AcelRx Pharmaceuticals
Annual Report 2016

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, 2016 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 of incorporation or organization)(IRS Employer Identification 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 RegisteredCommon Stock, $0.001 par valueThe NASDAQ Stock Market LLC Securities 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, 2016 (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$94,586,000. The calculation excludes 10,149,975 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 23, 2017, the number of outstanding shares of the registrant’s common stock was 45,336,540. DOCUMENTS INCORPORATED BYREFERENCE Portions of the Registrant's notice of annual meeting of stockholders and proxy statement to be filed pursuant to Regulation 14A within120 days after Registrant's fiscal year end of December 31, 2016, are incorporated by reference into Part III of this report.  1 ACELRX PHARMACEUTICALS, INC. 2016 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Page PART I Item 1. Business4Item 1A. Risk Factors28Item 1B. Unresolved Staff Comments59Item 2. Properties59Item 3. Legal Proceedings59Item 4. Mine Safety Disclosures59PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities60Item 6. Selected Financial Data62Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations63Item 7A. Quantitative and Qualitative Disclosures About Market Risk79Item 8. Financial Statements and Supplementary Data80Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure80Item 9A. Controls and Procedures80Item 9B. Other Information81PART III Item 10. Directors, Executive Officers and Corporate Governance83Item 11. Executive Compensation83Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters83Item 13. Certain Relationships and Related Transactions, and Director Independence84Item 14. Principal Accounting Fees and Services84PART IV Item 15. Exhibits, Financial Statement Schedules84Item 16. Form 10-K Summary84Signatures85 Unless the context indicates otherwise, the terms “AcelRx,” “AcelRx Pharmaceuticals,” “we,” “us” and “our” refer to AcelRx Pharmaceuticals, Inc.“DSUVIA” is a trademark, and ACELRX and “ZALVISO” are registered trademarks, all owned by AcelRx Pharmaceuticals, Inc. This report also containstrademarks 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 obtain, without delays, and maintain regulatory approval of DSUVIA(sufentanil sublingual tablet, 30 mcg), formerly knownas ARX-04 in the United States, and any related restrictions, limitations, and/or warnings in the label of an approved product candidate; •our ability to prepare and submit a Marketing Authorization Application, or MAA, and subsequently obtain, without delays, and maintainregulatory approval of ARX-04 (sufentanil sublingual tablet, 30 mcg) in the European Union, and any related restrictions, limitations, and/orwarnings in the label of an approved product candidate; •the success, cost and timing of our product development activities and clinical trials, including the additional clinical study, IAP312, forZALVISO (sufentanil sublingual tablet system); •our ability to successfully execute the pathway towards a resubmission of the ZALVISO New Drug Application, or NDA, including our abilityto satisfactorily conduct the clinical study, IAP312, requested by the U.S. Food and Drug Administration, or FDA, and any additional studiesor activities that may be required by the FDA in order to resubmit the ZALVISO NDA, and subsequently obtain, without further delays, andmaintain regulatory approval of ZALVISO in the United States and any related restrictions, limitations, and/or warnings in the label of anapproved product candidate; •our ability to manufacture and supply ZALVISO to Grünenthal GmbH, or Grünenthal, in accordance with their forecast and the Manufactureand Supply Agreement with Grünenthal; •the outcome of any potential FDA Advisory Committee meetings held for any of our product candidates; •the status of the Collaboration and License Agreement with Grünenthal or any other future potential collaborations, including potentialmilestones and royalty payments under the Grünenthal agreement and obligations under the Purchase and Sale Agreement with PDLBioPharma, Inc., or PDL; •our plans to research, develop and commercialize our product candidates; •our ability to attract additional collaborators with development, regulatory and commercialization expertise; •our ability to successfully retain our key scientific, engineering, medical or management personnel and hire new personnel as needed; •the size and growth potential of the markets for our product candidates, and our ability to serve those markets; •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 in a timely fashion, whether alone through recruiting qualified employees, byengaging a contract sales organization, or with potential future collaborators; •our ability to manufacture and supply DSUVIA, if approved, in support of any potential U.S. commercial launch; •our ability to obtain adequate government or third-party payor reimbursement; •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 accuracy of our estimates regarding expenses, future revenues, capital requirements and needs for additional financing; 3TM ® •our liquidity and capital resources; 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. 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, DSUVIA (known as ARX-04 outside of the United States), and our follow-on product candidate, ZALVISO, utilize sublingualsufentanil, delivered via a non-invasive route of administration. We anticipate developing a distribution capability and commercial organization in theUnited States to market and sell DSUVIA in the United States by ourselves, and potentially, in certain European Economic Area, or EEA, countries, eitheralone or with partners. In geographies where we decide not to commercialize ourselves, we would seek to out-license commercialization rights. We intendto seek regulatory approval for ZALVISO in the United States and, if successful, potentially promote ZALVISO as a follow-on product to DSUVIA, eitherby ourselves or with strategic partners. We have chosen sufentanil as the therapeutic ingredient for all of our current product candidates. Opioids have been utilized for pain relief for centuriesand are the standard-of-care for the treatment of moderate-to-severe acute pain. Sufentanil is available as an injectable in several markets around the worldand is used by anesthesiologists for induction of sedation or as an epidural; however, the injectable formulation is not suitable for the treatment of acutepain. We have created a proprietary sublingual (under the tongue) formulation of sufentanil intended for the treatment of moderate-to-severe acute pain.The sublingual formulation retains the therapeutic value of sufentanil and novel delivery devices provide a non-invasive route of administration.Sufentanil is highly lipophilic which provides for rapid absorption in the mucosal tissue, or fatty cells, found under the tongue, and for rapid transit acrossthe blood-brain barrier to reach the mu-opioid receptors in the brain. The sublingual route of delivery used by DSUVIA and ZALVISO provides arecognized onset of analgesia. The sublingual delivery system also eliminates the risk of intravenous, or IV, complications, such as catheter-relatedinfections. In addition, because patients do not require direct connection to an IV infusion pump, or IV line, DSUVIA and ZALVISO may allow for ease ofpatient mobility. DSUVIA (sufentanil sublingual tablet, 30 mcg), known as ARX-04 outside the United States DSUVIA is our lead investigational product candidate consisting of a single tablet delivered via a disposable, pre-filled, single-dose applicator, or SDA.We are developing DSUVIA for the treatment of moderate-to-severe acute pain to be administered by a healthcare professional to a patient in medicallysupervised settings. If approved, examples of potential patient populations and settings in which DSUVIA could be used include: emergency roompatients; patients who are recovering from short-stay or ambulatory surgery and do not require more long-term patient-controlled analgesia; post-operative patients who are transitioning from the operating room to the recovery floor; certain types of office-based procedures; patients being treated andtransported by paramedics; and for battlefield casualties. In the emergency room and in ambulatory care environments, patients often do not haveimmediate IV access available, or maintaining IV access can be an impediment to rapid discharge. Oral pills and liquids generally have slow and erraticonset of analgesia, and are often avoided in emergency departments should physician assessment determine a patient needs to maintain an NPO (nil peros or nothing by mouth) status due to the chance that a procedure under anesthesia will be necessary. Moreover, IV dosing results in high peak plasmalevels, thereby limiting the opioid dose and requiring frequent redosing intervals to titrate to satisfactory analgesia. Based on internal market researchconducted to date, we believe that additional treatment options are needed that can safely and effectively treat acute trauma pain, in both civilian andmilitary settings, and that can provide an alternative to IV opioids, oral pills and liquids for moderate-to-severe acute pain. 4 With the completion of the Phase 3 clinical program for DSUVIA, and the positive data obtained from all three studies, we submitted a New DrugApplication, or NDA, under section 505(b)(2) with the FDA for DSUVIA for the treatment of adult patients experiencing moderate-to-severe acute pain ina medically supervised setting in December 2016. The NDA was accepted for filing by the FDA with a Prescription Drug User Fee Act, or PDUFA, goaldate of October 12, 2017. The NDA contains results of the entire DSUVIA clinical program, including data from four (three Phase 3 and one Phase 2)clinical trials in which DSUVIA was assessed as a treatment for moderate-to-severe acute pain in post-operative and emergency department patients. Ineach of these clinical studies, patients treated with DSUVIA demonstrated improvements in pain intensity as early as 15-to-30 minutes after the start ofdosing. Adverse events reported in the studies were typical of opioid therapy, with the most common being nausea, headache, vomiting and dizziness. Sufentanil Sublingual Tablet 30 mcg Clinical Program Included More Than 900 PatientsStudyNumber of PatientsStudy DesignMean # 30 mcg Doses /Study PeriodEfficacy EndpointEfficacySAP202100Multi-center,randomized, placebo-controlled, post-operative4.9 / 12hSPID12: ARX-04 vsplaceboSST 30 mcgdemonstrated painrelief over placeboSAP301161Multicenter,randomized, placebo-controlled, post-operative7.0 / 24hSPID12: ARX-04 vsplaceboSST 30 mcgdemonstrated painrelief over placeboSAP30276Multicenter, open-label, EmergencyDepartment1.1 / 2hDrop in pain intensityfrom baselineSST 30 mcg patientshad >35% drop inpain at one hour aftera single doseSAP303140Multicenter, open-label, post-operative3.3 / 12hDrop in pain intensityfrom baselineSST 30 mcg patientshad 57% drop in painSelect ZALVISOPatients427Varied, post-operativeN/ASPID48: SS vs. placeboor IV PCA morphineSublingual sufentanilpatientsdemonstrated painrelief over placeboand morphine 1. Includes placebo patients, where applicable.2. 323 ZALVISO patients who dosed two 15-mcg tablets within 25 minutes were included in the ARX-04 safety database, balance received placebo. On May 11, 2015, we entered into an award contract supported by the Clinical and Rehabilitative Medicine Research Program, or CRMRP, of the UnitedStates Army Medical Research and Materiel Command, or USAMRMC, within the U.S. Department of Defense, or the DoD, in which the DoD agreed toprovide up to $17.0 million to support the development of DSUVIA, referred to as the DoD Contract. Under the terms of the DoD Contract, the DoD hasand continues to reimburse us for costs incurred for development, manufacturing, regulatory and clinical costs outlined in the contract in order to submitan NDA to the FDA, including reimbursement for certain personnel and overhead expenses. The period of performance under the DoD Contract began onMay 11, 2015. The contract gives the DoD the option to extend the term and provide additional funding. On March 2, 2016, the DoD Contract wasamended to approve enrollment of additional patients in the SAP302 study, approve the addition of the SAP303 study, and extend the contract period ofperformance by four months from November 10, 2016 to March 9, 2017, to accommodate the increased SAP302 patient enrollment and the SAP303study. The costs for these changes has been absorbed within the current contract value. If DSUVIA is approved by the FDA, the DoD has the option topurchase 112,000 units of commercial product pursuant to the terms of the DoD Contract. We have also held various meetings with Health Authorities in Europe, including Iceland and Hungry who have been designated as rapporteur and co-rapporteur, respectively, to discuss the submission of a Marketing Authorization Application, or MAA, for ARX-04 (known as DSUVIA in the UnitedStates). Based on feedback from these discussions, we intend to submit a hybrid application for a label indication for ARX-04 in the EU for acutemoderate-to-severe pain in adult patients in medically supervised settings. At the time of the anticipated submission of the MAA, we will have onlycompleted one study in the emergency room for acute pain patients, in addition to two Phase 3 and one Phase 2 post-operative pain studies. We may needan additional controlled study in the emergency department with ARX-04 to obtain a label that includes trauma-related pain in addition to post-operativepain. We also anticipate we may need comparator studies in the EU to ensure premium reimbursement in certain countries. We anticipate submitting theMAA for ARX-04 in the first half of 2017. A pre-submission meeting was held with the European-appointed rapporteur and co-rapporteur in January2017. 51®2 ZALVISO (sufentanil sublingual tablet system) As a follow-on product candidate to DSUVIA in the United States, ZALVISO is intended for the management of moderate-to-severe acute pain inhospitalized adult patients. ZALVISO consists of 15 mcg sublingual tablets delivered by the ZALVISO System, a needle-free, handheld, patient-administered, pain management system, or together, ZALVISO. While still under development in the U.S., as discussed further below, ZALVISO isapproved and marketed in the EU. ZALVISO is a pre-programmed, non-invasive, system to allow hospital patients with moderate-to-severe acute pain to self-dose with sufentanil sublingualtablets, 15 mcg, to manage their pain. ZALVISO is designed to help address certain problems associated with post-operative IV patient-controlledanalgesia (PCA). ZALVISO allows patients to self-administer sufentanil sublingual tablets via a pre-programmed, secure system designed to eliminate therisk of programming errors. On December 16, 2013, AcelRx and Grünenthal GmbH, a company organized under the laws of Germany, or Grünenthal, entered into a Collaboration andLicense Agreement, or the License Agreement, and related Manufacture and Supply Agreement, or the MSA, and together with the License Agreement,the Agreements. The License Agreement grants Grünenthal rights to commercialize ZALVISO, our novel sublingual patient-controlled analgesia, or PCA,system, or the Product, in the countries of the European Union, or EU, Switzerland, Liechtenstein, Iceland, Norway and Australia, or the Territory, forhuman use in pain treatment within, or dispensed by, hospitals, hospices, nursing homes and other medically supervised settings, or the Field. We retainrights with respect to the Product in countries outside the Territory, including the United States, Asia and Latin America. Under the MSA, we willexclusively manufacture and supply the Product to Grünenthal for the Field in the Territory. We entered into amendments to the License Agreement,effective July 17, 2015 and September 20, 2016, or the License Amendments, and together with the License Agreement, the Amended License Agreement,and entered into an amendment to the MSA, or the MSA Amendment, and together with the MSA, the Amended MSA, effective as of July 17, 2015, andtogether, the Amended Agreements. For additional information on the Amended Agreements, see Note 6 “Collaboration Agreement” in theaccompanying notes to the Consolidated Financial Statements. ZALVISO was approved for commercial sale by the European Commission in September 2015. Grünenthal has initially deployed the ZALVISO System ina limited number of hospitals in targeted countries under a pilot program, whereby the hospital will use ZALVISO in a small number of post-operativepatients. Pilot programs are expected to last several months after which ZALVISO may be available for commercial sale. ZALVISO has been commerciallylaunched in Germany, France, the UK, and Italy, and is expected to be commercially launched in the second quarter of 2017 in the Netherlands, Belgium,Portugal, Ireland, Spain, Austria and the Nordics. On September 18, 2015, we sold a majority of the expected royalty stream and commercial milestonesfrom the sales of ZALVISO in the EU and EEA by Grünenthal to PDL, or the Royalty Monetization. For additional information on the RoyaltyMonetization with PDL, see Note 8 “Liability Related to Sale of Future Royalties” in the accompanying notes to the Consolidated Financial Statements.Royalty revenues and non-cash royalty revenues from the commercial sales of ZALVISO in the EU are expected to be minimal for 2017. We submitted an NDA for ZALVISO in September 2013, and on July 25, 2014, the Division of Anesthesia, Analgesia, and Addiction Products, or theDivision, of the FDA issued a Complete Response Letter, or CRL, for the ZALVISO NDA. The CRL contains requests for additional information on theZALVISO System to ensure proper use of the device. The requests include submission of data demonstrating a reduction in the incidence of opticalsystem errors, changes to address inadvertent dosing, among other items, and submission of additional data to support the shelf life of the product. InMarch 2015, we received correspondence from the FDA stating that, in addition to the work we had performed to address the items in the CRL, a clinicalstudy would be required to test the modifications to the ZALVISO device and mitigations put in place to reduce the risk of inadvertent dosing/misplacedtablets. Our IAP312 study is designed to evaluate the effectiveness of changes made to enhance performance of the ZALVISO device, incidence of inadvertentdosing and takes into account comments from the FDA on the protocol. The IAP312 study will include approximately 315 post-operative patients andcollect information requested by the Division including device failure rate and incidence of dropped tablets. These results will supplement the threePhase 3 trials already completed that include a head-to-head comparison to IV PCA. We initiated IAP312 in September 2016 and expect to complete thisstudy in mid-2017. Pending successful completion of the IAP312 trial, we anticipate resubmitting the NDA for ZALVISO by the end of 2017. 6® ARX-03 We have made a strategic decision to hold any further development of ARX-03 (sufentanil/triazolam sublingual tablet), a single, fixed-dose, combinationdrug product designed to provide mild sedation, anxiety reduction and pain relief for patients undergoing painful procedures in a physician’s office, inorder to focus our efforts on the continued development and potential commercialization of DSUVIA (known as ARX-04 outside the United States), andZALVISO. Accordingly, the Investigational New Drug, or IND, application for ARX-03 has been inactivated. 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 and fentanyl. These third-party clinical results correlate well withpreclinical trials demonstrating sufentanil’s high therapeutic index, or the ratio of the toxic dose to the therapeutic dose of a drug, used as a measure ofthe 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 250 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 formoderate-to-severe acute pain. None of our product candidates have been approved by the FDA, although ZALVISO has been approved in the EU. To date, we have received minimal revenue from the sale of ZALVISO in the EU. 7 Our Product Candidates The following table summarizes key information about our existing product candidates. Product Candidate Description Target Use StatusDSUVIA, known as ARX-04, outsidethe United States Sufentanil sublingual tablet, 30 mcg Moderate-to-severe acute pain in amedically supervised setting,administered by a healthcareprofessional NDA accepted for filing by the FDAwith PDUFA goal date of October 12,2017. MAA filing for ARX-04targeted for the first half of 2017. ZALVISO Sufentanil sublingual tablet system,15 mcg Moderate-to-severe acute pain in thehospital setting, administered by thepatient as needed Phase 3 trial, IAP312, initiated inSeptember 2016.European Commission approvedMAA in September 2015 andZALVISO device is CE marked.Grünenthal began pilot launches ofZALVISO in the European Union in2016. DSUVIA (sufentanil sublingual tablet, 30 mcg), known as ARX-04 outside the United States None of our product candidates have been approved by the FDA, although ZALVISO has been approved in theEU. To date, we have received minimal revenue from the sale of ZALVISO in the EU. How DSUVIA May Address the Unmet Medical Need of Patients Requiring Short-Term Management of Moderate-To-Severe Acute Pain in MedicallySupervised Settings. Settings in which patients might require the short-term management of moderate-to-severe acute pain include emergency room patients; patients who arerecovering from short-stay or ambulatory surgery and do not require more long-term patient-controlled analgesia; post-operative patients who aretransitioning from the operating room to the recovery floor; certain types of office-based procedures; patients being treated and transported byparamedics; and for battlefield casualties. While IV opioids are currently employed to control moderate-to-severe acute pain in many of these settings, the use of IV opioids suffers from thefollowing: •side effects associated with the most commonly used opioid, morphine, and its active metabolites; 8 •infection risk associated with the invasive nature of IV delivery; •consumption of hospital resources including an IV pump, a bed where the patient can be monitored, and nurse time; and, •possible impairment of a patient’s cognitive abilities, which can make it difficult to provide accurate medical history to physicians duringevaluation. Healthcare providers and hospital administrators caring for patients in moderate-to-severe acute pain in the aforementioned medically supervised settingscould significantly benefit from the following items: •non-invasively delivered analgesic that utilizes fewer hospital resources, thereby incurring less cost; •effective and rapid-acting pain relief with sufficient duration of effect allowing efficient treatment while assuring patient satisfaction; •pain relief that does not sacrifice cognitive function; and/or, •fewer side effects, including infection risks due to invasive routes of delivery such as IV; In our clinical studies, DSUVIA has demonstrated the following attributes: •ease of administration; •pain reduction (as much as 3-points on a validated 10-point scale) beginning as early as 15-to-30 minutes after administration; •maintenance of cognitive function; and, •adverse event types similar to IV opioids, such as nausea, headache, vomiting and dizziness. We believe that DSUVIA provides a safety, efficacy and tolerability profile potentially enabling DSUVIA to replace IV opioid use in a majority ofpatients with moderate-to-severe acute pain in the proposed medically supervised settings. This may be especially true in the emergency medical settingsin the United States, where the number of emergency departments is decreasing, resulting in an increased focus on resource management to treat agrowing number of patients in an efficient manner. DSUVIA Description The benefits of DSUVIA are the result of combining the following three elements: •sufentanil, a high therapeutic index opioid; •AcelRx’s proprietary, non-invasive sublingual dosage form; and, •a disposable single-dose applicator (SDA) that enables simple administration of sufentanil sublingual tablets in medically supervised settings. DSUVIA utilizes sufentanil, which has one of the highest therapeutic indices of all commercially available opioids, making it an attractive candidate forthe management of moderate-to-severe acute 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. Phase 3 Clinical Trials for DSUVIA Multi-center, double-blind, placebo-controlled study (SAP301) In September 2015, we reported that SAP301, a pivotal Phase 3 multi-center, double-blind, placebo-controlled study of DSUVIA that evaluated theefficacy and safety of DSUVIA vs. placebo for the treatment of moderate-to-severe acute pain following ambulatory abdominal surgery, met its primaryand secondary endpoints. Results demonstrated that patients receiving DSUVIA administered via a disposable, pre-filled SDA experienced significantlygreater pain reduction compared to placebo, as measured by the summed pain intensity difference over 12 hours, or SPID-12, (p<0.001). Adverse eventsrelated to study drug were typical of opioid therapy and were similar for patients treated with DSUVIA and placebo, the most common of which werenausea (29%) and headache (12%). The Phase 3 SAP301 trial enrolled adult patients undergoing outpatient abdominal surgery procedures at four clinical sites in the United States.Following surgery, 163 patients were randomized to receive either DSUVIA, or placebo, in a 2:1 active to placebo ratio. DSUVIA, or placebo, wasadministered by site staff as requested by the patient, but not more than once per hour. The intent-to-treat, or ITT, population in this study averaged 40.9years of age with an average Body Mass Index of 27.5, and had a higher percent of females to males (68%:32%). Eighty-nine percent of patients enteringthe study completed the 24-hour study period. 