it had received correspondence from the FDA stating that in addition to the bench testing and two HumanFactors studies the Company had performed for Zalviso in order to address the issues raised in the CRL, an additional clinical study is needed to assessthe risk of inadvertent dispensing and overall risk of dispensing failures. The Company intends to meet with the FDA to discuss and clarify the need foran additional clinical study, and the potential design and objectives of such a study. This event has no impact on the Financial Statements as presentedherein. 16. Unaudited Quarterly Financial Data (in thousands, except per share amounts) The following table sets forth certain unaudited quarterly financial data for the eight quarters ended December 31, 2014. The unaudited information setforth below has been prepared on the same basis as the audited information and includes all adjustments necessary to present fairly the information setforth herein. The operating results for any quarter are not indicative of results for any future period. All data is in thousands except per share data. 2014 2013 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Revenues $95 $71 $4,825 $226 $940 $407 $548 $27,607 Operating Expenses $8,636 $12,331 $9,894 $12,005 $11,509 $8,178 $8,858 $7,624 Net income / (loss) $(9,631) $(10,575) $671 $(13,818) $(12,762) $(17,447) $(10,986) $17,769 Net income / (loss) per share(basic) $(0.22) $(0.24) $0.02 $(0.32) $(0.34) $(0.47) $(0.26) $0.41 Net income / (loss) per share(diluted) $(0.22) $(0.30) $(0.13) $(0.32) $(0.34) $(0.47) $(0.26) $0.39 F-28 EXHIBIT INDEX Incorporation By ReferenceExhibitNumber Exhibit Description Form SECFile No. Exhibit Filing Date 3.1 Amended and Restated Certificate of Incorporation of the Registrant, currently ineffect. 8-K 001-35068 3.1 2/28/2011 3.2 Amended and Restated Bylaws of the Registrant, currently in effect. S-1 333-170594 3.4 1/7/2011 4.1 Reference is made to Exhibits 3.1 through 3.2. 4.2 Specimen Common Stock Certificate of the Registrant. S-1 333-170594 4.2 1/31/2011 4.3 Second Amended and Restated Investors’ Rights Agreement, among the Registrantand certain of its security holders, dated as of November 23, 2009. S-1 333-170594 4.3 11/12/2010 4.4 Warrant to Purchase Common Stock of the Registrant, issued to Hercules TechnologyII, L.P., dated as of December 16, 2013. 10-K 001-35068 4.4 3/17/2014 4.5 Warrant to Purchase Common Stock of the Registrant, issued to Hercules TechnologyGrowth Capital, Inc., dated as of December 16, 2013 10-K 001-35068 4.5 3/17/2014 4.6 Form of Warrant issued to certain purchasers pursuant to the Securities PurchaseAgreement dated May 29, 2012, between the Registrant and the purchasers identifiedtherein. 8-K 001-35068 4.8 5/30/2012 10.1+ Form of Indemnification Agreement between the Registrant and each of its directorsand executive officers. S-1 333-170594 10.1 1/7/2011 10.2+ 2006 Stock Plan, as amended. S-1 333-170594 10.2 11/12/2010 10.3+ Forms of Notice of Grant of Stock Option, Stock Option Agreement and Stock OptionExercise Notice under 2006 Stock Plan. 10-K 001-35068 10.3 3/30/2011 10.4+ 2011 Equity Incentive Plan. S-8 333-172409 99.3 2/24/2011 10.5+ Forms of Stock Option Grant Notice, Notice of Exercise and Option Agreement under2011 Equity Incentive Plan. 10-K 001-35068 10.5 3/30/2011 10.6+ Forms of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreementunder 2011 Equity Incentive Plan. 10-K 001-35068 10.6 3/30/2011 10.7+ 2011 Employee Stock Purchase Plan. S-8 333-172409 99.6 2/24/2011 10.8 Lease between Metropolitan Life Insurance Company and the Registrant, datedDecember 15, 2011. 10-K 001-35068 10.9 3/23/2012 10.9 Amendment to Lease between Metropolitan Life Insurance and the Registrant, datedMay 2, 2014 8-K 001-35068 10.1 5/7/2014 10.10 Amended and Restated Loan and Security Agreement among the Registrant, HerculesTechnology II, L.P. and Hercules Technology Growth Capital, Inc., dated as ofDecember 16, 2013. 10-K 001-35068 10.10 3/17/2014 10.11 Award/Contract with the U.S. Army Medical Research and Material Command, datedMay 26, 2011. 10-Q 001-35068 10.3 8/11/2011 10.12+ Amended and Restated Offer Letter between the Registrant and Larry Hamel, datedDecember 31, 2010. S-1 333-170594 10.14 1/7/2011 10.13+ Amended and Restated Offer Letter between the Registrant and Badri (Anil) Dasu,dated December 30, 2010. S-1 333-170594 10.15 1/7/2011 10.14+ Amended and Restated Offer Letter between the Registrant and Pamela Palmer, datedDecember 29, 2010. S-1 333-170594 10.16 1/7/2011   Incorporation By ReferenceExhibitNumber Exhibit Description Form SECFile No. Exhibit Filing Date 10.15+ Amended and Restated Offer Letter between the Registrant and Richard King, datedDecember 31, 2010. S-1 333-170594 10.17 1/7/2011 10.16+ Amended and Restated Offer Letter between the Registrant and James Welch, datedDecember 29, 2010. S-1 333-170594 10.18 1/7/2011 10.17+ Offer Letter between the Registrant and Timothy E. Morris, dated March 24, 2014. 10-Q 001-35068 10.3 5/8/2014 10.18+ Offer Letter between the Registrant and Jane Wright-Mitchell, dated June 13, 2014. 10.19+ Separation and Consulting Agreement between the Registrant and James Welch,dated March 24, 2014 8-K 001-35068 10.2 5/8/2014 10.20+ Separation Agreement between the Registrant and Richard King, dated December 15,2014. 8-K/A 001-35068 10.1 12/16/2014 10.21+ Non-Employee Director Compensation Policy. 10-K 001-35068 Item 11 3/12/2013 10.22+ 2014 Cash Bonus Plan Summary. 