9 The primary endpoint of the study was the difference in the SPID-12 score of patients receiving DSUVIA compared to those receiving placebo. SPID‑12scores were +25.8 for DSUVIA-treated patients and +13.1 for placebo-treated patients; the difference between the two groups being highly statisticallysignificant (p<0.001). Notably, the difference in pain intensity from baseline was superior for DSUVIA over placebo at the earliest time point measured(15 minutes; p=0.002). Secondary efficacy endpoints were also superior for DSUVIA compared to placebo. There were two SAEs reported during the study period, both of which were in the placebo group and resulted in early termination of the affected patients.No patient in the DSUVIA group dropped out of the study prior to 24 hours due to an adverse event. A lower percent of patients treated with DSUVIAdropped out of the study prior to 24 hours due to lack of efficacy compared to the placebo group (3.7% and 18.5%, respectively; p=0.002). Multi-center, single-arm, open-label study (SAP302) Results from the single-arm, open-label Phase 3 SAP302 trial, which assessed DSUVIA in patients who presented to the emergency room with moderate-to-severe acute pain associated with trauma or injury, were reported in August 2016. Overall, the 76 adults treated with DSUVIA in the SAP302 studyexperienced a mean pain intensity difference to baseline (PID) of 2.9 from a baseline of 8.1, or 35%, on a 0 – 10 numeric rating scale at 60 minutes. Inaddition, DSUVIA demonstrated a predicted onset of activity in patients enrolled in SAP302. Patients reported a mean pain intensity decrease of 1.1compared to baseline 15 minutes following first administration of DSUVIA and a decrease of 1.9 after 30 minutes. DSUVIA was well tolerated in the SAP302 study, with 79% of patients reporting no adverse events. The most common related adverse events reported inthe study occurred with single-digit rates – nausea (7%) and vomiting (4%). All these events were rated as mild with the exception of one event ofmoderate nausea. Drug-induced cognitive impairment was not seen with DSUVIA in this study as assessed using the validated Six-Item Screener, aninstrument used to identify patients with cognitive impairment. Multi-center, single-arm, open-label study (SAP303) Results from the SAP303 clinical trial, which allowed for administration of DSUVIA for up to 12 hours in 140 patients 40 years of age and older who hadmoderate-to-severe acute pain following a surgical procedure with general anesthesia or spinal anesthesia (except those who received intrathecal opioids),were reported in September 2016. In this study, DSUVIA was well tolerated in the management of moderate-to-severe acute pain in post-operative studypatients, including elderly patients and those with organ impairment. Regardless of age and organ function, approximately 2 in 3 patients had no adverseevents during the study (63% of all patients, 63% of those aged ≥65 years, 62% of those with hepatic impairment, 70% of those with renal impairment).The most common related adverse events were nausea (27%) and dizziness (4%). On a global assessment of DSUVIA as a method of pain control, 90% ofhealthcare professionals and 87% of patients responded “good” or “excellent.” The primary efficacy variable for SAP303 was the SPID-12, and secondary efficacy variables included pain intensity by evaluation time point. In thisstudy, DSUVIA showed a reduction in pain intensity starting at 30 minutes after the first dose, followed by 27%, 49%, and 57% reductions in mean painintensity from a baseline mean pain score of 6.2 at 1 hour, 2 hours, and 12 hours, respectively. The FDA has also agreed to allow us to include as supporting safety information in the NDA for DSUVIA, data from 323 patients treated in the ZALVISOclinical studies who had administered two sufentanil sublingual 15 mcg tablets 20-to-25 minutes apart. We have previously completed and analyzedpharmacokinetic and modeling data, which demonstrated the equivalency of one sufentanil sublingual tablet, 30 mcg, to two sufentanil sublingualtablets, 15 mcg, taken 20-to-25 minutes apart. 10 Phase 2 Clinical Trial for DSUVIA Placebo-controlled, dose-finding study (SAP202) 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, DSUVIA successfully met its primary endpoint. Results demonstrated that patients receiving DSUVIAadministered by a healthcare professional, no more frequently than once per hour, had significantly greater pain reduction as measured by SPID-12 thanplacebo-treated patients (+6.53 for DSUVIA-treated patients and -7.12 for placebo-treated patients; p=0.003). The sufentanil sublingual 20 mcg tablet-treated patients did not achieve SPID-12 scores that differentiated from placebo. Adverse events reported in the study were generally mild-to-moderate innature, with two serious adverse events of post-surgical infection reported, both of which were determined by the investigator to be unrelated to studydrug. This dose-ranging study randomized 101 patients following bunionectomy surgery in a 2:2:1 ratio to sufentanil sublingual tablet, 30 mcg,sufentanil sublingual tablet, 20 mcg, or placebo treatment arms. The intent-to-treat, or ITT, population in this study averaged 42.5 years of age and wasevenly balanced for males 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 related adverse events for patients receiving active drug were nausea (46%) and vomiting (21%). Two patients discontinued treatment, oneunrelated to study drug (anxiety/chest pain) and the other probably related to study drug (somnolence/respiratory depression); however, both patientsrecovered without medical intervention. 11 ZALVISO— Sufentanil Sublingual Tablet System None of our product candidates have beenapproved by the FDA, although ZALVISO has been approved in the EU. To date, wehave received minimal revenue from the sale of ZALVISO in the EU. 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. 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). None of our product candidates have been approved by the FDA, although ZALVISO has been approved in the EU. To date, we have received minimalrevenue from the sale of ZALVISO in the EU. 12 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. 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 ofmoderate-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 the treatment of pain immediately following open-abdominal or major orthopedic surgery (hip and knee replacement). Patients were randomized1:1 to treatment with ZALVISO or IV PCA morphine and were treated for a minimum of 48 hours and up to 72 hours. 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 reportedin the 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 Phase 3 trial enrolled 178 adult patients at 13 U.S. sites. Patients were treated for post-operative pain for a minimum of 48 hours,and up to 72 hours. Patients were randomized 2:1, with 119 patients randomized to sufentanil sublingual tablet treatment and 59 to placebo treatment.Both treatments were delivered by the patient, as needed, using ZALVISO with a 20-minute lock-out period. Patients in both groups could receive up to 2mg morphine intravenously per hour as a rescue medication, the primary purpose of this rescue medication being to provide placebo-treated patientsaccess to pain medication to enable them to stay in the trial as long as possible. Pre-rescue pain scores were imputed to minimize the impact of this rescueopioid on efficacy evaluations. The primary endpoint evaluated pain intensity over the 48-hour study period compared to baseline, or Summed Pain Intensity Difference, or 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). 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 ITT population. Patients were treated for a minimum of 48 hours, and up to 72 hours. Patients were randomized 3:1, with 323 patients randomized tosufentanil sublingual tablet treatment and 104 to placebo treatment. Both treatments were delivered by the patient, as needed, using the ZALVISO Systemwith a 20-minute lock-out period. Patients in both groups could receive up to 2 mg morphine intravenously per hour as a rescue medication, the primarypurpose of this rescue medication being to enable placebo-treated patients to stay in the study. Pain scores recorded just prior to the delivery of rescuemedication were gathered and imputed forward to minimize the impact of this rescue opioid on efficacy evaluations. The primary endpoint evaluated SPID-48 in patients following major orthopedic surgery. Patients receiving ZALVISO demonstrated a significantlygreater SPID-48 compared to placebo-treated patients during the study period (+76.1 and -11.5, respectively; p < 0.001). Two hundred fifteen(68.3%) sufentanil sublingual tablet-treated patients completed the 48-hour study period, compared to 43 (41.3%) placebo-treated patients. Primaryreasons for drop-out in the sufentanil sublingual tablet- and placebo-treated groups were adverse events (7.0% and 6.7%, respectively) and lack ofefficacy (14.3% and 48.1%, respectively). 13 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% 3 patients (0.7%) in the ZALVISO group had treatment-emergent respiratory events that required naloxone reversal. 14 The Market Opportunity for DSUVIA and ZALVISO United StatesAccording to commissioned research, we estimate that there are currently 91.9 million patients who are treated in various medically supervised settingsfor their moderate-to-severe acute pain which is significant enough to warrant the use of an opioid. We believe these patients may be eligible fortreatment with DSUVIA, and in some cases ZALVISO, if approved in the United States. For DSUVIA, the current estimate of eligible patients, by setting, isas follows: Emergency Services (includes pre-hospital and Emergency Departmenttreatment)51.5 millionHospital procedures14.5 millionHospital outpatient surgery 7.2 millionAmbulatory Surgery Centers outpatient surgery 3.5 millionAmbulatory Surgery Center procedures1.9 millionOffice-based plastic surgery1.4 millionOffice-based procedures 2.3 million We estimate there are 7.8 million inpatient surgery patients and 1.8 million hospital inpatient floor (non-surgical) patients who could be eligible fortreatment with either DSUVIA or ZALVISO, if approved in the United States. We estimate that DSUVIA represents a $1.1 billion opportunity at peak year net sales, assuming treatment of an estimated 9.1 million patients withmoderate-to-severe acute pain. There can be no assurance that our estimate regarding the number of patients treated in the various settings will beaccurate. EuropeAccording to recent EU5 (France, Germany, Italy, Spain, and the United Kingdom) national health statistics, 142 million patients are represented acrossthe ARX-04 target segments annually. Each year, there are an estimated 110 million emergency attendances and 32 million surgical procedures performedeach year. It is anticipated that there are 51 million patients in emergency medicine with moderate-to-severe acute pain and 16 million with moderate-to-severe acute pain following surgery each year. Using the published priced benchmarks of Penthrox (methoxyflurane) and branded fentanyl products,£17.89 (UK) and €8.04 (Germany), respectively, we believe that ARX-04 could achieve an average price point equivalent to €15 price per unit. A recentlypublished micro-costing literature review has determined the total cost of drug and labor per patient necessary to administer IV opioids in the emergencydepartment in the EU5 countries ranges from €18.31 to €28.38. Based on this information, we believe peak year sales in emergency medicine and post-operative pain across Europe are expected to be approximately €700 million, assuming ARX-04 achieves an average price point equivalent to €15;however, there can be no assurance that ARX-04 will be able to achieve a €15 price per unit. Our Strategy Our strategy is to develop and commercialize DSUVIA, if approved, in the United States. We have designed and developed DSUVIA for the treatment ofmoderate-to-severe acute pain in a medically supervised setting. DSUVIA is intended to be administered by a healthcare professional. We intend tocommercialize DSUVIA ourselves with the initial target market of emergency medicine. We intend to expand the promotion of DSUVIA into other areasof the hospital, including post-surgical and non-surgical patients with moderate-to-severe acute pain, and patients undergoing painful procedures.Beyond the hospital, we intend to promote DSUVIA in ambulatory surgery centers and certified doctor’s offices for use in patients with moderate-to-severe acute pain. We anticipate our commercial efforts will require a modestly sized commercial organization in the United States. We will selectivelyutilize third-party contractors in order to maximize the capital efficiency of our manufacturing and commercialization efforts. If the IAP312 study issuccessful, and ZALVISO is approved by the FDA, we may commercialize ZALVISO ourselves as a follow-on product in the United States. We may 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. 15 DSUVIAOur specific strategy with respect to DSUVIA is to: •seek regulatory approval in the United States; •further expand our relationship with our contract manufacturing organizations, or CMOs, for the manufacture and packaging of DSUVIA; •build a targeted sales force focused on the emergency room and hospitals in the United States; and, •on our own, or with a partner, supply the DoD and other military organizations as requested and appropriate. ARX-04 (known as DSUVIA in the United States)Our specific strategy with respect to ARX-04 in territories outside of the United States is to: •seek regulatory approval in the EEA; •seek commercial partnerships for ARX-04 in countries outside of the United States; and/or, •build a modest commercial operation focused on the emergency room and hospitals in certain countries in the EEA. ZALVISO Our specific strategy with respect to ZALVISO is to: •collaborate with Grünenthal to continue to support the launch of ZALVISO in their licensed territories; •continue to strengthen our commercial relationships for the manufacturing of the components and assembly of the ZALVISO System; and, •seek regulatory approval in the United States and, if successful, potentially promote ZALVISO as a follow-on product to DSUVIA. Sales and Marketing We anticipate developing a distribution capability and commercial organization in the United States to market and sell DSUVIA in the United States andperhaps certain EEA countries, either alone or with strategic partners. In geographies where we decide not to commercialize ourselves, we would seek toout-license commercialization rights. In executing our strategy, our goal is to have significant control over the development process and commercialexecution for DSUVIA, while retaining meaningful economics. We plan to build progressively commercial capability to support introduction of DSUVIA to the United States market as we move toward potential NDAapproval. We foresee two stages of commercial execution to support successful introduction of DSUVIA in the United States: Prior to FDA approval of DSUVIA, we plan to: •create and deploy a focused scientific support team to gather a detailed understanding of individual emergency room, and hospital needs inorder to be prepared to present DSUVIA effectively at the time of commercial launch; •increase awareness of the clinical profile of sublingual administration of sufentanil through publication of our clinical data; •engage appropriate Advisory Boards that include representative emergency room physicians, anesthesiologists, surgeons, nurses, P&Tcommittee members and other related experts to provide us with input on appropriate commercial positioning for DSUVIA for each of these keyaudiences; •build a sales and marketing organization that can define appropriate segmentation and positioning strategies and tactics for DSUVIA; and, •gather relevant clinical and health economic data identifying the limitations of IV opioids and other relevant treatments for moderate-to-severeacute pain in use today. Assuming FDA approval, we plan to: •establish DSUVIA on hospital and ambulatory surgery center formularies through deployment of an experienced team to explain the clinicaland health economic attributes of DSUVIA; 16 •create and progressively deploy a high-quality, customer-focused and experienced sales organization dedicated to bringing innovative, highlyvalued healthcare solutions to patients, payors and healthcare providers, including progressively building a targeted sales force ofapproximately 65 people in the United States; •conduct post-approval clinical trials for DSUVIA; •undertake efforts to establish DSUVIA as a suitable choice for moderate-to-severe acute pain in medically supervised settings; and, •expand the market through deployment of DSUVIA into other suitable medically supervised settings outside of the hospital and ambulatorysurgery centers. If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our product candidates, we maybe unable to generate any product revenue. For a more comprehensive discussion of the risks related to our commercialization, please see “Risk Factors—Risks Related to Commercialization of Our Product Candidates” appearing elsewhere in this Form 10-K. Collaborative Arrangements Grünenthal Collaboration On December 16, 2013, we and Grünenthal entered into the License Agreement, as amended effective July 17, 2015 and September 20, 2016, and relatedMSA, as amended effective July 17, 2015, together the Amended Agreements. The License Agreement grants Grünenthal rights to commercializeZALVISO, or the Product, in the Territory for human use in pain treatment in the Field. We retain rights with respect to the Product in countries outsidethe Territory, including the United States, Asia and Latin America. Under the MSA, we are required to exclusively manufacture and supply the Product toGrünenthal for the Field in the Territory. Under the terms of the Amended Agreements with Grünenthal, we received an upfront cash payment of $30.0 million in December 2013, a milestonepayment of $5.0 million related to the MAA submission, which occurred in July 2014, and a $15.0 million milestone payment due to the EC approval ofthe MAA for ZALVISO in September 2015. Under the Amended License Agreement, we are eligible to receive approximately $194.5 million inadditional milestone payments, based upon successful regulatory and product development efforts ($28.5 million) and net sales target achievements($166.0 million). Grünenthal will also make tiered royalty, supply and trademark fee payments in the mid-teens up to the mid-twenties percent range,depending on the sales level achieved, on net sales of ZALVISO in the Territory. For additional information on the Amended Agreements, see Note 6“Collaboration Agreement” in the accompanying notes to the Consolidated Financial Statements. On September 18, 2015, we sold a majority of the expected royalty stream and commercial milestones from the sales of ZALVISO in the EU and EEA byGrünenthal to PDL, or the Royalty Monetization. We received gross proceeds of $65.0 million in the Royalty Monetization. PDL will receive 75% of theEuropean royalties under the Amended License Agreement with Grünenthal, as well as 80% of the first four commercial milestones worth $35.6 million(or 80% of $44.5 million), subject to the capped amount of $195.0 million. For additional information on the Royalty Monetization with PDL, see Note 8“Liability Related to Sale of Future Royalties” in the accompanying notes to the Consolidated Financial Statements. Grünenthal will be responsible for all commercial activities for ZALVISO, including obtaining and maintaining pharmaceutical product regulatoryapproval in the Territory. We will be responsible for obtaining and maintaining device regulatory approval in the Territory and manufacturing and supplyof ZALVISO to Grünenthal for commercial sales. 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. 17 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, 2016, we are the owner of record of 20 issued U.S. patents, which together provide coverage for sufentanil sublingual tablets, and thedevice components of ZALVISO and the DSUVIA. These patents provide coverage through at least 2027. We also hold four issued European patents,each valid in at least ten countries in Europe. In addition, we own six patents in Japan, seven in China and seven in Korea, and a number of otherinternational patents which provide coverage through at least 2027. We are also pursuing a number of U.S. and foreign patent applications. The patentapplications 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 thepatents 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 ZALVISO and DSUVIA formulations, our ZALVISO device, thecombination of drugs and our ZALVISO device, our DSUVIA 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. 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 DSUVIA 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 DSUVIA in the emergency department are likely to include generic injectable intravenous opioids such as morphine,hydromorphone and fentanyl. In this environment, DSUVIA may also compete with other branded non-invasive products or product candidates, such asEgalet Corporation’s SPRIX, Hospira Inc.’s DYLOJECT (Hospira, Inc. was recently sold by Pfizer, Inc. to ICU Medical), Acura Pharmaceuticals, Inc.’sOXAYDO, Depomed, Inc.’s NUCYNTA, Bristol-Myers Squibb Company’s COMBUNOX, Purdue Pharma, L.P.’s OXYFAST, Endo Pharmaceuticals, Inc.’sOPANA, Medical Developments International Limited’s PENTHROX (methoxyflurane) inhaler, CL-108, a bi-layered tablet, in development byCharleston Laboratories Inc., in collaboration with Daiichi Sankyo, or generic oral opioids which have moderate-to-severe acute pain labeling. In theshort-stay or ambulatory surgery segment, DSUVIA will likely compete with these products in addition to generic injectable local anesthetics such asbupivacaine, or branded formulations thereof, including Pacira Pharmaceuticals, Inc.’s EXPAREL. In addition, Heron Therapeutics, Inc. is in Phase 2development of HTX-011, a long-acting formulation of the local anesthetic bupivacaine in a fixed-dose combination with the anti-inflammatorymeloxicam for the prevention of post-operative pain, and Recro Pharma, Inc. is developing IV meloxicam, which is in Phase 3 clinical trials for thetreatment of moderate-to-severe acute pain. According to clinicaltrials.gov, SUBSYS, a sublingual fentanyl spray currently approved and marketed byINSYS Therapeutics, Inc. for breakthrough cancer pain, will be studied as a potential treatment for acute pain in emergency room patients, post-operativepatients, and in patients undergoing painful procedures without sedation. Within the military environment, and in certain civilian settings, DSUVIAcompetitors may also include intramuscular morphine or ketamine injections that are marketed by a variety of generic manufacturers. 18 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 ZALVISOwould compete with a number of opioid-based and non-opioid based treatment options that are currently available, as well as some products that are indevelopment. The hospital market for opioids for moderate-to-severe acute pain is large and competitive. These products can be grouped into threeclasses – PCA-based systems, most commonly using an opioid as the pain control agent; non PCA-based systems that require nurse delivery of oral orparenteral opioids; and other non-opioid based treatment modalities. Due to the difficulty of managing moderate-to-severe acute pain, healthcareprofessionals will often use a combination of PCA opioids, parenteral or oral opioids and non-opioid based treatments to manage pain. The primary competition for ZALVISO is the IV PCA pump, which is widely used in the moderate-to-severe acute pain in the hospital setting. Leadingmanufacturers of IV PCA pumps include Hospira, Inc. (recently sold by Pfizer, Inc. to ICU Medical), CareFusion Corporation (purchased by Becton,Dickinson and Company), Baxter International, 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 asfrom compounding 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 Pharmaceuticals, Inc.’s EXPAREL. Inaddition, Halyard Health, Inc. has developed a medical device, the ON-Q Pain Relief System, which is a non-narcotic elastomeric pump that automaticallyand continuously delivers a regulated flow of local anesthetic to a patient’s surgical site or in close proximity to nerves, providing targeted pain relief forup to five days. Additional potential competitors for ZALVISO include the fentanyl iontophoretic transdermal system, IONSYS, originally developed by AlzaCorporation and Ortho-McNeil Pharmaceutical, Inc., both Johnson & Johnson subsidiaries, and most recently by The Medicines Company. On April 30,2015, IONSYS was approved for marketing in the U.S. by the FDA, and in November 2015, IONSYS was approved for marketing in Europe, providing afirst-to-market advantage for IONSYS, which is marketed by The Medicines Company. Cara Therapeutics, Inc. is developing a kappa opioid agonist,CR845, as an IV agent for the management of post-operative moderate-to-severe pain. Trevena, Inc. is developing TRV130, an intravenous G proteinbiased ligand that targets the mu opioid receptor for the treatment of moderate-to-severe acute pain where intravenous therapy is preferred, with a clinicaldevelopment focus in acute post-operative pain. Trevena, Inc. initiated Phase 3 development of TRV130 in the first quarter of 2016. In addition, asmentioned above, Heron Therapeutics, Inc. is in Phase 2 development of HTX-011, a long-acting formulation of the local anesthetic bupivacaine in afixed-dose combination with the anti-inflammatory meloxicam for the prevention of post-operative pain, and Recro Pharma, Inc. is developing IVmeloxicam, which is in Phase 3 clinical trials for the treatment of moderate-to-severe acute pain. Recro Pharma, Inc. is also developing an intranasal formof dexmedetomidine as a potential agent for the management of post-operative pain, for which it announced positive efficacy results in its Phase IIclinical trial. Finally, Innocoll AG is developing XARACOLL a controlled-release resorbable implant containing bupivacaine, and Durect Corporationhas been developing POSIDUR, a controlled-release bupivacaine product candidate utilizing Durect Corporation’s Saber technology. 19 Pharmaceutical Manufacturing and Supply We currently rely on contract manufacturers to produce sufentanil sublingual tablets for commercial product and for our clinical trials under current GoodManufacturing Practices, or cGMP, with oversight by our internal managers. Equipment specific to the pharmaceutical manufacturing process waspurchased and customized for us and is currently owned by us. We plan to continue to rely on contract manufacturers and, potentially, collaborationpartners to manufacture commercial quantities of our product candidates if and when approved for marketing by the FDA. We currently rely on a singlemanufacturer for the preclinical and clinical supplies of our drug product for each of our product candidates and do not currently have agreements inplace for redundant supply or a second source for any of our product candidates. We have identified other manufacturers that could satisfy ourcommercial 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,Mexico and other countries, subject to agreement by the parties to any additional fees for such other countries. The term of the Services Agreementextends until December 31, 2017, or the Initial Term, and will automatically renew thereafter for periods of two years, unless terminated by either partyupon eighteen months’ prior written notice; provided, however, that the Services Agreement may not be terminated without cause prior to the end of theInitial Term. In addition, we entered into a related Amended and Restated Capital Expenditure and Equipment Agreement, or the Amended CapitalAgreement, related to clinical and commercial production of our product candidates. Under the terms of the Amended Capital Agreement, we have made,and may make certain future 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, Malaysia, Canada and the United States. Allcontract manufacturers and component suppliers have been selected for their specific competencies in the manufacturing processes and materials thatmake up ZALVISO. FDA regulations require that materials be produced under cGMPs or Quality System Regulation, or QSR. We outsource injectionmolding of all the plastic parts for the cartridge and device and product sub-assemblies; tablet cartridge filling and packaging; and assembly, packagingand labeling of the dispenser and controller. DSUVIA utilizes an SDA in the delivery of the tablets. FDA regulations require that materials be produced under cGMPs or QSR, as required for therespective unit operation within the manufacturing process. We outsource injection 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. 20 In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and its implementing regulations. The process ofobtaining regulatory approvals and complying with applicable laws and regulations requires the expenditure of substantial time and financial resources.Failure to comply at any time during the product development and approval process, or after approval, may subject an applicant to administrative orjudicial sanctions. These sanctions could include the FDA’s refusal to approve pending applications, withdrawal of an approval, a clinical hold, warningletters, 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 Statesgenerally involves 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 application, 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. 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 device 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, DSUVIA, ZALVISO, and others, are regulated under IND applications for clinical development and in the case of ZALVISO, alldevice 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. 21 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. 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. 22 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 December 2015, the Committee for Medicinal Products for Human Use, or CHMP, at the European Medicines Agency, or EMA, confirmed that anMAA for ARX-04 may be submitted in the EU under the EMA’s centralized procedure. This regulatory procedure, reserved for novel products,biotechnology products and new chemical entities, allows for commercialization across 31 EU and EFTA countries based on approval by EMA. We arecurrently preparing the ARX-04 MAA with a target submission date in the first half of 2017. We are responsible for maintaining ZALVISO device regulatory approval in the EU in order to support the manufacturing and supply of ZALVISO toGrünenthal for commercial sales. We completed the Conformité Européenne approval process for the ZALVISO device, more commonly known as a CEMark approval. We received CE Mark approval in December 2014, which permits the commercial sale of the ZALVISO device in the European Union. Inconnection with the CE Mark approval, we were also granted International Standards Organization, or ISO, 13485:2003 certification of our qualitymanagement system. This is an internationally recognized quality standard for medical devices. Certification of our quality management system wasissued by the British Standards Institution, or BSI, a Notified Body. ISO 13485:2003 certification recognizes that consistent quality policies andprocedures are in place for the development, design and manufacturing of medical devices. The certification indicates that we have successfullyimplemented a quality system that conforms to ISO 13485 standards for medical devices. Certification to this standard is one of the key regulatoryrequirements for a CE Mark in the EU and EEA, as well as to meet equivalent requirements in other international markets. The certification applies to theRedwood City, California location which designs, manufactures and distributes finished medical devices, and includes critical suppliers. We have sinceundergone successful surveillance audits by the Notified Body for the ZALVISO CE mark and for our status as an ISO 13485 certified devicemanufacturer. Controlled Substances Regulations Sufentanil, a Schedule II controlled substance, is the active pharmaceutical ingredient in DSUVIA and ZALVISO. Controlled substances are governed bythe Drug Enforcement Administration, or DEA, of the U.S. Department of Justice. Similarly, sufentanil is regulated as a controlled substance in Europeand other territories outside of the U.S. The handling of controlled substances and/or drug product by us, our contract manufacturers, analyticallaboratories, packagers and distributors, are regulated by the Controlled Substances Act and regulations thereunder. The Drug Supply Chain Security Act of 2013, or DSCSA, imposes obligations on manufacturers of pharmaceutical products, among others, related toproduct tracking and tracing. Among the requirements are that manufacturers will be required to provide certain information regarding the drug productto individuals and entities to which product ownership is transferred, label drug product with a product identifier, and keep certain records regarding thedrug 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. 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, any person or entity from knowingly and willfully offering, paying, soliciting orreceiving remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or in return for, purchasing, leasing, ordering or arrangingfor the purchasing, leasing or ordering of any item or service reimbursable under Medicare, Medicaid or other federal healthcare program. The term“remuneration” has been broadly interpreted to include anything of value, including for example, gifts, discounts, the furnishing of supplies orequipment, credit arrangements, payments of cash, waivers of payment, ownership interests and providing anything at less than its fair market value. TheAnti-Kickback Statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasersand/or formulary managers on the other. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain commonactivities from prosecution, the exceptions and safe harbors are drawn narrowly, and practices involving remuneration that may be alleged to be intendedto induce purchasing, leasing or ordering may be subject to scrutiny if they do not qualify for an exception or safe harbor. The failure to satisfy all of therequirements of an applicable exception or safe harbor do not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality of thearrangement will be evaluated on a case-by-case basis based on a cumulative review of all of its facts and circumstances. Our practices may not in all casesmeet all of the criteria for protection under an exception or safe harbor. 23 Additionally, the intent standard under the federal Anti-Kickback Statute was amended by the Patient Protection Affordable Care Act of 2010, asamended by the Health Care and Education Reconciliation Act of 2010, collectively, the Affordable Care Act or PPACA, to a stricter standard such that aperson or entity no longer needs to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it in order to have committeda violation. Rather, if “one purpose” of the remuneration is to induce referrals, the federal Anti-Kickback Statute is violated. In addition, the AffordableCare Act codified case law that a claim that includes items or services resulting from a violation of the federal Anti-Kickback Statute also constitutes afalse or fraudulent claim for purposes of the civil False Claims Act (discussed below). The federal civil False Claims Act and related laws prohibit, among other things, any person or entity from knowingly presenting, or causing to bepresented, a false or fraudulent claim for payment or approval to the federal government or knowingly making, using or causing to be made or used a falserecord or statement material to a false or fraudulent claim to the federal government. Pharmaceutical and other healthcare companies have beenprosecuted under these laws for, among other things, allegedly providing free product to customers with the expectation that the customers would billfederal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of the companies’ marketing ofthe product for unapproved, and thus non-reimbursable, uses. Further, the Civil Monetary Penalties Law imposes penalties against any person or entitywho, among other things, is determined to have presented or caused to be presented a claim to, among others, a federal healthcare program that the personknows or should know is for a medical or other item or 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 their implementing regulations,imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information. Among other things,HITECH makes HIPAA’s privacy and security standards directly applicable to business associates that are independent contractors or agents of coveredentities that receive or obtain protected health information in connection with providing a service on behalf of a covered entity. HITECH also createdfour new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave stateattorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s feesand costs associated with pursuing federal civil actions. In addition, state laws govern the privacy and security of health information in certaincircumstances, many of 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 Affordable Care Act, or PPACA, and its implementing regulations, require thatcertain manufacturers of drugs, devices, biologicals and medical supplies, for which federal healthcare program payment is available, report informationrelated to certain payments or other transfers of value made or distributed to physicians and teaching hospitals, or to entities or individuals at the requestof, or designated on behalf of, the physicians and teaching hospitals and to report annually certain ownership and investment interests held by physiciansand their immediate 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, certainstates such as California require 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 describedabove or any other laws 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, additional reporting requirements and/or oversight if we becomesubject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws and the curtailment orrestructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations. To the extent that anyof our products will be sold in a foreign country, we may be subject to similar foreign laws and regulations, which may include, for instance, applicablepost-marketing requirements, including safety surveillance, anti-fraud and abuse laws and implementation of corporate compliance programs andreporting of payments or transfers of value to healthcare professionals. 24 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, the Affordable Care Act was signed into law. Among other cost containment measures, theAffordable Care Act established an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologicagents. 25 Since its enactment, there have been judicial and Congressional challenges to numerous provisions of the Affordable Care Act. In January, Congressvoted to adopt a budget resolution for fiscal year 2017, or the Budget Resolution, that authorizes the implementation of legislation that would repealportions of the Affordable Care Act. The Budget Resolution is not a law, but it is widely viewed as the first step toward the passage of legislation thatwould repeal certain aspects of the Affordable Care Act. Further, on January 20, 2017, President Trump signed an Executive Order directing federalagencies with authorities and responsibilities under the Affordable Care Act to waive, defer, grant exemptions from, or delay the implementation of anyprovision of the Affordable Care Act that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, ormanufacturers of pharmaceuticals or medical devices. Congress also could consider subsequent legislation to replace elements of the Affordable Care Actthat are repealed. We will continue to evaluate the effect that the Affordable Care Act and any future measures to repeal or replace the Affordable Care Acthave on our business. Further, there may continue to be additional proposals relating to the reform of the U.S. healthcare system, some of which could further limit the prices weare able to charge for our products, or the amounts of reimbursement available for our products. If future legislation were to impose direct governmentalprice controls and access restrictions, it could have a significant adverse impact on our business. Managed care organizations, as well as Medicaid andother government agencies, continue to seek price discounts. Some states have implemented, and other states are considering, price controls or patientaccess constraints under the Medicaid program, and some states are considering price-control regimes that would apply to broader segments of theirpopulations that are not Medicaid-eligible. Due to the volatility in the current economic and market dynamics, we are unable to predict the impact of anyunforeseen or unknown legislative, regulatory, payer or policy actions, which may include cost containment and other healthcare reform measures. Suchpolicy actions could have a material adverse impact on our profitability. Reimbursement and Health Reform Significant uncertainty exists as to the coverage and reimbursement status of any product candidate that receives regulatory approval. In the United Statesand markets in other countries, sales of our product candidates, if approved for commercial sale, will depend, in part, on the extent to which third-partypayors provide coverage and establish adequate reimbursement levels for product candidates. In the United States, third-party payors include federal and state healthcare programs, government authorities, private managed care providers, privatehealth insurers and other organizations. There has been increasing legislative and enforcement interest in the United States with respect to specialty drugpricing practices. Specifically, there have been several recent U.S. Congressional inquiries and proposed bills designed to, among other things, bringmore transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, and reform government programreimbursement methodologies for drugs. Further, third-party payors are increasingly challenging the price, examining the medical necessity andreviewing the cost-effectiveness of medical drug products and medical services, in addition to questioning their safety and efficacy. Such payors maylimit coverage to specific drug products on an approved list, also known as a formulary, which might not include all of the FDA-approved drugs for aparticular indication. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectivenessof our product candidates, in addition to the costs required to obtain the FDA approvals. Nonetheless, our product candidates may not be consideredmedically necessary or cost-effective. Moreover, the process for determining whether a third-party payor will provide coverage for a drug product may be separate from the process for settingthe price of a drug product or for establishing the reimbursement rate that such a payor will pay for the drug product. A payor’s decision to providecoverage for a drug product does not imply that an adequate reimbursement rate will be approved. Further, one payor’s determination to provide coveragefor a drug product does not assure that other payors will also provide coverage for the drug product. Adequate third-party reimbursement may not beavailable to maintain price levels sufficient to realize an appropriate return on our investment. In the United States, the PPACA was enacted in an effort to, among other things, broaden access to health insurance, reduce or constrain the growth ofhealthcare spending, enhance remedies against fraud and abuse, impose new taxes and fees on the health industry and impose additional health policyreforms. Aspects of PPACA 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; •expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program; 26 •expansion of eligibility criteria for Medicaid programs, 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 requirement to annually report drug samples that manufacturers and distributors provide to physicians; •a 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. PPACA has the potential to substantially change health care financing and delivery by both governmental and private insurers, and may also increase ourregulatory 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. Aggregatereductions of Medicare payments to providers of 2% per fiscal year went into effect on April 1, 2013 and will stay in effect through 2024 unlessCongressional action is taken. The American Tax Payer Relief Act further reduced Medicare payments to several providers, including hospitals. Moreover, the DSCSA imposes new obligations on manufacturers of pharmaceutical products, among others, related to product tracking and tracing.Among the requirements of this new legislation, manufacturers will be required to provide certain information regarding the drug product to individualsand entities to which product ownership is transferred, label drug product with a product identifier, and keep certain records regarding the drug product.AcelRx is engaging CMOs and solution providers in serialization to implement the requirements of the DSCSA on our products. The acceptability of theapproach that AcelRx is implementing will be ultimately subject to review by the FDA. 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. 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 $21.4 million, $22.5 million and $24.5 million during the yearsended December 31, 2016, 2015 and 2014, respectively. We plan to incur significant expenditures for the foreseeable future as we seek to continue thedevelopment of ARX-04 and ZALVISO and begin commercial preparations for ARX-04 and ZALVISO. Employees As of December 31, 2016, we employed 39 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. 27 Item 1A. Risk Factors This Form 10-K contains forward-looking information based on our current expectations. Because our actual results may differ materially from anyforward-looking statements made by or on behalf of us, this section includes a discussion of important factors that could affect our actual future results,including, but not limited to, our revenues, expenses, net loss and loss per share. We believe the risks described below are the risks that are material to usas of the date of this Form 10-K. If any of the following risks comes to fruition, our business, financial condition, results of operations and future growthprospects would likely be materially and adversely affected. Risks Related to Clinical Development and Regulatory Approval We depend substantially on the success of DSUVIA (known as ARX-04 outside of the United States), which may not receive regulatory approval in theUnited States or in Europe. Since our inception in 2005, we have focused primarily on development of our product candidate, ZALVISO; however, given the delay in the potentialapproval of ZALVISO in the United States, we believe the importance of DSUVIA (known as ARX-04 outside of the United States) (sufentanil sublingualtablet, 30 mcg) to our future success has increased. DSUVIA is now our lead product candidate and ZALVISO will serve as a follow-on product, ifapproved in the United States. In December 2016, we submitted the New Drug Application, or NDA, for DSUVIA for the treatment of patientsexperiencing moderate-to-severe acute pain in a medically supervised setting to the United States Food and Drug Administration, or FDA. The NDA wasaccepted for filing by the FDA with a Prescription Drug User Fee Act, or PDUFA, goal date of October 12, 2017. As part of our development program, we met with the FDA in December 2015 to review plans for the NDA for DSUVIA. We have also held variousmeetings with Health Authorities in Europe to discuss the submission of a Marketing Authorization Application, or MAA, for ARX-04 (known asDSUVIA in the United States). Based on feedback from discussions with the Health Authorities in Europe, we intend to submit the MAA for ARX-04 for alabel indication for acute moderate-to-severe pain in adult patients in medically supervised settings. At the time of submission of the MAA, we will haveonly completed one open-label study in the emergency room for acute pain patients, in addition to three Phase 3 post-operative pain studies. We mayneed an additional controlled study in the emergency department setting with ARX-04 to obtain a label that includes trauma-related pain in addition topost-operative pain in the European Union, or EU. We also anticipate we may need comparator studies in the EU to ensure premium reimbursement incertain countries. A pre-submission meeting was held with the assigned rapporteur and co-rapporteur in January 2017 and, a hybrid MAA submission isplanned in the first half of 2017. If DSUVIA is not approved for sale in the United States or ARX-04 is not approved for sale in the EU, or if it is approvedwith a more limited indication, it could have a significant impact on our ability to generate cash flows from product sales or to enter into a collaborationagreement. If we are unable to receive approval to commercialize DSUVIA in the United States, we would be required to find alternative sources of capitalto continue operations. If DSUVIA is not approved for sale in the United States, and we are unsuccessful in finding alternative sources of capital, it will bedifficult for us to continue under our current operating plan. Any disagreement with the FDA or EMA as to the results from SAP301, SAP302, and SAP303, and therefore any additional requirements imposed by theFDA or EMA prior to approval of the NDA or the planned MAA submission, as well as any delay in approval by the FDA of the DSUVIA NDA, or by theEMA of the ARX-04 MAA, if and when it is submitted, may negatively impact our stock price and harm our business operations. The FDA may hold anAdvisory Committee meeting to obtain committee input on the safety and efficacy of DSUVIA. Typically, Advisory Committees will provide responses tospecific questions asked by the FDA, including the Committee’s view on the approvability of the drug under review. Advisory Committee decisions arenot binding but an adverse decision at the Advisory Committee may have a negative impact on the regulatory review of DSUVIA. Any delay inobtaining, or inability to obtain, regulatory approval would prevent us from commercializing DSUVIA in the United States or ARX-04 in Europe,generating revenues and potentially achieving profitability. If any of these events occur, we may be forced to delay or abandon our development effortsfor DSUVIA in the United States or ARX-04 in the EU, which would have a material adverse effect on our business and could potentially cause us to ceaseoperations. We depend on the clinical and regulatory success of ZALVISO, which may not succeed in the current IAP312 study or receive regulatory approval inthe United States. While the importance of ARX-04 (known as DSUVIA in the United States) to our future success has increased, ZALVISO remains an important follow-onproduct candidate for us. The success of the current IAP312 study and ultimate approval by the FDA is important to our investors and our current and anypotential future collaboration partner. Should the current IAP312 study be unsuccessful and ZALVISO not be approved by the FDA, the lack of successmay have a negative impact. The success of ZALVISO, in part, relies upon our ability to develop and receive regulatory approval of this productcandidate in the United States for the management of moderate-to-severe acute pain in adult patients in the hospital setting. To date, our Phase 3 programfor ZALVISO has consisted of three Phase 3 clinical trials. We reported positive top-line data from each of these trials and submitted an NDA forZALVISO to the FDA in September 2013, which the FDA then accepted for filing in December 2013. On July 25, 2014, the FDA issued a CompleteResponse Letter, or CRL, for our NDA for ZALVISO. The CRL contains requests for additional information on the ZALVISO System to ensure proper useof the device. The requests include submission of data demonstrating a reduction in the incidence of optical system errors, changes to address inadvertentdosing, among other items, and submission of additional data to support the shelf life of the product. Furthermore, in March 2015, we receivedcorrespondence from the FDA stating that in addition to the bench testing and two Human Factors studies we had performed in response to the issuesidentified in the CRL, a clinical trial is needed to assess the risk of inadvertent dispensing and overall risk of dispensing failures. Based on the results ofthe Type C meeting with FDA, which took place in September 2015, we submitted a protocol to the FDA for a clinical study in post-operative patientsdesigned to evaluate the effectiveness of changes made to enhance ZALVISO device performance. We completed the protocol review with the FDA andinitiated IAP312 in September 2016. The IAP312 study was designed to rule out a 5% device failure rate. The study design requires a minimum of 315patients. In the IAP312 study, sites will proactively look for tablets that have been dispensed by the patient but failed to be placed under the tongue,known as dropped tablets. The FDA refers to dropped tablets as inadvertent dispensing. In the prior Phase 3 studies based on approximately 30,000tablets dispensed there were 15 dropped tablets discovered from 7 out of 768 patients. With study sites proactively looking for dropped tablets, weanticipate the observed rate of inadvertent dispensing will be as high or higher in IAP312 than previously reported in the combined Phase 3 studies.Correspondence from the FDA suggests that they may include the rate of inadvertent dispensing along with the device failures to calculate a total errorrate. The protocol will evaluate all incidents of misplaced tablets; however, per the protocol, the error rate calculation does not include the rate of®inadvertent dispensing. Further, the correspondence from the FDA suggests that we may need to modify the Risk Evaluation and Mitigation Strategies, orREMS, for ZALVISO to address dropped tablets. Timing of the completion of the IAP312 study will be dependent on the rate of patient enrollment in thestudy, among other things. 