8-K 001-35068 10.1 2/10/2014 10.23+ Supplemental Cash Bonus Plan. 8-K 001-35068 Item 5.02 11/10/2014 10.24+ Supplemental Retention Cash Bonus Plan. 8-K 001-35068 Item 5.02 12/8/2014 10.25 Securities Purchase Agreement dated May 29, 2012, between the Registrant and thepurchasers identified therein. 8-K 001-35068 10.23 5/30/2012 10.26 At Market Issuance Sales Agreement, dated August 31, 2012, by and between theRegistrant and MLV & Co. LLC. 8-K 001-35068 10.1 8/31/2012 10.27 Supply Agreement with Mallinckrodt LLC, effective as of May 31, 2013. 10-Q 001-35068 10.1 11/5/2103 10.28# Manufacture and Supply Agreement with Grünenthal GmbH, effective as ofDecember 16, 2013. 10-K 001-35068 10.28 3/17/2014 10.29# Collaboration and License Agreement with Grünenthal GmbH, effective as ofDecember 16, 2013. 10-K 001-35068 10.29 3/17/2014 10.30 Manufacturing Services Agreement between Registrant and PatheonPharmaceuticals, Inc., dated as of January 18, 2013 10-Q 001-35068 10.1 5/8/2013 10.31 Amended and Restated Capital Expenditure Agreement between Registrant andPatheon Pharmaceuticals, Inc., dated as of January 18, 2013 10-Q 001-35068 10.2 5/8/2013 10.32 Second Amendment to Amended and Restated Capital Expenditure and EquipmentAgreement, between the Registrant and Patheon Pharmaceuticals, Inc. effective as ofJanuary 30, 2014. 10-Q 001-35068 10.4 5/8/2014 23.1 Consent of Independent Registered Public Accounting Firm. 24.1 Power of Attorney (included in signature page). 31.1 Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended. 31.2 Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)promulgated under the Securities Exchange Act of 1934, as amended. 32.1 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Actof 2002.*  Incorporation By ReferenceExhibitNumber Exhibit Description Form SECFile No. Exhibit Filing Date 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document +Indicates management contract or compensatory plan.#Material in the exhibit marked with a “***” has been omitted pursuant to a request for confidential treatment filed with the SEC. Omitted portionshave been filed separately with the SEC.*The certifications attached as Exhibit 32.1 accompany this Annual Report on Form 10-K pursuant to 18 U.S.C. Section 1350, as adopted pursuantto Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the SecuritiesExchange Act of 1934, as amended. Exhibit 10.18 June 13, 2014 Jane Wright-MitchellAddress Line 1Address Line 2 Dear Jane: On behalf of AcelRx Pharmaceuticals, Inc. (the “Company”), I am pleased to offer you the full time position of Chief Legal Officer. Speaking formyself, as well as the other members of the Company’s management team, we are all very impressed with your credentials and we look forward to yourfuture success in this position. The terms of your new position with the Company are as set forth below: 1. Position. (a) Your job title will be Chief Legal Officer, and your primary work location will be AcelRx Headquarters in Redwood City,California. You will report to Richard King, Chief Executive Officer. Of course, the Company may change your position, duties, and work location fromtime to time at its discretion. (b) You agree to the best of your ability and experience that you will at all times loyally and conscientiously perform all of the dutiesand obligations required of and from you pursuant to the express and implicit terms hereof, and to the reasonable satisfaction of the Company. During theterm of your employment, you further agree that you will devote 100% of your business time and attention to the business of the Company, the Companywill be entitled to all of the benefits and profits arising from or incident to all such work services and advice, you will not render commercial orprofessional services of any nature to any person or organization, whether or not for compensation, without the prior written consent of the Company,such consent not to be unreasonably withheld, and you will not directly or indirectly engage or participate in any business that is competitive in anymanner with the business of the Company. Nothing in this letter agreement will prevent you from accepting speaking or presentation engagements inexchange for honoraria or from serving on boards of charitable organizations, from owning no more than one percent (1%) of the outstanding equitysecurities of a corporation whose stock is listed on a national stock exchange or serving on no more than one board of directors of anothernoncompetitive domestic or international company; provided, however, that in all cases, these activities do not unreasonably detract from theperformance of your duties for the Company. 2. Start Date. Subject to fulfillment of any conditions imposed by this letter agreement, you will commence this new position with theCompany on July 14, 2014 (the “Start Date”). 3. Compensation. You will be paid a monthly salary of $24,000, less required deductions and withholdings, which is equivalent to $288,000on an annualized basis (the “Base Salary”). Your salary will be payable in two equal payments per month pursuant to the Company’s regular payrollpolicy. The Base Salary will be reviewed annually as part of the Company’s normal salary review process. In addition to your base salary, you will havethe opportunity to earn a target annual bonus of up to 35% of your earned salary based on achievement of a series of personal and company objectivesthat the Company will set for you. The Company shall have the sole discretion to determine whether you have earned any such bonus and, if so, theamount of any such bonus. The bonus will be considered earned only when it is approved by the Company’s Board of Directors.  