28 There is no guarantee that the additional work we perform related to ZALVISO, including the IAP312 trial, will be supportive of, or guarantee, an NDAresubmission, or result in our successfully obtaining FDA approval of ZALVISO in a timely fashion, if at all. For example, the trial might not meet itsobjectives or the FDA could still have concerns regarding the performance of the device, inadvertent dosing (dropped tablets), or other issues. At anyfuture point in time, the FDA could require us to complete further clinical, Human Factors, pharmaceutical, reprocessing or other studies, which coulddelay or preclude any NDA resubmission or approval of the NDA and could require us to obtain significant additional funding. There is no guaranteesuch funding would be available to us on favorable terms, if at all. If the ZALVISO NDA is resubmitted, the FDA may hold an Advisory Committeemeeting to obtain committee input on the safety and efficacy of ZALVISO. Typically, Advisory Committees will provide responses to specific questionsasked by the FDA, including the Committee’s view on the approvability of the drug under review. Advisory Committee decisions are not binding but anadverse decision at the Advisory Committee may have a negative impact on the regulatory review of ZALVISO. Additionally, we may choose to engagein the dispute resolution process with the FDA. Our proposed trade name of ZALVISO has been approved by the EMA and is currently being used in the EU. It has also been conditionally approved bythe FDA, which must approve all drug trade names to avoid medication errors and misbranding. However, the FDA may withdraw this approval in whichcase any brand recognition or goodwill that we establish with the name ZALVISO prior to commercialization may be worthless. Any delay in approval by the FDA of the ZALVISO NDA, if, and when, it is resubmitted, may negatively impact our stock price and harm our businessoperations. Any delay in obtaining, or inability to obtain, regulatory approval would prevent us from commercializing ZALVISO in the United States,generating revenues and potentially achieving profitability. If any of these events occur, we may be forced to delay or abandon our development effortsfor ZALVISO, which would have a material adverse effect on our business and could potentially cause us to cease operations. 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 our three Phase 3 clinical trials for ARX-04 (known as DSUVIA in the United States), or SAP301, SAP302,and SAP303, as well as each of our three ZALVISO Phase 3 clinical trials completed to date, in addition to all of our Phase 2 clinical trials for ARX-04and ZALVISO. However, even if we believe that the data from clinical trials is positive, the FDA has and in the future could determine that the data fromour trials was negative or inconclusive or could reach a different conclusion than we did on that same data. Negative or inconclusive results of a clinicaltrial or difference of opinion could cause the FDA to require us to repeat the trial or conduct additional clinical trials prior to obtaining approval forcommercialization, and there is no guarantee that additional trials would achieve positive results or that the FDA will agree with our interpretation of theresults. Any such determination by the FDA would delay the timing of our commercialization plan for DSUVIA and ZALVISO, or further development ofour other product candidates, and adversely affect our business operations. For example, although we had achieved the primary endpoints in each of ourthree Phase 3 clinical trials for ZALVISO which were included in our NDA filed in 2013, in March 2015, we received correspondence from the FDAstating that in addition to the bench testing and two Human Factors studies we had performed in response to the issues identified in the CRL, a clinicaltrial is needed to assess the risk of inadvertent dispensing and overall risk of dispensing failures. Any additional clinical trials would delay ourdevelopment efforts for ZALVISO, which would have a material adverse effect on our business. 29 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 three Phase 3 clinicaltrials for DSUVIA (known as ARX-04 outside the United States), three Phase 3 clinical trials for ZALVISO, and several Phase 2 clinical trials both forDSUVIA and ZALVISO, future clinical trials may not begin on time, have an effective design, enroll a sufficient number of patients or be completed onschedule, if at all. For example, in June 2014, we completed a pharmacokinetic study in support of the DSUVIA development program. In this study ofhealthy volunteers, it was shown that two sublingual administrations of a ZALVISO sufentanil sublingual tablet, 15 mcg, dosed 20 minutes apart wereequivalent to one sublingual administration of a sufentanil sublingual tablet, 30 mcg. Based on the pharmacokinetic equivalency of two ZALVISOtablets to one DSUVIA tablet, the FDA has agreed to accept 323 ZALVISO patients into the DSUVIA safety database; however, the FDA also required thatthe DSUVIA safety database comprise 350 patients dosed with at least one dose of DSUVIA. Based on this feedback from the FDA, we expanded theclinical program for DSUVIA by 176 additional patients to include individuals from specific populations and settings, in order to increase the DSUVIAsafety database. As a result, the completion of the Phase 3 clinical program for DSUVIA was extended and our clinical trial expenses increased. Finally,we postponed the start of IAP312, originally planned for the first quarter of 2016, to September 2016. The postponement was due to a delay in the receiptand testing of final clinical supplies for this trial. As a result, the development timeline for ZALVISO was further extended. We anticipate the enrollmentand treatment period for IAP312 will continue through mid-2017; however, timing of the completion of the IAP312 study will be dependent on the rate ofpatient enrollment in the study, among other things. 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 obtaining regulatory approval to commence a trial; •delays in reaching agreement with the FDA on final trial design; •imposition of a clinical hold by the FDA, IRBs 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 tablets and 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 not yet responded to the ZALVISO Complete Response Letter nor resubmitted the ZALVISO NDA. Activities that we undertake to addressissues raised in the CRL may be deemed insufficient by the FDA. We completed bench testing and additional Human Factors studies that we believed addressed certain items contained in the CRL. However, before theresults from these studies were submitted as a part of the proposed NDA resubmission, the FDA, in March 2015, notified us of the need for a clinical trialprior to the resubmission of the ZALVISO NDA. In early September 2015, we had a Type C meeting with the FDA to discuss the FDA’s request for anadditional clinical trial and our planned response to the CRL. In response to discussions with the FDA, we have agreed to complete an additional open-label study with ZALVISO in post-operative patients, known as IAP312. We have completed the protocol review for IAP312 and initiated this study inSeptember 2016 in order to support our NDA resubmission. Timing of the completion of the IAP312 study will be dependent on the rate of patientenrollment in the study, among other things. There is no guarantee that the trial results, even if successful, will address the issues raised by the FDA. Anydelay in obtaining, or inability to obtain, regulatory approval would prevent us from commercializing ZALVISO in the United States, generatingrevenues and achieving profitability. If any of these events occur, we may be forced to delay or abandon our development and commercialization effortsfor ZALVISO in the United States, which would have a material adverse effect on our business and could potentially cause us to cease operations. 30 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. Whilewe designed the protocols for bench testing and the Human Factors studies to address the issues raised in the CRL, and designed the protocol for theadditional ZALVISO clinical trial to further address these issues, there is no guarantee that the FDA will deem such protocols and results sufficient toaddress 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 IAP312 study, the FDA may hold a different opinion and deem the results insufficient. The FDA may provide review commentaryat any time during the resubmission and review process which could adversely affect or even prevent the approval of ZALVISO, which would adverselyaffect our business. We may not be able to identify appropriate remediations to issues that the FDA may raise, and we may not have sufficient time orfinancial resources to conduct future activities to remediate issues raised by the FDA. 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. Phase 2 clinical trials we conducted with ZALVISO did generate someAEs, but no SAEs, related to the trial drug. In our Phase 3 active-comparator clinical trial (IAP309), 7% of ZALVISO-treated patients dropped out of thetrial prematurely due to an AE (10% in placebo group), and we observed three serious adverse events, or SAEs, that were assessed as possibly or probablyrelated to study drug (one in the ZALVISO group and two in the IV patient-controlled morphine group). In our Phase 3, double-blind, placebo-controlled,abdominal surgery trial (IAP310), 5% of ZALVISO-treated patients dropped out of the trial prematurely due to an AE (7% in placebo group). There wereno SAEs determined to be related to study drug. In our Phase 3, double-blind, placebo-controlled, orthopedic surgery trial (IAP311), 7% of ZALVISO-treated patients dropped out of the trial prematurely due to an AE (7% in placebo group). Two patients (one each in the ZALVISO group and placebogroup) experienced an SAE considered possibly or probably related to the trial drug by the investigator. In our Phase 2 DSUVIA placebo-controlled bunionectomy study (SAP202), two patients in the DSUVIA 30 mcg group (5%) discontinued treatment due toan AE, one unrelated to study drug and the other probably related to study drug. There were no SAEs deemed related to study drug. In our Phase 3placebo-controlled abdominal surgery study (SAP301), no DSUVIA-treated patients dropped out of the trial prematurely due to an AE (4% in placebogroup). There were two SAEs determined to be related to study drug in the placebo-treated group. In our Phase 3 open-label, single-arm Emergency Roomstudy (SAP302), no DSUVIA-treated patients dropped out of the trial prematurely due to an AE. One patient had an SAE possibly or probably related tostudy drug. In our post-operative study in patients aged 40 years or older (SAP303), 3% of DSUVIA-treated patients dropped out of the trial prematurelydue to an AE. There were no SAEs deemed related to study drug. If any of our future products, including DSUVIA (known as ARX-04 outside the United States) or ZALVISO, cause serious or unexpected side effects afterreceiving marketing approval, a number of potentially 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 modified RiskEvaluation and Mitigation Strategies, 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. 31 Additional time may be required to obtain U.S. regulatory approval for DSUVIA and ZALVISO because they are drug/device combination products. DSUVIA and ZALVISO are combination product candidates with both drug and device components. The FDA requires both the drug and devicecomponents of combination product candidates to be reviewed as part of an NDA submission. There are very few examples of the FDA approval processfor drug/device combination products such as DSUVIA and ZALVISO. As a result, we have in the past, and may in the future, experience delays in thedevelopment and commercialization of ZALVISO due to regulatory uncertainties in the product development and approval process, in particular as itrelates to a drug/device combination product approval under an NDA, and we may experience similar delays and regulatory uncertainties related to theFDA’s review of the NDA for DSUVIA. Except for ZALVISO approval in Europe, we cannot predict when we will obtain regulatory approval to commercialize any of our product candidates,if at all, and we cannot, therefore, predict the timing of any future revenue. We cannot commercialize any of our product candidates, including DSUVIA (known as ARX-04 outside the United States) or ZALVISO, until theappropriate regulatory authorities, such as the FDA or the EMA, have reviewed and approved the product candidate. The regulatory agencies may notcomplete their review processes in a timely manner, or we may be unable to obtain regulatory approval for our product candidates. As part of ourdevelopment program, we met with the FDA in December 2015 to review plans for an NDA for DSUVIA. Based on feedback from the FDA, we expandedthe clinical program for DSUVIA by 176 additional patients to include individuals from specific populations and settings, in order to increase theDSUVIA safety database. As a result, the completion of the Phase 3 clinical program for DSUVIA was extended and our clinical trial expenses increased.We have also held various meetings with Health Authorities in Europe to discuss the submission of an MAA for ARX-04. Based on feedback fromdiscussions with the Health Authorities in Europe, including a pre-submission meeting with the European-appointed rapporteur and co-rapporteur inJanuary 2017, we intend to submit an MAA for a label indication for the treatment of acute moderate-to-severe pain in medically supervised settings. Atthe time of submission of the MAA we will have only completed one open-label study in the emergency room for acute pain patients, in addition to threePhase 3 post-operative pain studies. We may need an additional active-controlled study in the emergency department setting with ARX-04 to obtain alabel that includes both post-operative pain and trauma-related pain. In addition, we anticipate we may need comparator studies in the EU to ensurepremium reimbursement in certain countries. These additional studies will delay commercialization and any associated future revenues from ARX-04 inthese countries. In September 2015, the European Commission, or EC, approved Grünenthal’s, MAA for ZALVISO for post-operative pain; however, we cannot predict thecommercial success of ZALVISO. We received a CRL for ZALVISO on July 25, 2014, which contains requests for additional information on the ZALVISOSystem. In addition, in March 2015, we received correspondence from the FDA stating that in addition to the bench testing and two Human Factorsstudies we had performed in response to the issues identified in the CRL, a clinical trial is needed to assess the risk of inadvertent dispensing and overallrisk of dispensing failures. Based on our Type C meeting with the FDA in early September 2015 to discuss the FDA’s request for an additional clinicaltrial and our planned response to the CRL, we submitted a protocol to the FDA for a clinical study in post-operative patients designed to evaluate theeffectiveness of changes made to enhance the ZALVISO device. We have completed the protocol review and initiated the IAP312 study in September2016, in order to support our NDA resubmission. Timing of the completion of the IAP312 study will be dependent on the rate of patient enrollment in thestudy, among other things. Although the FDA has provided feedback on the DSUVIA clinical program and reviewed the protocol for IAP312, and we haveincorporated feedback from Health Authorities in Europe concerning the submission of the MAA for ARX-04, pending the results of our clinical trials, theFDA or EMA may in the future require us to complete additional clinical work prior to approving the NDA for DSUVIA, resubmitting the NDA forZALVISO, or submitting the MAA for ARX-04. Additional delays may result if any of our product candidates is taken before an FDA AdvisoryCommittee which may recommend restrictions on approval or recommend non-approval. In addition, we may experience delays or rejections based uponadditional government regulation from future legislation or administrative action, or changes in regulatory agency policy during the period of productdevelopment, clinical trials 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. In addition, inJanuary 2015, EMA conducted a pre-approval inspection of our ZALVISO contract manufacturer’s manufacturing and packaging site, and provided itsobservations on a Form 483. Although we believe we have adequately addressed these observations in revised standard operating procedures, we, ourcontract manufacturers, and their vendors, are all subject to preapproval and post-approval inspections at any time. The results of these inspections couldimpact our ability to obtain FDA approval for ZALVISO and, if approved, our ability to launch and successfully commercialize ZALVISO in the UnitedStates. In addition, results of EMA inspections could impact our ability to maintain EC approval of ZALVISO, and Grünenthal’s ability to expand andsustain commercial sales of ZALVISO in the EU. 32 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 EMA, 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. We must comply with theQuality Systems Regulation, or QSR, which sets forth the FDA’s current good manufacturing practice, or cGMP, requirements for medical devices, andother applicable government regulations and corresponding foreign standards for drug cGMPs. If we fail to comply with these regulations, it could have amaterial 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, as mentioned above, we intend to submit the MAA for ARX-04 for a labelindication for acute moderate-to-severe pain following surgery, or as a result of trauma. We may need an additional controlled study in the emergencydepartment setting with ARX-04 to obtain a label that includes both post-operative pain and trauma-related pain. In addition, we intend to resubmit ourNDA seeking approval of ZALVISO for the management of moderate-to-severe acute pain in adult patients in the hospital setting; however, our clinicaltrial data was generated exclusively from the post-operative segment of this population, and the FDA may restrict any approval to post-operative patientsonly, 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 or all of our clinical trial sites to determine the integrity of our clinical data. The FDA may auditsome or all of our Human Factors study sites to determine the integrity of our data and may audit the data and results of bench testing. Any rejection ofany of our data would negatively impact our ability to obtain marketing authorization for a product candidate and would have a material adverse effecton our business and financial condition. In addition, an NDA may not be approved, or approval may be delayed, as a result of changes in FDA policies fordrug approval during the review period. For example, although many products have been approved by the FDA in recent years under Section 505(b)(2) ofthe Federal Food, Drug and Cosmetic Act, or FDCA, objections have been raised to the FDA’s interpretation of Section 505(b)(2). If challenges to theFDA’s interpretation of Section 505(b)(2) are successful, the FDA may be required to change its interpretation, which could delay or prevent the approvalof such an NDA. Any significant delay in the acceptance, review or approval of an NDA that we have submitted would have a material adverse effect onour business and financial condition and would require us to obtain significant additional funding. Even if we obtain regulatory approval for DSUVIA, ZALVISO and our other product candidates in the United States, we and our collaborators faceextensive regulatory requirements and 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 DSUVIA, ZALVISO and our other product candidates, if approved, will likely include restrictions on use due to the opioid nature ofsufentanil. DSUVIA, ZALVISO and our other product candidates, if approved in the United States in the future, will also be subject to ongoing FDA requirementsgoverning the labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, record-keeping and reporting of safety and otherpost-market information. The holder of an approved NDA is obligated to monitor and report AEs and any failure of a product to meet the specifications inthe NDA. The holder of an approved NDA must also submit new or supplemental applications and obtain FDA approval for certain changes to theapproved product, product labeling or manufacturing process. Advertising and promotional materials must comply with FDA rules and are subject to FDAreview, in addition to other potentially applicable federal and state laws. 33 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. 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. Except for ZALVISO approval in Europe, we may never obtain approval for, or commercialize, any other products outside of the United States, whichwould limit our ability to realize their full market potential. In order to market any products outside of the United States, we or our commercial partners, including Grünenthal in Europe, must establish and complywith numerous and varying regulatory requirements of other countries regarding safety and efficacy. On September 22, 2015, we announced that theEuropean Commission had approved Grünenthal’s MAA for ZALVISO for the management of acute moderate-to-severe post-operative pain in adultpatients. In April 2016, Grünenthal completed the first commercial sale of ZALVISO. Outside of Europe, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval inone country does not mean that regulatory approval will be obtained in any other country. Approval processes vary among countries and can involveadditional product testing and validation and additional administrative review periods. Seeking foreign regulatory approval could result in difficultiesand costs for us and require additional non-clinical trials or clinical trials, which could be costly and time consuming. Regulatory requirements can varywidely from country-to-country and could delay or prevent the introduction of our products in those countries. Our current clinical trial data may not besufficient to support marketing approval in all territories. In addition, we lack the personnel, expertise and capabilities to gain regulatory approval of ourproduct candidates on a global basis without a commercial partner. With ZALVISO’s approval for sale in Europe, we are substantially dependent onGrünenthal to successfully commercialize it. While Grünenthal does have products approved in international markets, we do not have any productcandidates approved for sale in any jurisdiction, including international markets, and we do not have experience in obtaining regulatory approval ininternational markets. Grünenthal’s experience in international markets does not guarantee regulatory approval or compliance with regulatoryrequirements in international markets. If we fail to comply with regulatory requirements in international markets or to obtain and maintain requiredapprovals, or if regulatory approvals in international markets are delayed, our target market will be reduced and our ability to realize the full marketpotential of our products will be harmed. 34 DSUVIA, ZALVISO and our other product candidates will require Risk Evaluation and Mitigation Strategies, or REMS. Our product candidates, if approved in the United States, will require REMS. The REMS may include requirements for special labeling or medicationguides for patients, special communication plans to health care professionals and restrictions on distribution and use. While we have received pre-clearance from the FDA regarding certain aspects of the proposed required REMS for ZALVISO, we cannot predict the final REMS to be required as partof any FDA approval of ZALVISO. Depending on the extent of the REMS requirements, any United States launch may be delayed, the costs tocommercialize ZALVISO may increase substantially and the potential commercial market could be restricted. DSUVIA, if approved, will also requireREMS programs that may significantly increase our costs to commercialize these product candidates. Furthermore, risks of sufentanil that are notadequately addressed through proposed REMS for our future product candidates, if approved, may also prevent or delay their approval forcommercialization. Existing and future legislation may increase the difficulty and cost for us to commercialize DSUVIA, 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, including changes to the regulation of opioid-containing products. There have been a number of legislative and regulatory changes and proposed changes regarding healthcare systems that couldprevent or delay marketing approval of ZALVISO outside the EU, or our other product candidates, including DSUVIA (known as ARX-04 outside theUnited States), restrict or regulate post-approval activities for DSUVIA, ARX-04 and ZALVISO, and affect our ability to profitably sell any products forwhich we obtain marketing approval. In the EU, the pricing of prescription drugs is subject to government control. In addition, the EU provides options for its member states to restrict therange of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products forhuman use. 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; •expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program; •expansion of eligibility criteria for Medicaid programs, 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 requirement to annually report drug samples that manufacturers and distributors provide to physicians; •a 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. Aggregatereductions of Medicare payments to providers of 2% per fiscal year went into effect on April 1, 2013 and will stay in effect through 2024 unlessCongressional action is taken. The American Tax Payer Relief Act further reduced Medicare payments to several providers, including hospitals. Moreover, the Drug Supply Chain Security Act of 2013 imposes new obligations on manufacturers of pharmaceutical products, among others, related toproduct tracking and tracing. Among the requirements of this new legislation, manufacturers will be required to provide certain information regarding thedrug product to individuals and entities to which product ownership is transferred, label drug product with a product identifier, and keep certain recordsregarding 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. 