Jane Wright-MitchellJune 13, 2014Page 2 of 5 4. Bonus Advance. In addition, you will receive a one-time bonus advance in the amount of $50,000 (less payroll deductions andwithholdings) (the “Bonus Advance”) which would be considered earned if you remain employed by the Company for one year after your start date. Thisamount would be subject to required deductions and withholdings and will be paid to you in the first regular payroll following 30 days of activeemployment. If you resign your employment for any reason or if you are terminated for cause prior to one (1) year of your start date, you will be requiredto repay the gross amount of the Bonus Advance to the Company and you authorize the Company to withhold any amount due from any final paymentsdue to you, subject to applicable law. 5. Stock Option Grant. In connection with the commencement of your employment, the Company will recommend that the Board of Directors,at the next regularly scheduled meeting, grant you an option to purchase 65,000 shares of the Company’s Common Stock (“Option Shares”) with anexercise price equal to the fair market value on the date of the grant. These option shares will vest at the rate of 25% of the shares on the twelve (12)month anniversary of your Vesting Commencement Date (as defined in your Stock Option Agreement, which date will be your Start Date, as definedabove) and the remaining Option Shares will vest monthly thereafter at the rate of 1/48 of the total number of the Option Shares per month. Vesting will,of course, depend on your continued employment with the Company. The option will be subject to the terms of the Company’s 2011 Equity IncentivePlan and the Stock Option Agreement between you and the Company. 6. Benefits. (a) Insurance Benefits. The Company will provide you with the opportunity to participate in the standard benefits plans currentlyavailable to other Company employees, subject to any eligibility requirements imposed by such plans. (b) Vacation; Sick Leave. You will be entitled to paid time off according to the Company’s standard policies. (c) Employee Stock Purchase Plan (ESPP). You will be eligible to participate in the Company’s ESPP. (d) 401 (k) Plan. You will be eligible to participate in the Company’s 401 (k) Plan.  Jane Wright-MitchellJune 13, 2014Page 3 of 5 7. Change of Control Severance Benefits. (a) Severance Benefits. If: (i) the Company undergoes a Change in Control (as such term is defined in the Plan); and (ii) during theperiod which begins three (3) months prior to consummation of the Change in Control and ends twelve (12) months following the closing of the Changein Control, the Company terminates your employment without Cause (as such term is defined in the Plan) or you terminate your employment due to anInvoluntary Resignation (as such defined below); and (iii) you execute and allow to become effective a general release of all claims against the companyin a format acceptable to the Company, then the Company will provide you with the following severance benefits: (i) The vesting of the Option Shares and any additional grant of options to purchase shares of the company’s common stocksubsequently awarded to you by the Board (collectively, the “Employee Options”) shall accelerate in full such that 100% of the then unvestedEmployee Options will become immediately vested and exercisable as of your termination date; (b) Involuntary Resignation. For purposes of this Paragraph 7, an “Involuntary Resignation” shall mean your resignation ofemployment with the Company within thirty (30) days following the occurrence of any of the following events without your written consent and afterproviding the Company with thirty (30) days to cure such event: (i) a material reduction or change in your job duties, reporting relationships,responsibilities and requirements inconsistent with your position with the Company and prior duties, reporting relationships, responsibilities andrequirements prior to the Change in Control, provided that neither a mere change in title alone nor reassignment following a Change in Control to aposition that is substantially similar to the position held prior to the Change in Control in terms of job duties, responsibilities or requirements shallconstitute a material reduction in job responsibilities; (ii) a reduction in your then-current base salary by at least 20%, provided that an across-the-boardreduction in the salary level of all other senior executives by the same percentage amount as part of a general salary level reduction shall not constitutesuch a salary reduction, or (iii) the relocation of your principal place for performance of your Company duties to a location more than thirty (30) milesfrom the Company’s then current location. 8. Confidential Information and Invention Assignment Agreement. Your acceptance of this offer and commencement of employment withthe Company is contingent upon the execution of, and delivery to an officer of the Company, the Company’s Confidential Information and InventionAssignment Agreement, a copy of which is enclosed for your review and execution (the “Confidentiality Agreement”), prior to or on your Start Date. 9. At-Will Employment. Your employment with the Company will be on an “at will” basis, meaning that either you or the Company mayterminate your employment at any time, with or without cause, and with or without advance notice. 10. No Conflicting Obligations. You understand and agree that, by accepting this offer of employment, you represent to the Company thatyour performance will not breach any other agreement to which you are a party and that you have not, and will not during the term of your employmentwith the Company, enter into any oral or written agreement in conflict with any of the provisions of this letter or the Company’s policies. You are not tobring with you to the Company, or use or disclose to any person associated with the Company, any confidential or proprietary information belonging toany former employer or other person or entity with respect to which you owe an obligation of confidentiality under any agreement or otherwise. TheCompany does not need and will not use such information and we will assist you in any way possible to preserve and protect the confidentiality ofproprietary information belonging to third parties. Also, we expect you to abide by any obligations to refrain from soliciting any person employed by orotherwise associated with any former employer and suggest that you refrain from having any contact with such persons until such time as any non-solicitation obligation expires.  Jane Wright-MitchellJune 13, 2014Page 4 of 5 11. Preconditions to Employment. (a) This offer and your employment with the Company are contingent upon your successful completion of an employee application,background check, reference check, drug screen for illegal drugs, and satisfactory proof of your right to work in the United States. You agree to assist asneeded and to complete any documentation and actions at the Company’s request to meet these conditions. 12. Entire Agreement. This letter, together with the Confidentiality Agreement, sets forth the entire agreement and understanding betweenyou and the Company relating to your employment and supersedes all prior agreements and discussions between us. This letter may not be modified oramended except by a written agreement, signed by an officer of the Company, although the Company reserves the right to modify unilaterally yourcompensation, benefits, job title and duties, reporting relationships and other terms of your employment. This letter will be governed by the laws of theState of California without regard to its conflict of laws provision. We are all delighted to be able to extend you this offer and look forward to working with you. To indicate your acceptance of the Company’soffer, please sign and date this letter in the space provided below and return it to me, along with a signed and dated copy of the ConfidentialityAgreement. This offer will terminate if not accepted by you on or before June 18, 2014. Very truly yours, ACCEPTED AND AGREED: ACELRX PHARMACEUTICALS, INC. JANE WRIGHT-MITCHELL By:/s/ Richard King /s/ Jane Wright-Mitchell Signature Name: Richard King Title: Chief Executive Officer Date 6/15/14 Attachment A: Confidential Information and Invention Assignment Agreement  ACELRX PHARMACEUTICALS, INC. CONFIDENTIAL INFORMATION ANDINVENTION ASSIGNMENT AGREEMENT As a condition of my becoming employed (or my employment being continued) by or retained as a consultant (or my consulting relationshipbeing continued) by AcelRx Pharmaceuticals, Inc., a Delaware corporation (“AcelRx”) or any of its current or future subsidiaries, affiliates, successors orassigns (collectively, the “Company”), and in consideration of my employment or consulting relationship with the Company and my receipt of thecompensation now and hereafter paid to me by the Company, I agree to the following: 1. Employment or Consulting Relationship. I understand and acknowledge that this Agreement does not alter, amend or expand upon anyrights I may have to continue in the employ of, or in a consulting relationship with, or the duration of my employment or consulting relationship with, theCompany under any existing agreements between the Company and me or under applicable law. Any employment or consulting relationship between theCompany and me, whether commenced prior to or upon the date of this Agreement, shall be referred to herein as the “Relationship.” 2. Duties. I will perform for the Company such duties as may be designated by the Company from time to time. During the Relationship, I willdevote my best efforts to the interests of the Company and will not engage in other employment or in any activities detrimental to the best interests of theCompany without the prior written consent of the Company. 3. At-Will Relationship. I understand and acknowledge that my Relationship with the Company is and shall continue to be at-will, as definedunder applicable law, meaning that either I or the Company may terminate the Relationship at any time for any reason or no reason, without furtherobligation or liability. 