35 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 2017 and may continue to incurlosses for the foreseeable future. Since our inception in 2005, we have focused primarily on development of our product candidate, ZALVISO. ZALVISO has become a follow-on productcandidate to the Company, while DSUVIA (known as ARX-04 outside the United States) has become the focus. In September 2015, we announced that apivotal Phase 3 study of DSUVIA, SAP301, met all primary and secondary endpoints and in October 2015, we initiated SAP302, a Phase 3 study ofDSUVIA in the emergency room. Based on feedback from the FDA, we expanded the clinical program for DSUVIA by 176 additional patients to includeindividuals from specific populations and settings, in order to increase the DSUVIA safety database. Accordingly, we expanded the population in theSAP302 study of DSUVIA and conducted an additional study, SAP303, in post-operative patients with moderate-to-severe acute pain, including elderlyand organ impaired patients. As a result, the completion of the Phase 3 clinical program for DSUVIA was extended and our clinical trial expensesincreased. In addition, the FDA has requested an additional clinical trial for ZALVISO, IAP312, prior to resubmission of the ZALVISO NDA which willincrease our development costs for the ZALVISO program. We have incurred significant net losses in each year since our inception in July 2005, and as ofDecember 31, 2016, we had an accumulated deficit of $246.4 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 contract funding, sale of royalty and milestones,and proceeds from our commercial partner, Grünenthal. The size of our future net losses will depend, in part, on the rate of future expenditures and ourability to generate revenues. We expect to continue to incur substantial expenses as we continue our research and development activities for our productcandidates, including addressing issues raised by the FDA related to regulatory review of ZALVISO, as well as to support manufacturing and supply ofZALVISO in Europe for Grünenthal. While Grünenthal has begun the commercial launch of ZALVISO in the EU, if DSUVIA (known as ARX-04 outsidethe United States), ZALVISO, or our other product candidates are not successfully developed or commercialized, or if revenues are insufficient followingmarketing approval, we will not achieve profitability and our business may fail. Our success is also dependent on obtaining regulatory approval to marketour product candidates outside of the United States through current and future collaborations which may not materialize or prove to be successful. We are substantially dependent on our commercial partner, Grünenthal, to successfully commercialize ZALVISO in Europe. On December 16, 2013, we entered into a Collaboration and License Agreement, or the License Agreement, and related Manufacture and SupplyAgreement, or the MSA, and together with the License Agreement, the Agreements, with Grünenthal. We entered into amendments to the LicenseAgreement effective July 17, 2015 and September 20, 2016, or the License Amendments, and an amendment to the MSA effective July 17, 2015, or theMSA Amendment, with Grünenthal, and together with the License Agreement, and the MSA, the Amended Agreements. The Amended Agreements grantrights to commercialize ZALVISO in the EU, Switzerland, Liechtenstein, Iceland, Norway and Australia, or the Territory, for human use in pain treatmentwithin, or dispensed by, hospitals, hospices, nursing homes and other medically supervised settings. In September 2015, the European Commissionapproved Grünenthal’s MAA for ZALVISO for the management of acute moderate-to-severe post-operative pain in adult patients. Grünenthal has initiallydeployed the ZALVISO System in a limited number of hospitals in targeted countries under a pilot program, whereby the hospital will use ZALVISO in asmall number of post-operative patients. Pilot programs are expected to last several months after which ZALVISO may be available for commercial sale.ZALVISO has been commercially launched in Germany, France, the UK, and Italy, and is expected to be commercially launched in the second quarter of2017 in the Netherlands, Belgium, Portugal, Ireland, Spain, Austria and the Nordics. During the pilot and launch phases in the various European countries Grünenthal has reported certain issues from healthcare professionals, or HCPs, withthe initial set up of the ZALVISO controllers before being given to patients for use. To address the issues, we have assisted Grünenthal with implementingadditional training for HCPs and we have revised the controller software. Controllers with the revised software have undergone extensive bench testingand we believe we have successfully addressed the issues. Controllers with the revised software were delivered to Grünenthal in December 2016. Weanticipate additional devices will be delivered beginning in early 2017. Controllers with the U.S. version of the revised software are also being used inthe IAP312 clinical study that was initiated in September 2016. Grünenthal is continuing to use controllers with the original software until those withrevised software are available. There can be no assurance that the issues identified in the initial pilot and launch phases by Grünenthal will not have amaterial adverse impact on the current and future sales of ZALVISO in Europe. Further, if the availability of the controllers is delayed, or if new issuesoccur, there may be a material adverse impact on the future sales of ZALVISO in Europe which may have a negative impact on future revenues receivedand recognized by AcelRx. 36 There is no guarantee that Grünenthal will achieve commercial success in its ZALVISO launches in Germany, France and the United Kingdom oranywhere in the EU. In September 2015, we consummated a monetization transaction with PDL BioPharma, Inc., or PDL, pursuant to which we sold toPDL for $65.0 million 75% of the European royalties from sales of ZALVISO and 80% of the first four commercial milestones under the LicenseAgreement, subject to a capped amount, referred to as the Royalty Monetization. Even if Grünenthal is successful in the commercialization of ZALVISOin the EU, we will receive only 25% of the royalties and 20% of the first four commercial milestones under the License Agreement, and 100% of theroyalties after the capped amount is reached. Any failures in commercialization of ZALVISO outside the United States could have a material adverseimpact on our business, including an adverse impact on the development of ARX-04 or ZALVISO in the United States, if related to issues underlying thesufentanil sublingual tablet technology, safety or efficacy. Additionally, we agreed to certain representations and covenants relating to the AmendedAgreements under our agreements with PDL, and, if we breach those representations or covenants, we may become subject to indemnification claims byPDL and liable to PDL for its indemnifiable losses relating to such breaches. The amount of such losses could be material and could have a materialadverse impact on our business. We have never generated significant 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 DSUVIA, ZALVISO or our other product candidates in the United States. While we have a collaboration with Grünenthal forcommercialization of ZALVISO in Europe and Australia, we may not achieve all of the development milestones associated with the collaboration, andGrünenthal may not recognize a level of commercial sales of ZALVISO for which we would receive sales milestone payments. Even if Grünenthal issuccessful in commercialization of ZALVISO, as a result of our sale to PDL of certain expected royalties from the sales of ZALVISO by Grünenthal and amajority of our first four commercial sales milestones, we will receive only 25% of the sales royalties and 20% of the first four commercial milestonesunder the Amended License Agreement. In addition, we do not anticipate generating revenues from our other product candidates for the foreseeablefuture, if ever. Our ability to generate future revenues from product sales depends heavily on our success in: •obtaining and maintaining regulatory approval for DSUVIA (known as ARX-04 outside the United States) and/or ZALVISO in the UnitedStates and/or in Europe; •launching and commercializing DSUVIA and/or ZALVISO, including building internally or through entering a collaboration, a hospital-directed sales force in the United States and with third parties internationally, including Grünenthal, which may require additional funding;and, •completing the clinical development of ZALVISO, as well as obtaining regulatory approval for, and launching and commercializing DSUVIAand ZALVISO, 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 DSUVIA and/or ZALVISO in the United States, or if we arerequired by the FDA to complete activities in addition to those we currently anticipate or have already completed. For example, the Amended Agreementsinclude declining maximum transfer prices over the term of the contract with Grünenthal. These transfer prices were agreed to assuming economies ofscale that would occur with increasing production volumes (from the potential approval of ZALVISO in the U.S. and an increase in demand in Europe)and corresponding decreases in manufacturing costs. If we do not receive timely approval of ZALVISO in the U.S., are unable to successfully launchZALVISO in the U.S. or the volume of Grünenthal sales does not increase significantly, we are not likely to achieve the manufacturing cost reductionsrequired in order to accommodate these declining transfer prices without a corresponding decrease in our gross margin. 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. 37 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, understanding the market potential for ourproduct candidates and preparing for the potential commercialization of DSUVIA and ZALVISO in the United States. We have not yet obtainedregulatory approval of any of our product candidates in the United States. Consequently, any predictions that are made about our future success, orviability, or evaluation of our business and prospects, may not be accurate. 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, such as completing our commercialization plans so that we will be ready for commercializationof DSUVIA as early as in 2017 should DSUVIA be approved by the FDA, as well as the remaining development activities associated with ZALVISO,including completing the IAP312 study, to respond to issues raised by the FDA. While we believe we have sufficient capital resources to continueplanned operations through at least the first quarter of 2018, we will need additional capital to continue development of ZALVISO and we will needadditional capital to potentially pursue commercialization of any of our product candidates, including DSUVIA and ZALVISO. 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 trial of ZALVISO. Anyfurther development activities can be time consuming and costly. We submitted a protocol to the FDA for a clinical study in post-operative patientsdesigned to evaluate the effectiveness of changes made to enhance ZALVISO device performance. We received comments from the FDA on the protocolfor the study, known as IAP312, and we initiated the IAP312 study in September 2016. Timing of the completion of the IAP312 study will be dependenton the rate of patient enrollment in the study, among other things. Clinical trials, regulatory reviews, and a potential launch of a commercial product areexpensive activities. In addition, commercialization costs for ARX-04 and ZALVISO in the United States may be significantly higher than estimated. Wemay experience technical difficulties in our commercialization efforts or otherwise, which could substantially increase the costs of commercialization.Revenues may be lower than expected and accordingly costs to produce such revenues may exceed those revenues. We will need to seek additionalcapital to continue operations. Such capital demands could be substantial. To raise capital, we may seek to sell additional equity or debt securities,including under our Controlled Equity Offering Sales Agreement, or the Sales Agreement, with Cantor Fitzgerald & Co., or Cantor, monetize orsecuritize certain assets including future royalty streams and milestones, obtain a credit facility, or enter into product development, license or distributionagreements with third parties, or divest one or more of our product candidates. Such arrangements may not be available on favorable terms, if at all.Furthermore, any product development, licensing, distribution or sale agreements that we enter into may require us to relinquish valuable rights. We maynot be able to obtain sufficient additional funding or enter into a strategic transaction in a timely manner. If adequate funds are not available, we wouldbe required to reduce our workforce, delay, reduce the scope of, or eliminate, one or more of our research and development programs in advance of thedate on which we exhaust our cash resources to ensure that we have sufficient capital to meet our obligations and continue on a path designed to preservestockholder value. 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, including under the Sales Agreement withCantor, which would result in dilution to our stockholders or impose restrictive covenants that may adversely impact our business. The sale of additionalequity or convertible debt securities would result in the issuance of additional shares of our capital stock and dilution to all of our stockholders. Theincurrence of indebtedness would result in increased fixed payment obligations and could also result in certain restrictive covenants, such as limitationson our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions,such as minimum cash balances, that could adversely impact our ability to conduct our business. If we are unable to expand our operations or otherwisecapitalize on our business opportunities, our business, financial condition and results of operations could be materially adversely affected and we maynot be able to meet our debt service obligations. 38SM 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 Original Loan Agreement, with Hercules Technology II, L.P. andHercules Capital, Inc., formerly known as Hercules Technology Growth Capital, Inc., collectively referred to as the Lenders, under which we could haveborrowed up to $40.0 million in three tranches, represented by secured convertible promissory notes. We drew the first tranche of $15.0 million at theclosing of the new credit facility and the second tranche of $10.0 million on June 16, 2014. We did not have access to the third tranche of up to $15.0million, as it was conditioned upon FDA approval to market ZALVISO in the United States by August 1, 2015, which we did not obtain. We beganmaking principal payments in April 2015. On September 18, 2015, we amended the Original Loan Agreement with the Lenders to extend an interest onlyperiod from October 1, 2015 through March 31, 2016, with further extension to September 30, 2016 upon satisfaction of certain conditions, which havesince been satisfied. On September 30, 2016, we entered into Amendment No. 3 to the Original Loan Agreement which extends the interest-only periodfrom October 1, 2016 to April 1, 2017. On March 2, 2017, we refinanced the Original Loan Agreement in its entirety into a 36-month term loan with anadditional six month interest only period pursuant to a further amended and restated loan and security agreement, or the Amended Loan Agreement. Thescheduled maturity date is now March 2020. Refer to Note 19 “Subsequent Event” for additional information. We granted the Lenders a first priority security interest in substantially all of our assets, with the exception of our intellectual property and those assetssold under the Royalty Monetization, where the security interest 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, the Lenders could elect to declare all amounts outstanding, together with accrued and unpaid interest and penalty, to be immediatelydue and payable. Additional capital may not be available on terms acceptable to us, or at all. In addition, we recently sold a majority of the royalties andfirst four commercial sales milestone payments we are entitled to receive under the Amended Agreements with Grünenthal to PDL, which will decreasefuture cash flows available to us to repay this debt. Even if we were able to repay the full amount in cash, any such repayment could leave us with little orno working capital for our business. If we are unable to repay those amounts, the Lenders will have a first claim on our assets pledged under the AmendedLoan Agreement. If the Lenders should attempt to foreclose on the collateral, it is unlikely that there would be any assets remaining after repayment infull of such secured indebtedness. Any default under the Amended Loan Agreement and resulting foreclosure would have a material adverse effect on ourfinancial condition and our ability to continue our operations. We may not receive all of the funding from the Department of Defense for the advancement of ARX-04. On May 11, 2015, we entered into an award contract supported by the Clinical and Rehabilitative Medicine Research Program, or CRMRP, of the UnitedStates Army Medical Research and Materiel Command, or USAMRMC, within the U.S. Department of Defense, or the DoD, in which the DoD agreed toprovide up to $17.0 million to support the development of DSUVIA, referred to as the DoD Contract. Under the terms of the contract, the DoD has andcontinues to reimburse us for costs incurred for development, manufacturing, regulatory and clinical costs outlined in the contract in order to submit anNDA to the FDA, including reimbursement for certain personnel and overhead expenses. The period of performance under the contract began on May 11,2015. The contract gives the DoD the option to extend the term of the contract and provide additional funding for the research. On March 2, 2016, theDoD Contract was amended to approve enrollment of additional patients in the SAP302 study, approve the addition of the SAP303 study, and extend thecontract period of performance by four months from November 10, 2016 to March 9, 2017, to accommodate the increased SAP302 patient enrollment andthe SAP303 study. The costs for these changes have been absorbed within the current contract value. Funding under this contract will be subject to auditby the DoD to ensure adherence to specific guidance, policies and procedures. The DoD may find deficiencies during the course of an audit which couldjeopardize, or even eliminate, continued funding from the DoD, as well as require repayment of any funds they had provided us since inception of thecontract. 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; 39 •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 maintain in good order our production and manufacturing equipment for our products; •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. As mentioned above, we are obligated to manufacture and supply ZALVISO under the Amended Agreements with Grünenthal for use in the EU and theirother licensed territories. If we are unable to establish a reliable commercial supply of ZALVISO for Grünenthal’s Territory, we may be unable to satisfyour obligations under the Amended Agreements in a timely manner or at all, and we may, as a result, be in breach of the Amended Agreements. 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. 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. 40 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. We have built out a suite within Patheon’s production facility in Cincinnati, Ohio that serves as a manufacturing facility for clinical and commercialsupplies of sufentanil sublingual tablets. Late stage development and manufacture of registration stability lots, which were utilized in clinical trials, weremanufactured at this location. While we have produced a limited number of commercial lots at Patheon to support Grünenthal’s launch in Europe, ourexperience is limited, which has and may in the future impact our ability to deliver commercial supplies to Grünenthal on a timely basis. Delivery of the ZALVISO cartridges ordered by Grünenthal is behind schedule at Patheon. The inability to deliver cartridges to the schedule ordered byGrünenthal may have a negative impact on their future sales including the timing of their launch in certain countries. AcelRx is working with Patheon toresolve these issues; however, there can be no assurance that the issues will be resolved in a timely fashion, or that we will be able to meet Grünenthal’sneeds in such a way as to not impact their future sales. 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,Mexico and other countries, subject to agreement by the parties to any additional fees for such other countries. There is no guarantee that Patheon’sservices will be satisfactory or that they will continue to meet the strict regulatory guidelines of the FDA or other foreign regulatory agencies. In addition,in January 2013, we entered into an Amended and Restated Capital Expenditure and Equipment Agreement, or the Amended Capital Agreement, withPatheon, relating to the manufacture of sufentanil sublingual tablets. Under the terms of the Amended Capital Agreement, we have made and may makecertain future modifications 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 which may result in significant delays. In addition, there is a natural transition period when a new manufacturingfacility commences work. As a result, delays may occur, which can materially impact our ability to meet our desired commercial timelines, therebyincreasing our costs and reducing our ability to generate revenue. The facilities of any of our future manufacturers of sufentanil-containing sublingual tablets must be approved by the FDA or the relevant foreignregulatory agency, such as EMA, before commercial distribution from such manufacturers occurs. We do not fully control the manufacturing process ofsufentanil sublingual tablets and are completely dependent on these third party manufacturing partners for compliance with the FDA or other foreignregulatory agency’s requirements for manufacture. In addition, although our third party manufacturers are well-established commercial manufacturers, weare dependent on their continued adherence to cGMP manufacturing and acceptable changes to their process. If our manufacturers do not meet the FDA orother foreign regulatory agency’s strict regulatory requirements, they will not be able to secure FDA or other foreign regulatory agency approval for theirmanufacturing facilities. Although European inspectors have approved our tablet manufacturing site, our third party manufacturing partner is responsiblefor maintaining compliance with the relevant foreign regulatory agency’s requirements. If the FDA or the relevant foreign regulatory agency does notapprove these facilities for the commercial manufacture of sufentanil sublingual tablets, we will need to find alternative suppliers, which would result insignificant delays in obtaining FDA or other foreign regulatory agency approval for ARX-04 and ZALVISO outside the EU. These challenges may have amaterial adverse impact on our business, results of operations, financial condition and prospects. 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. We have made modifications to thedesign of the ZALVISO device subsequent to the original submission of the ZALVISO NDA, which we plan to include as a part of any resubmitted NDA.We submitted a protocol to the FDA for a clinical study in post-operative patients designed to evaluate the effectiveness of changes made to enhanceZALVISO device performance, in response to the CRL we received for ZALVISO. We have completed the protocol review with the FDA for the study,known as IAP312, and initiated the IAP312 study in September 2016. If any additional changes to the device are substantial, the FDA may require us toperform further clinical trials or studies in order to approve the device for commercial use. We have manufactured and shipped launch supplies for delivery to Grünenthal; however, our experience is limited. We will continue to rely on contractmanufacturers, component fabricators and third party service providers to produce the necessary ZALVISO devices for the commercial marketplace. Wecurrently outsource manufacturing and packaging of the controller, dispenser and cartridge components of the ZALVISO device to third parties andintend to continue to do so. Some of these purchases and components were made and will continue to be made utilizing short-term purchase agreementsand we may not be able to enter into long-term agreements for commercial supply of DSUVIA (known as ARX-04 outside the United States) or ZALVISOdevices with third-party manufacturers, or may be unable to do so on acceptable terms. In addition, we have encountered and may continue to encounterproduction issues with our current or future contract manufacturers and other third party service providers, including the reliability of the productionequipment, quality of the components produced, their inability to meet demand or other unanticipated delays including scale-up and automatingprocesses, which could adversely impact our ability to supply our customers with DSUVIA, if approved in the U.S., ZALVISO in the EU, ARX-04, ifapproved outside the U.S., and ZALVISO, if approved in the U.S. and any other foreign territories. 41 We may not be able to establish additional sources of supply for sufentanil-containing sublingual tablets or device manufacture. Such suppliers aresubject to FDA and other foreign regulatory agency’s regulations requiring that materials be produced under cGMPs or Quality System Regulations, orQSR, or in ISO 13485 accredited manufacturers, and subject to ongoing inspections by regulatory agencies. Failure by any of our suppliers to complywith applicable regulations may result in delays and interruptions to our product candidate supply while we seek to secure another supplier that meets allregulatory requirements. In addition, if we are unable to establish a reliable commercial supply of ZALVISO for Grünenthal’s Territory, we may be unableto satisfy our obligations under the Amended Agreements in a timely manner or at all, and we may, as a result, be in breach of the Amended Agreements. For DSUVIA, we currently package the finished goods under a manual process at the Patheon facility. The capacity and cost to package the DSUVIA unitsunder this manual process is not sufficient to support successful future sales of DSUVIA. We will need to purchase, install and validate new equipmentand processes to automate the DSUVIA manufacturing process. The purchase and subsequent installation of this equipment to automate the DSUVIApackaging process will require substantial resources and take several years. There is no assurance that we will be able to successfully purchase, install orvalidate the equipment necessary to automate the DSUVIA packaging process. If we are successful in the purchase, installation and validation of thisequipment and process, there can be no assurance that we will be able to obtain the necessary regulatory approvals to manufacture product. 