4. Confidential Information. (a) Company Information. I agree at all times during the term of my Relationship with the Company and thereafter, to hold instrictest confidence, and not to use, except for the benefit of the Company to the extent necessary to perform my obligations to the Company under theRelationship, or to disclose to any person, firm, corporation or other entity without written authorization of the Board of Directors of the Company, anyConfidential Information of the Company which I obtain or create. I further agree not to make copies of such Confidential Information except asauthorized by the Company. I understand that “Confidential Information” means any Company proprietary information, technical data, trade secrets orknow-how, including, but not limited to, research, product plans, products, services, suppliers, customer lists and customers (including, but not limited to,customers of the Company on whom I called or with whom I became acquainted during the Relationship), prices and costs, markets, software,developments, inventions, laboratory notebooks, processes, formulas, technology, designs, drawings, engineering, hardware configuration information,marketing, licenses, finances, budgets or other business information disclosed to me by the Company either directly or indirectly in writing, orally or bydrawings or observation of parts or equipment or created by me during the period of the Relationship, whether or not during working hours. I understandthat Confidential Information includes, but is not limited to, information pertaining to any aspect of the Company’s business which is either informationnot known by actual or potential competitors of the Company or other third parties not under confidentiality obligations to the Company, or is otherwiseproprietary information of the Company or its customers or suppliers, whether of a technical nature or otherwise. I further understand that ConfidentialInformation does not include any of the foregoing items which has become publicly and widely known and made generally available through nowrongful act of mine or of others who were under confidentiality obligations as to the item or items involved.  (b) Prior Obligations. I represent that my performance of all terms of this Agreement as an employee or consultant of the Companyhas not breached and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by me prior or subsequentto the commencement of my Relationship with the Company, and I will not disclose to the Company or use any inventions, confidential or non-publicproprietary information or material belonging to any current or former client or employer or any other party. I will not induce the Company to use anyinventions, confidential or non-public proprietary information, or material belonging to any current or former client or employer or any other party. Iacknowledge and agree that I have listed on Exhibit D all agreements (e.g., non-competition agreements, non-solicitation of customers agreements, non-solicitation of employees agreements, confidentiality agreements, inventions agreements, etc.) with a current or former employer, or any other person orentity, that may restrict my ability to accept employment with the Company or my ability as an employee or consultant to recruit or engage customers orservice providers on behalf of the Company, or otherwise relate to or restrict my ability to perform my duties as an employee of the Company or anyobligation I may have to the Company. (c) Third Party Information. I recognize that the Company has received and in the future will receive confidential or proprietaryinformation from third parties subject to a duty on the Company’s part to maintain the confidentiality of such information and to use it only for certainlimited purposes. I agree to hold all such confidential or proprietary information in the strictest confidence and not to disclose it to any person, firm orcorporation or to use it except as necessary in carrying out my work for the Company consistent with the Company’s agreement with such third party. 5. Inventions. (a) Inventions Retained and Licensed. I have attached hereto, as Exhibit A, a list describing with particularity all inventions, originalworks of authorship, developments, improvements, and trade secrets which were made by me prior to the commencement of the Relationship (collectivelyreferred to as “Prior Inventions”), which belong solely to me or belong to me jointly with another, which relate in any way to any of the Company’sproposed businesses, products or research and development, and which are not assigned to the Company hereunder; or, if no such list is attached, Irepresent that there are no such Prior Inventions. If, in the course of my Relationship with the Company, I incorporate into a Company product, process ormachine a Prior Invention owned by me or in which I have an interest, the Company is hereby granted and shall have a non-exclusive, royalty-free,irrevocable, perpetual, worldwide license (with the right to sublicense) to make, have made, copy, modify, make derivative works of, use, sell andotherwise distribute such Prior Invention as part of or in connection with such product, process or machine. -2- (b) Assignment of Inventions. I agree that I will promptly make full written disclosure to AcelRx, will hold in trust for the sole rightand benefit of AcelRx, and hereby assign to AcelRx, or its designee, all my right, title and interest throughout the world in and to any and all inventions,original works of authorship, developments, concepts, know-how, improvements or trade secrets, whether or not patentable or registrable under copyrightor similar laws, which I may solely or jointly conceive or develop or reduce to practice, or cause to be conceived or developed or reduced to practice,during the period of my Relationship with the Company (collectively referred to as “Inventions”), except as provided in Section 5(e) below. I furtheracknowledge that all Inventions which are made by me (solely or jointly with others) within the scope of and during the period of my Relationship withthe Company are “works made for hire” (to the greatest extent permitted by applicable law) and are compensated