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 the Phase 2 and 3 clinical trials of DSUVIA, as well as our ongoing Phase 3clinical program for ZALVISO. We rely on CROs, as well as clinical trial sites, to ensure the proper and timely conduct of our clinical trials and documentpreparation. While we have agreements governing their activities, we have limited influence over their actual performance. We have relied and plan tocontinue to rely upon CROs to monitor and manage data for our clinical programs for DSUVIA (known as ARX-04 outside the United States), ZALVISO,and our other product candidates, as well as the execution of nonclinical and clinical trials. We control only certain aspects of our CROs’ activities.Nevertheless, we are responsible for ensuring that each of our trials is conducted in accordance with the applicable protocol, legal, regulatory andscientific standards and our reliance on the CROs does 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 DSUVIA and ZALVISO, or ourother product candidates. As a result, our financial results and the commercial prospects for DSUVIA, ZALVISO or any future product candidates forwhich we may obtain approval would be harmed, our costs could increase, and our ability to generate revenues could be delayed. 42 Risks Related to Commercialization of Our Product Candidates The commercial success of DSUVIA or ARX-04, if approved, as well as ZALVISO in the EU, will depend upon the acceptance of these products by themedical community, including physicians, nurses, patients, and pharmacy and therapeutics committees. The degree of market acceptance of DSUVIA in the U.S., or ARX-04 outside the U.S., if approved, as well as ZALVISO in the EU, will depend on a numberof 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 DSUVIA (known as ARX-04 outside the United States) for the management of moderate-to-severe acute pain by a healthcareprofessional for patient types that were not specifically studied in our Phase 3 trials; •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 any perceptions of sufentanil as a potentially unsafe drug due to its high potency; •limitations or warnings contained in the FDA- or EMA-approved label for DSUVIA (known as ARX-04 outside the United States) orZALVISO; •restrictions or limitations placed on DSUVIA or 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 formulary approval; and, •our ability to obtain and maintain sufficient third party coverage or reimbursement. If our approved products do not achieve an adequate level of acceptance by physicians, nurses, patients and pharmacy and therapeutics committees, orP&T Committees, we may not generate sufficient revenue 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 product revenue. In order to commercialize any products that may be approved in the United States, including DSUVIA and ZALVISO, we must build our internal sales,marketing, distribution, managerial and other capabilities or make arrangements with third parties to perform these services. In addition, we plan to enterinto agreements with third parties for the distribution of approved product candidates, including DSUVIA in the United States and ARX-04 outside theUnited States; however, if there are delays in establishing such relationships or those third parties do not perform as expected, our ability to effectivelydistribute products 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 current or futurecollaboration partners, if any, may not dedicate sufficient resources to the commercialization of ZALVISO or ARX-04, if approved, or may otherwise failin their commercialization due to factors beyond our control. If we are unable to establish effective collaborations to enable the sale of our productcandidates, 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. 43 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. Approval of ZALVISO in the EU, and any future approvals of our product candidates outside of the United States, will result in a variety of risksassociated with international operations and could materially adversely affect our business. Our existing collaboration with Grünenthal for marketing ZALVISO in European countries and Australia requires us to supply product to support the EUcommercialization of ZALVISO. In addition, if ARX-04 is approved for commercialization outside the United States, we intend to enter into agreementswith third parties to market ARX-04 in those countries, which may also require us to supply product to those third parties. We may be subject toadditional risks related to entering into international business 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; 44 •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 U.S. market for DSUVIA and ZALVISO is characterized by intense competition and cost pressure. If our product candidates obtain FDA approval,they will compete with a number of existing and future pharmaceuticals and drug delivery devices developed, manufactured and marketed by others. Weor our current and potential partners will compete against fully integrated pharmaceutical companies and smaller companies that are collaborating withlarger pharmaceutical companies. 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 DSUVIA in theemergency department are likely to include generic injectable intravenous opioids such as morphine, hydromorphone and fentanyl. In this environment,DSUVIA may also compete with other branded non-invasive products or product candidates, such as Egalet Corporation’s SPRIX, Hospira, Inc.’sDYLOJECT (Hospira, Inc. was recently sold by Pfizer, Inc. to ICU Medical), Acura Pharmaceuticals, Inc.’s OXAYDO, Depomed, Inc.’s NUCYNTA, Bristol-Myers Squibb Company’s COMBUNOX, Purdue Pharma, L.P.’s OXYFAST, Endo Pharmaceuticals, Inc.’s OPANA, Medical Developments InternationalLimited’s PENTHROX inhaler, CL-108, a bi-layered tablet, in development by Charleston Laboratories Inc., in collaboration with Daiichi Sankyo, orgeneric oral opioids which have moderate-to-severe acute pain labeling. In the short-stay or ambulatory surgery segment, DSUVIA will likely competewith these products in addition to generic injectable local anesthetics such as bupivacaine, or branded formulations thereof, including PaciraPharmaceuticals, Inc.’s EXPAREL. In addition, Heron Therapeutics, Inc. is in Phase 2 development of HTX-011, a long-acting formulation of the localanesthetic bupivacaine in a fixed-dose combination with the anti-inflammatory meloxicam for the prevention of post-operative pain, and Recro Pharma,Inc. is developing IV meloxicam, which is in Phase 3 clinical trials for the treatment of moderate-to-severe acute pain. According to clinicaltrials.gov,SUBSYS, a sublingual fentanyl spray currently approved and marketed by INSYS Therapeutics, Inc. for breakthrough cancer pain, is currently beingstudied as a potential treatment for acute pain in emergency room patients, post-operative patients, and in patients undergoing painful procedures withoutsedation. Within the military environment, and in certain civilian settings, DSUVIA competitors may also include intramuscular morphine injectionswhich are marketed by a variety of generic manufacturers. 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 manufacturersof IV PCA pumps include Hospira, Inc. (recently sold by Pfizer, Inc. to ICU Medical), CareFusion Corporation (purchased by Becton, Dickinson andCompany), Baxter International, Inc., Curlin Medical, Inc. and Smiths Medical. The most common opioids used to treat moderate-to-severe acute pain aremorphine, hydromorphone and fentanyl, all of which are available as generics both from generic product manufacturers as well as from compoundingpharmacies. In addition, 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 Pharmaceuticals, Inc.’s EXPAREL. Inaddition, Halyard Health, Inc. has developed a medical device, the ON-Q Pain Relief System, which is a non-narcotic elastomeric pump that automaticallyand continuously delivers a regulated flow of local anesthetic to a patient’s surgical site or in close proximity to nerves, providing targeted pain relief forup to five days. 45 Additional potential competitors for ZALVISO include the fentanyl iontophoretic transdermal system, IONSYS, originally developed by ALZACorporation and Ortho-McNeil Pharmaceutical, Inc., both Johnson & Johnson subsidiaries, and most recently by The Medicines Company. In April 2015,IONSYS was approved for marketing in the U.S. by the FDA, and in November 2015, it was approved for marketing in the EU by the EMA, providing afirst-to-market advantage for IONSYS. Cara Therapeutics, Inc. is developing a kappa opioid agonist, CR845, as an IV agent for the management of post-operative moderate-to-severe pain. Trevena, Inc. is developing TRV130, an intravenous G protein biased ligand that targets the mu opioid receptor for thetreatment of moderate-to-severe acute pain where intravenous therapy is preferred, with a clinical development focus in acute post-operative pain.Trevena, Inc. initiated Phase 3 development of TRV130 in the first quarter of 2016. In addition, Heron Therapeutics, Inc. is in Phase 2 development ofHTX-011, a long-acting formulation of the local anesthetic bupivacaine in a fixed-dose combination with the anti-inflammatory meloxicam for theprevention of post-operative pain, and Recro Pharma, Inc. is developing IV meloxicam, which is in Phase 3 clinical trials for the treatment of moderate-to-severe acute pain. Recro Pharma, Inc. is also developing an intranasal form of dexmedetomidine as a potential agent for the management of post-operativepain, for which it announced positive efficacy results in its Phase II clinical trial. Finally, Innocoll AG is developing XARACOLL a controlled-releaseresorbable implant containing bupivacaine, and Durect Corporation has been developing POSIDUR, a controlled-release bupivacaine product candidateutilizing Durect Corporation’s Saber technology. 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 paincould render our products non-competitive or obsolete. These and other risks may materially adversely affect our ability to attain or sustain profitableoperations. Formulary approval may not be available, or could be subject to certain restrictions for DSUVIA or ZALVISO in the United States and our otherproduct candidates, which could 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 DSUVIA or ZALVISO is used on a limited basis for certain patienttypes. Hospitals may seek to obtain DSUVIA or ZALVISO devices at little or no cost during this evaluation period. Revenue generated from thesehospitals during the evaluation period would be minimal. The evaluation period may last several months and there can be no assurance that use duringthe evaluation period will lead to formulary approval of DSUVIA or ZALVISO. Further, even successful formulary approval may be subject to certainrestrictions based on patient type or hospital protocol. Failure to obtain timely formulary approval for DSUVIA and/or ZALVISO would materiallyadversely affect our ability to attain or sustain profitable operations. Coverage and adequate reimbursement may not be available for DSUVIA or ZALVISO, if approved in the United States, or ARX-04 in the EU, ifapproved, or ZALVISO in the EU, which could make it difficult for us, or our partners, to sell our products profitably. Our ability to commercialize DSUVIA or ZALVISO, if approved in the United States, or ARX-04 in the EU, if approved, or ZALVISO in the EUsuccessfully will depend, in part, on the extent to which coverage and adequate reimbursement will be available from government payor programs at thefederal and state levels, authorities, including Medicare and Medicaid, private health insurers, managed care plans and other third-party payors. 46 No uniform policy requirement for coverage and reimbursement for drug products exists among third-party payors in the United States or the EU.Therefore, coverage and reimbursement can differ significantly from payor to payor. As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support for the use of our products to each payor separately, with noassurance that coverage and adequate reimbursement will be applied consistently or obtained in the first instance. Our inability to promptly obtaincoverage and adequate reimbursement rates from third party payors could significantly harm our operating results, our ability to raise capital needed tocommercialize any future approved drugs and our overall financial condition. 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 DSUVIA, ZALVISO or any of ourother product candidates, if approved in the United States, and ARX-04 or any of our other product candidates, if approved outside the United States, aswell as ZALVISO in the EU and elsewhere. The application of user fees to generic drug products may expedite the approval of additional pain medicationgeneric drugs. We expect to experience pricing pressures in connection with the sale of ZALVISO in the EU, and, if approved, DSUVIA in the UnitedStates, ARX-04 outside the United States, ZALVISO outside of the EU and any of our other product candidates, due to the trend toward managedhealthcare, the increasing influence of health maintenance organizations and additional legislative changes. If we fail to successfully secure and maintainreimbursement coverage for our products or are significantly delayed in doing so, we will have difficulty achieving market acceptance of our productsand 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 forDSUVIA, ZALVISO, or any of our other product candidates, if approved in the United States or ARX-04, or any of our other product candidates, ifapproved in the EU, or ZALVISO in the EU. Also, reimbursement amounts may reduce the demand for, or the price of, our products. If reimbursement isnot available, or is available only to limited levels, we may not be able to successfully commercialize DSUVIA, ZALVISO, or any of product candidates,if approved in the United States, or ARX-04, or any of our other product candidates, if approved in the EU, or ZALVISO in the EU. 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. For example, although in September 2015 the European Commissionapproved the MAA for Grünenthal to market ZALVISO in the 28 EU member states as well as for the European Economic Area countries, Norway, Icelandand Liechtenstein, separate pricing and reimbursement approvals may impact their ability to successfully commercialize ZALVISO. Adverse pricinglimitations may hinder our ability to recoup our investment in DSUVIA (known as ARX-04 outside the United States), ZALVISO and/or our other drugcandidates, even if/when those drug candidates obtain marketing approval. 47 Furthermore, even after initial price and reimbursement approvals, reductions in prices and changes in reimbursement levels can be triggered by multiplefactors, including reference pricing systems and publication of discounts by third party payors or authorities in other countries. In the EU, prices can bereduced further by parallel distribution and parallel trade, i.e. arbitrage between low-priced and high-priced countries. If any of these events occur,ZALVISO, and any future approved product candidates, including ARX-04, would be negatively affected. 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 DSUVIA and/or ZALVISO, if approved in the UnitedStates, we may become subject to significant liability. Such enforcement has become more common in the industry. The FDA and other regulatoryagencies strictly regulate the promotional claims that may be made about prescription drug products. In particular, a product may not be promoted foruses that are not approved by the FDA or such other regulatory agencies as reflected in the product’s approved labeling. If we receive marketing approvalfor our product candidates for our proposed indications, physicians may nevertheless use our products for their patients in a manner that is inconsistentwith the approved label, if the physicians personally believe in their professional medical judgment it could be used in such manner. However, if the FDAdetermines that our promotional materials or training constitutes promotion of an off-label use, it could request that we modify our training orpromotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure,civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider ourpromotional or training materials to constitute promotion of an off-label use, which could result in significant civil, criminal and/or 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. The FDA or other enforcement authorities could also requestthat we enter into a consent decree or a corporate integrity agreement, or seek a permanent injunction against us under which specified promotionalconduct is monitored, changed or curtailed. If we cannot successfully manage the promotion of our product candidates, including DSUVIA and ZALVISOin the United States, if approved, we could become subject to significant liability, which would materially adversely affect our business and financialcondition. Guidelines and recommendations published by government agencies, as well as non-governmental organizations, can reduce the use of our productcandidates, including DSUVIA and ZALVISO, if/when approved. Government agencies and non-governmental organizations promulgate regulations and guidelines applicable to certain drug classes that may include theproduct candidates that we are developing. Recommendations of government agencies or non-governmental organizations may relate to such matters asmaximum quantities dispensed to patients, dosage, route of administration and use of concomitant therapies. Government agencies and non-governmental organizations have offered commentary and guidelines on the use of opioid-containing products. We are uncertain how these activities andguidelines may impact our product candidates and our ability to gain marketing approval. Regulations or guidelines suggesting the reduced use ofcertain drug classes that may include the product candidates that we are developing or the use of competitive or alternative products as the standard-of-care to be followed by patients and healthcare providers could result in decreased use of our product candidates, or negatively impact our ability to gainmarket acceptance and market share. 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 GPOs, if DSUVIA or 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. 48 We intend to rely on a limited number of pharmaceutical wholesalers to distribute our product candidates, including DSUVIA and ZALVISO in theUnited States, if approved. We intend to rely primarily upon pharmaceutical wholesalers in connection with the distribution of our product candidates, including DSUVIA andZALVISO in the United States, if approved. If we are unable to establish or maintain our business relationships with these pharmaceutical wholesalers oncommercially acceptable terms, or if our wholesalers are unable to distribute our drugs for regulatory, compliance or any other reason, 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 receive required quotas of controlled substances or comply with the Drug Enforcement Administration regulations, or the cost ofcompliance with these regulations, may adversely affect our business. 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 a high 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. In addition, ourcontract manufacturers are required to maintain relevant licenses and registrations. This high degree of regulation can result in significant costs in order tocomply with the required regulations, which may have an adverse effect on the development and commercialization 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 manufacturersapply for quotas on our behalf. We will need significantly greater amounts of sufentanil to implement our commercialization plans for ZALVISO in theEU, and any of our products that may be approved by the FDA in the future, including DSUVIA and ZALVISO. Any delay or refusal by the DEA inestablishing the procurement quota or a reduction in our quota for sufentanil or a failure to increase it over time to meet anticipated increases in demandcould delay or stop the clinical development of any of our product candidates or the commercial sale of any approved products. This, in turn, could havea material adverse effect on our business, results of operations, financial condition and prospects. 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; 49 •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; •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; and, •the federal Foreign Corrupt Practices Act of 1977 and other similar anti-bribery laws in other jurisdictions generally prohibit companies andtheir intermediaries from providing money or anything of value to officials of foreign governments, foreign political parties, or internationalorganizations with the intent to obtain or retain business or seek a business advantage. Recently, there has been a substantial increase in anti-bribery law enforcement activity by U.S. regulators, with more frequent and aggressive investigations and enforcement proceedings by boththe Department of Justice and the U.S. Securities and Exchange Commission. A determination that our operations or activities are not, or werenot, in compliance with United States or foreign laws or regulations could result in the imposition of substantial fines, interruptions ofbusiness, loss of supplier, vendor or other third-party relationships, termination of necessary licenses and permits, and other legal or equitablesanctions. Other internal or government investigations or legal or regulatory proceedings, including lawsuits brought by private litigants,may also follow as a consequence. 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. In order to supply the ZALVISO device to Grünenthal for commercial sales, we must maintain conformity of our quality system to applicable ISOstandards and must comply with applicable European laws and directives. We underwent a Conformité Européenne approval process for the ZALVISO device, more commonly known as a CE Mark approval process. We receivedCE Mark approval in December 2014, which permits the commercial sale of the ZALVISO device in the EU. In connection with the CE Mark approval, wewere also granted International Standards Organization, or ISO, 13485:2003 certification of our quality management system in November 2014. This is aninternationally recognized quality standard for medical devices. Certification of our quality management system was issued by the British StandardsInstitution, or BSI, a Notified Body. ISO 13485:2003 certification recognizes that consistent quality policies and procedures are in place for thedevelopment, design and manufacturing of medical devices. The certification indicates that we have successfully implemented a quality system thatconforms to ISO 13485 standards for medical devices. Certification to this standard is one of the key regulatory requirements for a CE Mark in the EU andEuropean Economic Area, or EEA, as well as to meet equivalent requirements in other international markets. The certification applies to the RedwoodCity, California location which designs, manufactures and distributes finished medical devices, and includes critical suppliers. If we fail to remain in compliance with applicable European laws and directives, we would be unable to continue to affix the CE Mark to our ZALVISOdevice, which would prevent Grünenthal from selling these devices within the EU and EEA. 50 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. 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. 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, 2016, we had 39 full-time employees. As our product candidates mature and approach potential commercialization in the UnitedStates, we plan to expand our employee base to increase our managerial, sales, marketing, operational, quality, engineering, financial and other resourcesand to hire more consultants and contractors. Future growth will impose significant additional responsibilities on our management, including the need toidentify, recruit, maintain, motivate and integrate additional employees, consultants and contractors. Also, our management may need to divert adisproportionate amount 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 be able to effectively manage the expansion of our operations, which may result in weaknesses in our infrastructure, give rise to operationalmistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Our expected growth could requiresignificant capital expenditures and may divert financial resources from other projects, such as the development of additional product candidates. If ourmanagement is unable to effectively manage our growth, our expenses may increase more than expected, our ability to generate and/or grow revenuescould be reduced, and we may not be able to implement our business strategy. Our future financial performance and our ability to commercializeDSUVIA, 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. For example, with the recent approval of ZALVISO in the EU, we have expanded our insurance coverage toinclude the sale of ZALVISO to our commercial partner, Grünenthal. There can be no assurance that such coverage will be adequate to protect us againstany future losses due to liability. On occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated adverseeffects. A successful product liability claim or series of claims brought against us could cause our stock price to decline and, if judgments exceed ourinsurance coverage, could adversely affect our results of operations and business. 51 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, 2016, we are the owner of record of 57 issued patents worldwide. These issued patentscover AcelRx’s sufentanil sublingual tablet, medication delivery devices, packaging and other platform technology. These issued patents are expected toprovide coverage through 2027 – 2031. 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, supplemental examination, re-examination or other post-issuance proceedings. In addition, there is no assurance that therespective court or agency in such adversarial proceedings would not make unfavorable decisions, such as reducing the scope of a patent of ours, ordetermining that a patent of ours is invalid or unenforceable. There is also no assurance that any patents issued to us will provide us with competitiveadvantages, will not be challenged by any third parties, or that the patents of others will not prevent the commercialization of products incorporating ourtechnology. Furthermore, there can be no guarantee that others will not independently develop similar products, duplicate any of our products, or designaround our patents. 52 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 or approved products 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 and/or be required to paythe owner of the patent for damages for past sales and for the right to license the patented technology for future sales. If we decide to pursue a license toone or more of these patents, we may not be able to obtain a license on commercially reasonable terms, if at all, or the license we obtain may require us topay substantial royalties or grant cross licenses to our patent rights. For example, if the relevant patent is owned by a competitor, that competitor maychoose not to license patent rights to us. If we decide to 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 and Trademark Office has developed new regulations and procedures to govern the full implementation of the Leahy-Smith Act, and many of thesubstantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, that became effective March 16,2013. We are uncertain what impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and itsimplementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of ourissued patents, all of 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. Claims could be brought regarding the validity of our patents by third parties and regulatoryagencies. Further, if any patent license we obtain is deemed invalid and/or unenforceable, it could impact our ability to commercialize or partner ourtechnology. 53 Competitors or third parties may infringe our patents. We may decide it is necessary 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. 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 or issued patents; •our patent applications were filed before the inventions covered by each patent or patent application was published by a third party; •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 productsand product candidates, 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. 54 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. Additionally, claims may bebrought regarding the validity of our patents by third parties and regulatory agencies in the United States and foreign countries. In addition, changes inthe law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technologyand the enforcement of intellectual property. 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 EU and India. In early 2014, the FDA accepted the ZALVISO mark as part of theNDA review process. Although we are not currently aware of any oppositions to or cancellations of our registered trademarks or pending applications, it ispossible that one or more of the applications could be subject to opposition or cancellation after the marks are registered. The registrations will be subjectto use and maintenance requirements. It is also possible that we have not yet registered all of our trademarks in all of our potential markets, and that thereare names or symbols other than “ACELRX” that may be protectable marks for which we have not sought registration, and failure to secure thoseregistrations could adversely affect our business. Opposition or cancellation proceedings may be filed against our trademarks and our trademarks may notsurvive 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 a clinical trial to assess the risk of inadvertent dispensing and overall risk of dispensing failures for ZALVISO. Our stock pricecould be subject to wide fluctuations in response to a variety of factors, including the following: •any delay with respect to the FDA’s review of the DSUVIA NDA or in resubmitting the NDA for ZALVISO, and any adverse development orperceived adverse development with respect to the FDA’s review of any NDA; •adverse results or delays in future clinical trials, including the IAP312 trial for ZALVISO; •inability to obtain additional funding, including funding necessary for the planned potential commercialization and manufacturing ofDSUVIA and ZALVISO in the United States; •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; •inability to maintain ISO 13485 certification and CE Mark approval for ZALVISO; •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 theinvestment community; •announcements of significant acquisitions, strategic partnerships, joint ventures, or other significant transactions, including dispositiontransactions, 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; 55 •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. 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, 2016 and 2015 was approximately 330,000 and 600,000 shares per day, respectively. Amore active market for our stock has only recently developed and may not be sustained. Our stockholders may be unable to sell their common stock at ornear 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. 56 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, orour independent 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. A significant number of shares ofour common stock are held by some of our original pre-IPO venture investors. These investors have previously distributed, and may in the futuredistribute their shares of AcelRx to their limited partners. Historically, these limited partners have subsequently sold those shares on the open marketfollowing the distribution. Sales of substantial number of shares of our common stock following such distributions may lead to a decline in the price ofour common stock. We are unable to predict the effect that sales may have on the prevailing market price of our common stock. All of our shares of common stockoutstanding are eligible for sale in the public market, subject in some cases to the volume limitations and manner of sale requirements of Rule 144 underthe Securities Act. Sales of stock by our stockholders could have a material adverse effect on the trading price of our common stock. 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. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock. Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our Sales Agreement with Cantor and ourequity incentive plans, could result in additional 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, including pursuant to the Sales Agreement with Cantor, our stockholders may experience substantial dilution. We may sellcommon stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If wesell common stock, convertible securities or other equity securities in more than one transaction, investors may be materially diluted by subsequent sales.These sales may also result in material dilution to our 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. For example, on October 1, 2014, a securities class action complaint was filed in the U.S. District Court for the Northern District of California againstAcelRx and certain of our current and former officers. On April 17, 2015, lead plaintiff filed an amended complaint. The amended complaint alleged thatbetween September 30, 2013 and July 25, 2014, AcelRx and certain of our current and former officers violated Sections 10(b) and 20(a) of the SecuritiesExchange Act of 1934 in connection with statements related to our lead drug candidate, ZALVISO. On November 25, 2015, the Court granted our Motionto Dismiss. Plaintiffs had the opportunity to file an amended complaint within 30 days’ which they declined to do. On January 18, 2016, the Court issuedan order dismissing the case with prejudice. If AcelRx experiences a decline in its stock price, we could face additional securities class action lawsuits. Securities class actions are often expensive andcan divert management’s attention and our financial resources, which could adversely affect our business. 57 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. In the year ended December 31, 2015, we used net operating losses toreduce our income tax liability. In the future, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards to offsetUnited States federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us. 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. Regardless of the restrictions in our Amended Loan Agreement or the terms of any potential future indebtedness, we anticipate that we willretain all available funds and any future earnings to support our operations and finance the growth and development of our business and, therefore, we donot expect to pay cash dividends in the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of ourBoard of Directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capitalrequirements, 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. 58 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.On October 2, 2015, we executed an agreement to sublease 11,871 square feet of this space for a term of 26 months commencing on December 1, 2015.We believe that our facilities are adequate to meet our current needs. Item 3. Legal Proceedings From time to time we may be involved in legal proceedings arising in the ordinary course of business. We are not currently involved in any material legalproceedings. We may, however, be involved in material legal proceedings in the future. Such matters are subject to uncertainty and there can be noassurance that such legal proceedings will not have a material adverse effect on our business, results of operations, financial position or cash flows. Item 4. Mine Safety Disclosures Not Applicable. 59 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 2016 Fourth Quarter $3.87 $2.48 Third Quarter $4.08 $2.61 Second Quarter $3.99 $2.40 First Quarter $4.50 $2.59 Year ended 2015 Fourth Quarter $5.88 $2.97 Third Quarter $5.10 $2.92 Second Quarter $4.99 $2.96 First Quarter $9.32 $3.58 Stock Price Performance Graph The following graph illustrates a comparison of the total cumulative stockholder return on our common stock since December 31, 2011, to two indices:the NASDAQ Composite Index and the NASDAQ Biotechnology Index. The stockholder return shown in the graph below is not necessarily indicative offuture performance, and we do not make or endorse any predictions as to future stockholder returns. 60 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. Holders of Record As of February 3, 2017, 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 Amended LoanAgreement. Regardless of the restrictions in our Amended Loan Agreement or the terms of any potential future indebtedness, we anticipate that we willretain all available funds and any future earnings to support our operations and finance the growth and development of our business and, therefore, we donot expect to pay cash dividends in the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of ourBoard of Directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capitalrequirements, business prospects and other factors our Board of Directors may deem relevant. Recent Sales of Unregistered Securities None. 61 Item 6. Selected Financial Data The selected financial data set forth below should be read together with the Consolidated Financial Statements and related notes, “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” and the other information contained in this Form 10-K. The selectedfinancial data is not intended to replace our audited financial statements and the accompanying notes. Our historical results are not necessarily indicativeof our future results. Year Ended December 31, 2016 2015 2014 2013 2012 (in thousands, except share and per share data) Consolidated Statements of Operations Data: Revenue: Collaboration agreement $6,440 $14,857 $5,217 $27,370 $— Contract and other 10,917 4,406 — 2,132 2,394 Total revenue 17,357 19,263 5,217 29,502 2,394 Costs and Operating Expenses: Cost of goods sold $12,315 $1,770 $— $— $— Research and development 21,402 22,488 24,520 26,292 24,908 General and administrative 15,597 14,203 18,346 9,877 7,199 Restructuring costs — 756 — — — Total costs and operating expenses 49,314 39,217 42,866 36,169 32,107 Loss from operations (31,957) (19,954) (37,649) (6,667) (29,713)Interest expense (2,770) (2,977) (2,639) (1,518) (2,283)Interest income and other income (expense), net 918 1,720 6,935 (15,241) (1,367)Non-cash interest expense on liability related to sale of futureroyalties (9,382) (2,428) — — — Net loss before income taxes $(43,191) $(23,639) $(33,353) $(23,426) $(33,363)Benefit (provision) for income taxes 34 (760) — — — Net loss $(43,157) $(24,399) $(33,353) $(23,426) $(33,363) Net loss per share of common stock, basic $(0.95) $(0.55) $(0.77) $(0.59) $(1.51) Shares used in computing net loss per share of common stock,basic 45,313,118 44,300,099 43,427,111 39,746,678 22,124,637 Net loss per share of common stock, diluted – see Note 14 $(0.95) $(0.60) $(0.91) $(0.59) $(1.51) Shares used in computing net loss per share of common stock,diluted 45,313,118 44,468,440 44,322,297 39,746,678 22,124,637 As of December 31, 2016 2015 2014 2013 2012 (in thousands) Balance Sheet Data: Cash, cash equivalents and short-term investments $80,310 $113,464 $75,350 $103,663 $59,763 Working capital 78,862 106,167 62,567 97,692 47,435 Total assets 99,993 127,785 86,416 110,031 64,520 Long-term debt 21,549 20,922 24,874 14,364 15,973 Liability related to sale of future royalties 72,987 63,612 — — — PIPE warrant liability 288 913 5,577 13,111 7,418 Accumulated deficit (246,362) (203,205) (178,806) (145,453) (122,027)Total stockholders’ (deficit) equity (5,337) 33,113 46,656 73,159 33,847 62 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, DSUVIA (known as ARX-04 outside of the United States), and our follow-on product candidate, ZALVISO, utilize sublingualsufentanil, delivered via a non-invasive route of sublingual administration. We anticipate developing a distribution capability and commercialorganization to market and sell DSUVIA in the United States by ourselves, and potentially, in certain European Economic Area, or EEA, countries, eitheralone or with strategic partners. In geographies where we decide not to commercialize ourselves, we would seek to out-license commercialization rights.We intend to seek regulatory approval for ZALVISO in the United States and, if successful, potentially promote ZALVISO as a follow-on product toDSUVIA, either by ourselves or with strategic partners. We have chosen sufentanil as the therapeutic ingredient for all of our current product candidates. Opioids have been utilized for pain relief for centuriesand are the standard-of-care for the treatment of moderate-to-severe acute pain. Sufentanil is available as an injectable in several markets around the worldand is used by anesthesiologists for induction of sedation or as an epidural; however, the injectable formulation is not suitable for the treatment of acutepain. We have created a proprietary sublingual (under the tongue) formulation of sufentanil intended for the treatment of moderate-to-severe acute pain.The sublingual formulation retains the therapeutic value of sufentanil and novel delivery devices provide a non-invasive route of administration.Sufentanil is highly lipophilic which provides for rapid absorption in the mucosal tissue, or fatty cells, found under the tongue, and for rapid transit acrossthe blood-brain barrier to reach the mu-opioid receptors in the brain. The sublingual route of delivery used by DSUVIA and ZALVISO provides arecognized onset of analgesia. The sublingual delivery system also eliminates the risk of intravenous, or IV, complications, such as catheter-relatedinfections. In addition, because patients do not require direct connection to an IV infusion pump, or IV line, DSUVIA and ZALVISO may allow for ease ofpatient mobility. DSUVIA (sufentanil sublingual tablet, 30 mcg), known as ARX-04 outside the United States DSUVIA is an investigational product candidate consisting of a single 30 mcg sublingual tablet delivered via a disposable, pre-filled, single-doseapplicator, or SDA. We are developing DSUVIA for the treatment of moderate-to-severe acute pain to be administered by a healthcare professional to apatient in medically supervised settings of acute pain. If approved, examples of potential patient populations and settings in which DSUVIA could beused include: emergency room patients; patients who are recovering from short-stay or ambulatory surgery and do not require more long-term patient-controlled analgesia; post-operative patients who are transitioning from the operating room to the recovery floor; certain types of office-basedprocedures; patients being treated and transported by paramedics; and for battlefield casualties. In the emergency room and in ambulatory careenvironments, patients often do not have immediate IV access available, or maintaining IV access can be an impediment to rapid discharge. Oral pills andliquids generally have slow and erratic onset of analgesia. Moreover, IV dosing results in high peak plasma levels, thereby limiting the opioid dose andrequiring frequent redosing intervals to titrate to satisfactory analgesia. Based on internal market research conducted to date, we believe that additionaltreatment options are needed that can safely and effectively treat acute trauma pain, in both civilian and military settings, and that can provide analternative to IV opioids for moderate-to-severe acute pain. With the completion of the Phase 3 clinical program for DSUVIA, and the positive data obtained from all three studies, we submitted an NDA undersection 505(b)(2) with the FDA for DSUVIA for the treatment of adult patients experiencing moderate-to-severe acute pain in a medically supervisedsetting in December 2016. The NDA was accepted for filing by the FDA with a Prescription Drug User Fee Act, or PDUFA, goal date of October 12, 2017.The NDA contains results of the entire DSUVIA clinical program, including data from four (three Phase 3 and one Phase 2) clinical trials in whichDSUVIA was assessed as a treatment for moderate-to-severe acute pain in post-operative and emergency department patients. In each of these clinicalstudies, patients treated with DSUVIA demonstrated improvements in pain intensity as early as 15-to-30 minutes after the start of dosing. Adverse eventsreported in the studies were typical of opioid therapy, with the most common being nausea, headache, vomiting and dizziness. 63 On May 11, 2015, we entered into an award contract supported by the Clinical and Rehabilitative Medicine Research Program, or CRMRP, of the UnitedStates Army Medical Research and Materiel Command, or USAMRMC, within the U.S. Department of Defense, or the DoD, in which the DoD agreed toprovide up to $17.0 million to support the development of DSUVIA, referred to as the DoD Contract. Under the terms of the DoD Contract, the DoD hasand continues to reimburse us for costs incurred for development, manufacturing, regulatory and clinical costs outlined in the contract in order to submitan NDA to the FDA, including reimbursement for certain personnel and overhead expenses. The period of performance under the DoD Contract began onMay 11, 2015. The contract gives the DoD the option to extend the term and provide additional funding. On March 2, 2016, the DoD Contract wasamended to approve enrollment of additional patients in the SAP302 study, approve the addition of the SAP303 study, and extend the contract period ofperformance by four months from November 10, 2016 to March 9, 2017, to accommodate the increased SAP302 patient enrollment and the SAP303study. The costs for these changes has been absorbed within the current contract value. If DSUVIA is approved by the FDA, the DoD has the option topurchase 112,000 units of commercial product pursuant to the terms of the DoD Contract. We have also held various meetings with Health Authorities in Europe, including Iceland and Hungry who have been designated as rapporteur and co-rapporteur, respectively, to discuss the submission of a Marketing Authorization Application, or MAA, for ARX-04 (known as DSUVIA in the UnitedStates). Based on feedback from these discussions, we intend to submit a hybrid application for a label indication for ARX-04 in the EU for acutemoderate-to-severe pain in adult patients in medically supervised settings. At the time of the anticipated submission of the MAA, we will have onlycompleted one study in the emergency room for acute pain patients, in addition to two Phase 3 and one Phase 2 post-operative pain studies. We may needan additional controlled study in the emergency department with ARX-04 to obtain a label that includes trauma-related pain in addition to post-operativepain. We also anticipate we may need comparator studies in the EU to ensure premium reimbursement in certain countries. We anticipate submitting theMAA for ARX-04 in the first half of 2017. A pre- submission meeting was held with the European-appointed rapporteur and co-rapporteur in January2017. ZALVISO (sufentanil sublingual tablet system) As a follow-on product candidate to DSUVIA in the United States, ZALVISO is intended for the management of moderate-to-severe acute pain inhospitalized adult patients. ZALVISO consists of sufentanil sublingual tablets, 15 mcg, delivered by the ZALVISO System, a needle-free, handheld,patient-administered, pain management system, or together, ZALVISO. While still under development in the U.S., as discussed further below, ZALVISO isapproved and marketed in the EU. ZALVISO is a pre-programmed, non-invasive, system to allow hospital patients with moderate-to-severe acute pain to self-dose with sufentanil sublingualtablets, 15 mcg, to manage their pain. ZALVISO is designed to help address certain problems associated with post-operative intravenous (IV) patient-controlled analgesia (PCA). ZALVISO allows patients to self-administer sufentanil sublingual tablets via a pre-programmed, secure system designed toeliminate the risk of programming errors. 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 MSA, and together with the License Agreement, the Agreements. The License Agreement grantsGrünenthal rights to commercialize ZALVISO, our novel sublingual patient-controlled analgesia, or PCA, system, or the Product, in the countries of theEuropean Union, or EU, Switzerland, Liechtenstein, Iceland, Norway and Australia, or the Territory, for human use in pain treatment within, or dispensedby, hospitals, hospices, nursing homes and other medically supervised settings, or the Field. We retain rights with respect to the Product in countriesoutside the Territory, including the United States, Asia and Latin America. Under the MSA, we will exclusively manufacture and supply the Product toGrünenthal for the Field in the Territory. We entered into amendments to the License Agreement, effective July 17, 2015 and September 20, 2016, or theLicense Amendments, and together with the License Agreement, the Amended License Agreement, and entered into an amendment to the MSA, or theMSA Amendment, and together with the MSA, the Amended MSA, effective as of July 17, 2015, and together, the Amended Agreements. For additionalinformation on the Amended Agreements, see Note 6 “Collaboration Agreement” in the accompanying notes to the Consolidated Financial Statements. ZALVISO was approved for commercial sale by the European Commission in September 2015. Grünenthal has initially deployed the ZALVISO System ina limited number of hospitals in targeted countries under a pilot program, whereby the hospital will use ZALVISO in a small number of post-operativepatients. Pilot programs are expected to last several months after which ZALVISO may be available for commercial sale. ZALVISO has been commerciallylaunched in Germany, France, the UK, and Italy, and is expected to be launched in the second quarter of 2017 in the Netherlands, Belgium, Portugal,Ireland, Spain, Austria and the Nordics. On September 18, 2015, we sold a majority of the expected royalty stream and commercial milestones from thesales of ZALVISO in the EU and EEA by Grünenthal to PDL, or the Royalty Monetization. For additional information on the Royalty Monetization withPDL, see Note 8 “Liability Related to Sale of Future Royalties” in the accompanying notes to the Consolidated Financial Statements. Royalty revenuesand non-cash royalty revenues from the commercial sales of ZALVISO in the EU are expected to be minimal for 2017. 64® We submitted an NDA for ZALVISO in September 2013, and on July 25, 2014, the Division of Anesthesia, Analgesia, and Addiction Products, or theDivision, of the FDA issued a Complete Response Letter, or CRL, for the ZALVISO NDA. The CRL contains requests for additional information on theZALVISO System to ensure proper use of the device. The requests include submission of data demonstrating a reduction in the incidence of opticalsystem errors, changes to address inadvertent dosing, among other items, and submission of additional data to support the shelf life of the product. InMarch 2015, we received correspondence from the FDA stating that, in addition to the work we had performed to address the items in the CRL, a clinicalstudy would be required to test the modifications to the ZALVISO device and mitigations put in place to reduce the risk of inadvertent dosing/misplacedtablets. Our IAP312 study is designed to evaluate the effectiveness of changes made to enhance performance of the ZALVISO device, incidence of inadvertentdosing and takes into account comments from the FDA on the protocol. The IAP312 study will include approximately 315 post-operative patients andcollect information requested by the Division including device failure rate and incidence of dropped tablets. These results will supplement the threePhase 3 trials already completed that include a head-to-head comparison to IV PCA. We initiated IAP312 in September 2016 and expect to complete thisstudy in mid-2017. Pending successful completion of the IAP312 trial, we anticipate resubmitting the NDA for ZALVISO by the end of 2017. 