by my salary (if I am an employee) or bysuch amounts paid to me under any applicable consulting agreement or consulting arrangements (if I am a consultant), unless regulated otherwise by themandatory law of the state of California. (c) Maintenance of Records. I agree to keep and maintain adequate and current written records of all Inventions made by me (solelyor jointly with others) during the term of my Relationship with the Company. The records may be in the form of notes, sketches, drawings, flow charts,electronic data or recordings, laboratory notebooks, and any other format. The records will be available to and remain the sole property of the Company atall times. I agree not to remove such records from the Company’s place of business except as expressly permitted by Company policy which may, fromtime to time, be revised at the sole election of the Company for the purpose of furthering the Company’s business. I agree to return all such records(including any copies thereof) to AcelRx at the time of termination of my Relationship with the Company as provided for in Section 6. (d) Patent and Copyright Rights. I agree to assist AcelRx, or its designee, at its expense, in every proper way to secure AcelRx’s, orits designee’s, rights in the Inventions and any copyrights, patents, trademarks, mask work rights, moral rights, or other intellectual property rightsrelating thereto in any and all countries, including the disclosure to AcelRx or its designee of all pertinent information and data with respect thereto, theexecution of all applications, specifications, oaths, assignments, recordations, and all other instruments which AcelRx or its designee shall deemnecessary in order to apply for, obtain, maintain and transfer such rights, or if not transferable, waive such rights, and in order to assign and convey toAcelRx or its designee, and any successors, assigns and nominees the sole and exclusive rights, title and interest in and to such Inventions, and anycopyrights, patents, mask work rights or other intellectual property rights relating thereto. I further agree that my obligation to execute or cause to beexecuted, when it is in my power to do so, any such instrument or papers shall continue after the termination of this Agreement until the expiration of thelast such intellectual property right to expire in any country of the world. If AcelRx or its designee is unable because of my mental or physical incapacityor unavailability or for any other reason to secure my signature to apply for or to pursue any application for any United States or foreign patents,copyright, mask works or other registrations covering Inventions or original works of authorship assigned to AcelRx or its designee as above, then Ihereby irrevocably designate and appoint AcelRx and its duly authorized officers and agents as my agent and attorney in fact, to act for and in my behalfand stead to execute and file any such applications and to do all other lawfully permitted acts to further the application for, prosecution, issuance,maintenance or transfer of letters patent, copyright or other registrations thereon with the same legal force and effect as if originally executed by me. Ihereby waive and irrevocably quitclaim to AcelRx or its designee any and all claims, of any nature whatsoever, which I now or hereafter have forinfringement of any and all proprietary rights assigned to AcelRx or such designee. -3- (e) Exception to Assignments. I understand that the provisions of this Agreement requiring assignment of Inventions to AcelRx donot apply to any invention which qualifies fully under the provisions of California Labor Code Section 2870 (attached hereto as Exhibit B). I will advisethe Company promptly in writing of any inventions that I believe meet such provisions and are not otherwise disclosed on Exhibit A. 6. Company Property; Returning Company Documents. I acknowledge and agree that I have no expectation of privacy with respect to theCompany’s telecommunications, networking or information processing systems (including, without limitation, stored company files, e-mail messages andvoice messages) and that my activity and any files or messages on or using any of those systems may be monitored at any time without notice. I furtheragree that any property situated on the Company’s premises and owned by the Company, including disks and other storage media, filing cabinets or otherwork areas, is subject to inspection by Company personnel at any time with or without notice. I agree that, at the time of termination of my Relationshipwith the Company, I will deliver to the Company (and will not keep in my possession, recreate or deliver to anyone else) any and all devices, records,data, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, laboratory notebooks, materials, flow charts,equipment, other documents or property, or reproductions of any of the aforementioned items developed by me pursuant to the Relationship or otherwisebelonging to the Company, its successors or assigns. In the event of the termination of the Relationship, I agree to sign and deliver the “TerminationCertification” attached hereto as Exhibit C; however, my failure to sign and deliver the Termination Certificate shall in no way diminish my continuingobligations under this Agreement. 7. Notification to Other Parties. (a) Employees. In the event that I leave the employ of the Company, I hereby consent to notification by the Company to my newemployer about my rights and obligations under this Agreement. (b) Consultants. I hereby grant consent to notification by the Company to any other parties besides the Company with whom Imaintain a consulting relationship, including parties with whom such relationship commences after the effective date of this Agreement, about my rightsand obligations under this Agreement. -4-  8. Solicitation of Employees, Consultants and Other Parties. I agree that during the term of my Relationship with the Company, and for aperiod of twelve (12) months immediately following the termination of my Relationship with the Company for any reason, whether with or without cause,I shall not either directly or indirectly solicit, induce, recruit or encourage any of the Company’s employees or consultants to terminate their relationshipwith the Company, or attempt to solicit, induce, recruit, encourage or take away employees or consultants of the Company, either for myself or for anyother person or entity. Further, during my Relationship with the Company and at any time following termination of my Relationship with the Companyfor any reason, with or without cause, I shall not use any Confidential Information of the Company to attempt to negatively influence any of theCompany’s clients or customers from purchasing Company products or services or to solicit or influence or attempt to influence any client, customer orother person either directly or indirectly, to direct his or its purchase of products and/or services to any person, firm, corporation, institution or otherentity in competition with the business of the Company. 9. Representations and Covenants. (a) Facilitation of Agreement. I agree to execute promptly any proper oath or verify any proper document required to carry out theterms of this Agreement upon the Company’s written request to do so. (b) Conflicts. I represent that my performance of all the terms of this Agreement does not and will not breach any agreement I haveentered into, or will enter into with any third party, including without limitation any agreement to keep in confidence proprietary information acquiredby me in confidence or in trust prior to commencement of my Relationship with the Company. I agree not to enter into any written or oral agreement thatconflicts with the provisions of this Agreement. (c) Voluntary Execution. I certify and acknowledge that I have carefully read all of the provisions of this Agreement and that Iunderstand and will fully and faithfully comply with such provisions. 10. General Provisions. (a) Governing Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of theState of California, without giving effect to the principles of conflict of laws. (b) Entire Agreement. This Agreement sets forth the entire agreement and understanding between the Company and me relating tothe subject matter herein and merges all prior discussions between us. No modification or amendment to this Agreement, nor any waiver of any rightsunder this Agreement, will be effective unless in writing signed by both parties. Any subsequent change or changes in my duties, obligations, rights orcompensation will not affect the validity or scope of this Agreement. -5- (c) Severability. If one or more of the provisions in this Agreement are deemed void by law, then the remaining provisions willcontinue in full force and effect. (d) Successors and Assigns. This Agreement will be binding upon my heirs, executors, administrators and other legal representatives,and my successors and assigns, and will be for the benefit of the Company, its successors, and its assigns. (e) Survival. The provisions of this Agreement shall survive the termination of the Relationship and the assignment of thisAgreement by the Company to any successor in interest or other assignee. (f) Remedies. I acknowledge and agree that violation of this Agreement by me may cause the Company irreparable harm, andtherefore agree that the Company will be entitled to seek extraordinary relief in court, including but not limited to temporary restraining orders,preliminary injunctions and permanent injunctions without the necessity of posting a bond or other security and in addition to and without prejudice toany other rights or remedies that the Company may have for a breach of this Agreement. (g) ADVICE OF COUNSEL. I ACKNOWLEDGE THAT, IN EXECUTING THIS AGREEMENT, I HAVE HAD THE OPPORTUNITYTO SEEK THE ADVICE OF INDEPENDENT LEGAL COUNSEL, AND I HAVE READ AND UNDERSTOOD ALL OF THE TERMS AND PROVISIONSOF THIS AGREEMENT. THIS AGREEMENT SHALL NOT BE CONSTRUED AGAINST ANY PARTY BY REASON OF THE DRAFTING ORPREPARATION HEREOF. [Signature Page Follows] -6- The parties have executed this Agreement on the respective dates set forth below: COMPANY: EMPLOYEE: ACELRX PHARMACEUTICALS, INC. JANE WRIGHT-MITCHELL, an Individual: By:Richard King Name:Chief Executive Officer Signature Title: Date: Date: Address:351 Galveston Drive Address:Address Line 1 Redwood City, CA 94063 Address Line 2 SIGNATURE PAGE TO CONFIDENTIAL INFORMATION ANDINVENTION ASSIGNMENT AGREEMENT OFACELRX PHARMACEUTICALS, INC.  EXHIBIT A LIST OF PRIOR INVENTIONSAND ORIGINAL WORKS OF AUTHORSHIPEXCLUDED UNDER SECTION 5 Title Date Identifying Numberor Brief Description ___ No inventions or improvements ___ Additional Sheets Attached Signature of Employee/Consultant: ___________________ Print Name of Employee/Consultant: __________________ Date: __________________________________________  EXHIBIT B Section 2870 of the California Labor Code is as follows: (a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in aninvention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using theemployer’s equipment, supplies, facilities, or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrablyanticipated research or development of the employer; or (2) Result from any work performed by the employee for the employer. (b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded frombeing required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable.  EXHIBIT C TERMINATION CERTIFICATION This is to certify that I do not have in my possession, nor have I failed to return, any devices, records, data, notes, reports, proposals, lists,correspondence, specifications, drawings, blueprints, sketches, laboratory notebooks, flow charts, materials, equipment, other documents or property, orcopies or reproductions of any aforementioned items belonging to AcelRx Pharmaceuticals, Inc., its subsidiaries, affiliates, successors or assigns (togetherthe “Company”). I further certify that I have complied with all the terms of the Company’s Confidential Information and Invention Assignment Agreement signedby me, including the reporting of any inventions and original works of authorship (as defined therein), conceived or made by me (solely or jointly withothers) covered by that agreement. I further agree that, in compliance with the Confidential Information and Invention Assignment Agreement, I will preserve as confidential alltrade secrets, confidential knowledge, data or other proprietary information relating to products, processes, know-how, designs, formulas, developmentalor experimental work, computer programs, data bases, other original works of authorship, customer lists, business plans, financial information or othersubject matter pertaining to any business of the Company or any of its employees, clients, consultants or licensees. I further agree that for twelve (12) months from the date of this Certificate, I shall not either directly or indirectly solicit, induce, recruit orencourage any of the Company’s employees or consultants to terminate their relationship with the Company, or attempt to solicit, induce, recruit,encourage or take away employees or consultants of the Company, either for myself or for any other person or entity. Further, I shall not at any time useany Confidential Information of the Company to negatively influence any of the Company’s clients or customers from purchasing Company products orservices or to solicit or influence or attempt to influence any client, customer or other person either directly or indirectly, to direct his or its purchase ofproducts and/or services to any person, firm, corporation, institution or other entity in competition with the business of the Company. Date: (Employee’s Signature) (Type/Print Employee’s Name)  EXHIBIT D LIST OF PRIOR AGREEMENTSEXCLUDED UNDER SECTION 4(b) ___ No prior agreements ___ Additional Sheets Attached Signature of Employee/Consultant: ________________________________ Print Name of Employee/Consultant: _______________________________ Date:  Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statements: (1)Registration Statements Form S-8 Nos. 333-194634, 333-187206, 333-180334, 333-172409 pertaining to Employee Incentive Plan of AcelRxPharmaceuticals, Inc.; (2)Registration Statements Form S-3 Nos. 333-196089, 333-190003, 333-183237, 333-182245 of AcelRx Pharmaceuticals, Inc. and in the relatedprospectuses; of our reports dated March 12, 2015, with respect to the financial statements of AcelRx Pharmaceuticals, Inc., and the effectiveness of internalcontrol over financial reporting of AcelRx Pharmaceuticals, Inc. included in this Annual Report on Form 10-K of AcelRx Pharmaceuticals, Inc. forthe year ended December 31, 2014. /s/ Ernst & Young LLP Redwood City, California March 12, 2015 /s/ Richard A. KingRichard A. KingChief Executive Officer and Director(Principal Executive Officer)Exhibit 31.1 CERTIFICATIONS I, Richard A. King, certify that: 1. I have reviewed this annual report on Form 10-K of AcelRx Pharmaceuticals, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting. Date: March 12, 2015  /s/ Timothy E. MorrisTimothy E. MorrisChief Financial Officer(Principal Financial Officer)Exhibit 31.2 CERTIFICATIONS I, Timothy E. Morris, certify that: 1. I have reviewed this annual report on Form 10-K of AcelRx Pharmaceuticals, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting. Date: March 12, 2015 Exhibit 32.1 CERTIFICATION Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 ofChapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), Richard A. King, Chief Executive Officer of AcelRx Pharmaceuticals, Inc. (the“Company”), and Timothy E. Morris, Chief Financial Officer of the Company, each hereby certifies that, to the best of his or her knowledge: 1.The Company’s Annual Report on Form 10-K for the period ended December 31, 2014, to which this Certification is attached as Exhibit 32.1 (the“Annual Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act, and 2.The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. In Witness Whereof, the undersigned have set their hands hereto as of the 12 day of March, 2015. /s/ Richard A. King /s/ Timothy E. MorrisRichard A. KingChief Executive Officer Timothy E. MorrisChief Financial Officer “This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to beincorporated by reference into any filing of AcelRx Pharmaceuticals, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.” th

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