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 and pre-commercialization activities and support Grünenthal’s launch of ZALVISO in the EU. As a result, we expect tocontinue to incur negative cash flows. Although ZALVISO has been approved for sale in the EU, we sold the majority of the royalty rights and certaincommercial sales milestones we are entitled to receive under the Grünenthal Agreements to PDL in September 2015. As we pursue development of ourproduct candidates, including regulatory review and potential commercial development, subject to FDA approval, of our product candidates, we expectthe business aspects of our company to become more complex. In the future, we plan to add personnel and incur additional costs related to the maturationof our business and the potential commercialization of DSUVIA and ZALVISO in the United States. In addition, we believe that continued investment inresearch and development is critical to attaining our strategic objectives. In order to develop our product candidates as commercially viable therapeutics,we expect to expend significant resources for expertise in manufacturing, regulatory affairs, clinical research and other aspects of pharmaceuticaldevelopment. To date, we have funded our operations primarily through the issuance of equity securities, borrowings, payments from our commercial partner,Grünenthal, monetization of certain future royalties and commercial sales milestones from the sales of ZALVISO by Grünenthal, and funding from theDoD. Our revenues since inception have consisted primarily of revenues from our Amended License Agreement with Grünenthal and our research contracts withthe DoD. As mentioned above, in May 2015, the DoD agreed to provide us up to $17.0 million to support the development of DSUVIA. Under the termsof the contract, the DoD has and continues to reimburse us for costs incurred for development, manufacturing, regulatory and clinical costs outlined in thecontract in order to submit an NDA to the FDA, including reimbursement for certain personnel and overhead expenses. There can be no assurance that we will enter into other collaborative agreements or receive research-related contract awards in the future. We expectrevenues to continue to fluctuate from period-to-period. There can be no assurance that our relationship with our existing commercial partner, Grünenthal,will continue beyond the initial term, or that we will be able to meet the milestones specified in the Amended License Agreement, or that we will obtainmarketing approval for any of our product candidates, outside of ZALVISO in the EU and EEA, and subsequently generate revenue from those productcandidates in excess of our operating expenses. Our net losses were $43.2 million and $24.4 million during the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, we hadan accumulated deficit of $246.4 million. As of December 31, 2016, we had cash, cash equivalents and investments totaling $80.3 million compared to$113.5 million as of December 31, 2015. 65 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 Consolidated Financial Statements are fairly stated in accordance with accounting principles generally accepted in theUnited States, and meaningfully 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 Consolidated Financial Statementsand the related disclosures, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparationof these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts in our Consolidated FinancialStatements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonableunder the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readilyapparent from 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 “Organization and Summary of Significant Accounting Policies” in the accompanying Notes to Consolidated FinancialStatements describes the significant accounting policies used in the preparation of the financial statements. Certain of these significant accountingpolicies 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. 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. Since we apply significant judgment in arriving at the BESPs, any materialchanges would significantly affect the allocation of the total consideration to the different elements of a multiple element arrangement. Revenueallocated is then recognized when the four basic revenue recognition criteria, mentioned above, are met for each element. 66 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. In May 2015, we entered into an award contract with the USAMRMC to support the development of DSUVIA. The contract provides for thereimbursement of qualified expenses for research and development activities as defined under the terms of the contract. Revenue under the contract isrecognized when the related qualified research expenses are incurred. We are entitled to reimbursement of overhead costs associated with the study costsincurred under the DoD Contract. We estimate this overhead rate by utilizing forecasted expenditures. Final reimbursable overhead expenses aredependent on direct labor and direct reimbursable expenses throughout the life of the contract, which may increase or decrease based on actual expensesincurred. Deferred revenue represents the portion of research or license payments received which have not been earned. Inventories Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out method for all inventories. Inventory includes the costof active pharmaceutical ingredients, or API, raw materials and third-party contract manufacturing and packaging services. Indirect overhead costsassociated with production and distribution are allocated to the appropriate cost pool and then absorbed into inventory based on the units produced ordistributed, assuming normal capacity, in the applicable period. Indirect overhead costs in excess of normal capacity are recorded as period costs in theperiod incurred. Our policy is to write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value andinventory in excess of expected requirements. We periodically evaluate the carrying value of inventory on hand for potential excess amount over demandusing the same lower of cost or market approach as that used to value the inventory. Because selling prices to Grünenthal are set to recover only directcosts with minimal markup, all inventories are carried at net realizable value. Cost of Goods Sold Cost of goods sold for ZALVISO shipped to Grünenthal includes the inventory costs of API, third-party contract manufacturing costs, packaging anddistribution costs, shipping, handling and storage costs, depreciation and costs of the employees involved with production. 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. 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. 67 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, 512,456 shares of which remain outstanding at December 31, 2016. Under the terms of the PIPE warrants, upon certain transactions, including amerger, tender offer, sale of all or substantially all of the assets of AcelRx or if a person or group shall become the owner of 50% of our issued andoutstanding common stock, which is outside of our control, each PIPE warrant holder may elect to receive a cash payment in exchange for the warrant, inan amount determined by application of the Black-Scholes option-pricing model. Accordingly, the PIPE warrants are recorded as a liability at fair value atthe end of each reporting period, as determined by the Black-Scholes option-pricing model and changes to the fair value are recorded in interest incomeand other income (expense), net. The inputs for the Black-Scholes option-pricing model include exercise price of the PIPE warrants, market price of theunderlying common shares, expected term, volatility based on a group of our peers and the risk-free rate corresponding to the expected term of the PIPEwarrants. These inputs are subjective and generally require significant analysis and judgment to develop. Changes to the inputs could significantlyimpact the estimated fair value of the PIPE warrants, and since issuance of the PIPE warrants through December 31, 2016, changes in our stock price havehad a significant impact to the estimated fair value of the PIPE warrants. Non-Cash Interest Expense on Liability Related to Sale of Future Royalties In September 2015, we sold certain royalty and milestone payment rights from the sales of ZALVISO in the European Union by our commercial partner,Grünenthal, pursuant to the Collaboration and License Agreement, dated as of December 16, 2013, as amended, to PDL for an upfront cash purchase priceof $65.0 million. We continue to have significant continuing involvement in the Royalty Monetization primarily due to our obligation to act as theintermediary for the supply of ZALVISO to Grünenthal. Under the relevant accounting guidance, because of our significant continuing involvement, theRoyalty Monetization has been accounted for as a liability that will be amortized using the interest method over the life of the arrangement. In order todetermine the amortization of the liability, we are required to estimate the total amount of future royalty and milestone payments to be received by PDLand payments we are required to make to PDL, up to a capped amount of $195.0 million, over the life of the arrangement. The sum of the capped amountof $195.0 million, less the $61.2 million of net proceeds we received will be recorded as interest expense over the life of the liability. Consequently, weimpute interest on the unamortized portion of the liability and record interest expense using an estimated interest rate for an arms-length debt transaction.Our estimate of the interest rate under the arrangement is based on the amount of royalty and milestone payments expected to be received by PDL overthe life of the arrangement. Our estimate of this total interest expense resulted in an effective annual interest rate of approximately 14%. We willperiodically assess the expected royalty and milestone payments using a combination of historical results, internal projections and forecasts from externalsources. To the extent such payments are greater or less than our initial estimates or the timing of such payments is materially different than our originalestimates, we will prospectively adjust the amortization of the liability and the interest rate. We will record non-cash royalty revenues and non-cash interest expense within our Consolidated Statements of Comprehensive Loss over the term of thePDL agreement. 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, 2016, 2015 and 2014 Revenue In September 2015, the European Commission, or EC, granted marketing approval for ZALVISO in the European Union to our commercial partner,Grünenthal. ZALVISO has been commercially launched in Germany, France, the UK, and Italy, and is expected to be commercially launched in thesecond quarter of 2017 in the Netherlands, Belgium, Portugal, Ireland, Spain, Austria and the Nordics. We anticipate that royalty revenues and non-cashroyalty revenues from the commercial sale of ZALVISO in 2017 will be minimal. Revenue during the year ended December 31, 2016, was $17.3 million, including $6.4 million recognized under our Amended License Agreement withGrünenthal. In addition, we recognized $10.9 million in revenue under the DoD Contract. Revenue during the year ended December 31, 2015, was $19.3 million, including $14.9 million recognized under our Amended License Agreement withGrünenthal. In addition, we recognized $4.4 million in revenue under the DoD Contract. Revenue for the year ended December 31, 2014 was $5.2 million, related to our Amended License Agreement with Grünenthal. Collaboration Agreement Revenue Below is a summary of revenue recognized under the Amended Agreements during the years ended December 31, 2016, 2015 and 2014 (in thousands): Years Ended December 31, 2016 2015 2014 License $— $13,167 $4,560 Product sales 5,742 — — Joint steering committee, research and development services 688 1,690 657 Non-cash royalty revenue related to Royalty Monetization (SeeNote 8) 7 — — Royalty revenue 3 — — Total $6,440 $14,857 $5,217 As a result of the launch of ZALVISO in Europe by our licensee, Grünenthal, we recognized $5.7 million in product sales in the year ended December 31,2016, consisting of ZALVISO devices, drug product and accessories. Delivery of the ZALVISO cartridges ordered by Grünenthal is behind schedule atPatheon. The inability to deliver cartridges to the schedule ordered by Grünenthal may have a negative impact on their future sales including the timingof their launch in certain countries. We are working with Patheon to resolve these issues; however, there can be no assurance that the issues will beresolved in a timely fashion, or that we will be able to meet Grünenthal’s needs in such a way as to not impact their future sales. The first commercial sale of ZALVISO occurred in April 2016. As mentioned above, under the Royalty Monetization, we sold a portion of the expectedroyalty stream and commercial milestones from the sales of ZALVISO in the EU by Grünenthal to PDL. As the royalty amounts are not currentlyreasonably estimable without the royalty reports, we recognize royalty revenue and non-cash royalty revenue on a quarterly basis in arrears. As of December 31, 2016, we had current and non-current portions of the deferred revenue balance under the Amended Agreements of $0.4 million and$3.8 million, respectively. Our long-term deferred revenue balance increased during the year ended December 31, 2016 from $0.6 million to $3.8 million.The estimated margin we expect to receive on transfer prices under the Amended Agreements was deemed to be a significant and incremental discount onmanufacturing services, as compared to market rates for contract manufacturing margin. The value assigned to this portion of the total allocatedconsideration was $4.4 million. We anticipate that the long-term deferred revenue balance will decline on a straight-line basis through 2029, as werecognize collaboration revenue under the Amended Agreements. 69 Contract and Other Revenue During the years ended December 31, 2016 and 2015, we recognized revenue of $10.9 million and $4.4 million, respectively, for services performedunder the DoD Contract for DSUVIA. Under the terms of the DoD Contract, the DoD reimburses us for costs incurred for development, manufacturing,regulatory and clinical costs as outlined in the contract, including reimbursement for certain personnel and overhead expenses, in support of thesubmission of the DSUVIA NDA to the FDA. Cost of goods sold Total cost of goods sold was $12.3 million and $1.8 million for the years ended December 31, 2016 and 2015, respectively. As mentioned above, the ECapproved ZALVISO in late September 2015. Under the Amended Agreements with Grünenthal, we will sell ZALVISO at a predetermined transfer pricethat approximates the direct cost of manufacture at our contract manufacturers. We will not recover internal indirect costs as part of the transfer price. Inaddition, the Amended Agreements include declining maximum transfer prices over the term of the contract with Grünenthal. These transfer prices wereagreed to assuming economies of scale that would occur with increasing production volumes (from the potential approval of ZALVISO in the U.S. and anincrease in demand in Europe) and corresponding decreases in manufacturing costs. We do not have long-term supply agreements with our contractmanufacturers and prices are subject to periodic changes. To date, we have not received U.S. approval of ZALVISO and the Grünenthal launch is in thevery early stages. If we do not receive timely approval of ZALVISO in the U.S., are unable to successfully launch ZALVISO in the U.S. or the volume ofGrünenthal sales does not increase significantly, we are not likely to achieve the manufacturing cost reductions required in order to accommodate thesedeclining transfer prices without a corresponding decrease in our gross margin. Cost of goods sold for ZALVISO delivered to Grünenthal includes theinventory costs of the active pharmaceutical ingredient, or API, third-party contract manufacturing costs, estimated warranty costs, packaging anddistribution costs, shipping, handling and storage costs. These direct costs included in costs of goods sold totaled $6.4 million in the year endedDecember 31, 2016. The indirect costs to manufacture include internal personnel and related costs for purchasing, supply chain, quality assurance,depreciation and related expenses. Prior to the initiation of commercial production in October 2015, these costs were included in research anddevelopment expenses as period costs. In the year ended December 31, 2016, indirect costs included in costs of goods sold totaled $5.9 million. Weanticipate that at future production levels, indirect costs included in costs of goods sold for 2017 will be approximately $1.4 million per quarter. For theforeseeable future, we anticipate negative gross margins on ZALVISO delivered to Grünenthal. 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; however, in 2016 research and development expenses related to DSUVIA, known as ARX-04 outside theUnited States, were greater than those for ZALVISO. Research and development expenses included the following: •expenses incurred under agreements with contract research organizations and clinical trial sites; •employee-related expenses, which include salaries, benefits and stock-based compensation; •payments to third party pharmaceutical and engineering development contractors; •payments to third party manufacturers; •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; and •costs for equipment and laboratory and other supplies. 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 research and development expenditures as weseek to continue development of ARX-04 and ZALVISO, including the expenses associated with the MAA submission for ARX-04 and any additionalclinical trials required to support an indication in the EU that includes trauma-related pain and ensures premium reimbursement in certain EU countries,in addition to conducting IAP312, the additional clinical trial for ZALVISO. 70 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, 2016, 2015 and 2014 (in thousands): Years Ended December 31, $ Change2016 vs.2015 $ Change2015 vs.2014 % Change2016 vs.2015 % Change2015 vs.2014 2016 2015 2014 DSUVIA $8,764 $5,848 $3,068 $2,916 $2,780 50% 91%ZALVISO 4,076 4,950 10,638 (874) (5,688) (18)% (53)%Overhead 8,562 11,690 10,814 (3,128) 876 (27)% 8%Total research and development expenses $21,402 $22,488 $24,520 $(1,086) $(2,032) (5)% (8)% 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 ARX-04 in the EU and the continued development of ZALVISO in the UnitedStates, our future research and development expenses will depend on the clinical success of each product candidate as well as ongoing assessments of thecommercial potential of our product candidates. In addition, we cannot predict which product candidates may be subject to future collaborations, whenthese arrangements will be secured, if at all, and to what degree these arrangements would affect our development plans and capital requirements. Research and development expenses during the year ended December 31, 2016, as compared to the year ended December 31, 2015, decreased by $1.1million primarily due to a $3.1 million reduction in overhead costs, predominantly as a result of the allocation of certain research and developmentpersonnel and related expenses to cost of goods sold. In addition, ZALVISO-related expenses decreased by $0.9 million due to the completion of certaindevelopment activities as we finalized the development path forward with the FDA, while DSUVIA-related spending increased incrementally by $2.9million due to increased spending as we completed the SAP302 and SAP303 studies and prepared and submitted the NDA to the FDA in December 2016,partially offset by the completion of the SAP301 study in 2015. The $2.0 million decrease in research and development expenses during the year ended December 31, 2015, as compared to the year ended December 31,2014, was primarily attributable to a $5.7 million decrease related to the ZALVISO development program in response to the CRL received from the FDAin March 2015, partially offset by a $2.8 million increase related to DSUVIA as we advanced development into Phase 3 clinical trials, and a $0.9 millionincrease in overhead-related costs, primarily facilities expense, and personnel-related expenses, including stock-based compensation. General and Administrative Expenses General and administrative expenses consisted primarily of salaries, benefits and stock-based compensation for personnel in administration, finance, pre-commercialization and business development activities. Other significant expenses included legal expenses related to litigation and patent protection ofour intellectual property, allocated facility costs and professional fees for general legal, audit and consulting services. We expect general andadministrative expenses in 2017 to increase as compared to 2016 expenses, as we focus our efforts on preparing for the potential commercialization ofDSUVIA in the United States, and the continued development of ARX-04 in the EU and ZALVISO in the United States. Total general and administrative expenses for the years ended December 31, 2016, 2015 and 2014 were as follows (in thousands, except percentages): Years Ended December 31, $ Change2016 vs.2015 $ Change2015 vs.2014 % Change2016 vs.2015 % Change2015 vs.2014 2016 2015 2014 General and administrative expenses $15,597 $14,203 18,346 $1,394 $(4,143) 10% (23)% The $1.4 million increase in general and administrative expenses during the year ended December 31, 2016, as compared to the year ended December 31,2015, was primarily due to $2.4 million in DSUVIA-related market research activities, and $0.3 million in ZALVISO-related market research activities,offset by decreases of $0.6 million in professional services and legal expenses, $0.5 million in stock-based compensation expense, and net decreases of$0.2 million in other general and administrative-related expenses. 71 The $4.1 million decrease in general and administrative expenses during the year ended December 31, 2015, as compared to the year ended December 31,2014, was primarily due to a $3.9 million decrease in market research and outside services, primarily related to market research activities for ZALVISO,and a $0.2 million decrease in headcount-related expenses, primarily due to the March 2015 restructuring. Restructuring Costs In March 2015, we received correspondence from the FDA stating that in addition to the bench testing and two Human Factors studies we had performedin response to the issues identified in the CRL, a clinical trial is needed to assess the risk of inadvertent dispensing and overall risk of dispensing failures.On March 19, 2015, our Board of Directors, in connection with our efforts to reduce operating costs, conserve capital, focus the Company's financial anddevelopment resources on working with the FDA to seek marketing approval for ZALVISO, and continuing development of DSUVIA (known as ARX-04outside the United States), implemented a cost reduction plan. The cost reduction plan reduced our workforce by 19 employees, approximately 36% oftotal headcount, in the first quarter of 2015. Years Ended December 31, $ Change2016 vs.2015 $ Change2015 vs.2014 % Change2016 vs.2015 % Change2015 vs.2014 2016 2015 2014 Restructuring costs $— $756 $— $(756) $756 (100)% —% Restructuring costs in the year ended December 31, 2015 consist of employee termination benefit costs of $0.8 million. The restructuring liability wasfully disbursed as of December 31, 2015. Other (Expense) Income Total other (expense) income for the years ended December 31, 2016, 2015 and 2014 was as follows (in thousands, except percentages): Years Ended December 31, $ Change2016 vs.2015 $ Change2015 vs.2014 % Change2016 vs.2015 % Change2015 vs.2014 2016 2015 2014 Interest expense $(2,770) $(2,977) $(2,639) $207 $(338) (7)% 13%Interest income and other income (expense),net 918 1,720 6,935 (802) (5,215) (47)% (75)%Non-cash interest expense on liabilityrelated to sale of future royalties (9,382) (2,428) — (6,954) (2,428) 286% —%Total other (expense) income $(11,234) $(3,685) $4,296 $(7,549) $(7,981) 205% (186)% Interest expense consisted primarily of interest accrued or paid on our debt obligation agreements and amortization of debt discounts. Interest expense forall periods pertains to interest on our Loan and Security Agreement with Hercules Technology II, L.P. and Hercules Capital, Inc., formerly known asHercules Technology Growth Capital, Inc., together, the Lenders. The amount of interest expense decreased in the year ended December 31, 2016 ascompared to the year ended December 31, 2015, due to the lower average principal balance in the year ended December 31, 2016. In the year endedDecember 31, 2015, the higher average principal balance resulted in a larger amount of interest expense incurred in the year ended December 31, 2015 ascompared to the year ended December 31, 2014. As of December 31, 2016, the accrued balance due under the Original Loan Agreement was $21.5million. Refer to Note 7 “Long-Term Debt” and Note 19 “Subsequent Event” for additional information. The change in interest income and other income (expense), net, during the year ended December 31, 2016 as compared to the year ended December 31,2015, was primarily attributable to the change in the fair value of our warrants, or PIPE warrants, issued in connection with the private placement of ourcommon stock, which was completed in June 2012. During the year ended December 31, 2016, our stock price decreased, resulting in other incomeduring the year ended December 31, 2016; while in the year ended December 31, 2015, there was an even greater decline in our stock price, resulting ingreater other income in the prior year period. The decrease in interest income and other income (expense), net, during the year ended December 31, 2015 as compared to the year ended December 31,2014, was primarily attributable to fewer PIPE warrants outstanding at December 31, 2015, as compared to December 31, 2014, and a smaller decrease inour stock price during the year ended December 31, 2015, as compared to the year ended December 31, 2014, which is a primary driver in the Black-Scholes valuation model used to estimate the fair value of the PIPE warrants. Interest income and other income (expense), net, during the year endedDecember 31, 2015 also included $0.5 million in impairment charges related to leasehold improvements in our corporate offices. 72 The increase in non-cash interest expense on liability related to the Royalty Monetization during the year ended December 31, 2016 as compared to theyear ended December 31, 2015, is attributable to the royalty sale transaction that we completed in September 2015. As described above, the RoyaltyMonetization has been recorded as debt under the applicable accounting guidance. We impute interest on the liability and record interest expense basedon the amount and timing of royalty and milestone payments expected to be received by PDL over the life of the arrangement. There are a number offactors that could materially affect the estimated interest rate and we will assess this estimate on a periodic basis. As a result, future interest rates coulddiffer significantly and any such change in interest rate will be adjusted prospectively. We anticipate that we will incur approximately $11 million innon-cash interest expense related to the Royalty Monetization in the year ended December 31, 2017. Benefit (Provision) for Income Taxes Total benefit (provision) for income taxes for the years ended December 31, 2016, 2015 and 2014 was as follows (in thousands, except percentages): Years Ended December 31, $ Change2016 vs.2015 $ Change2015 vs.2014 % Change2016 vs.2015 % Change2015 vs.2014 2016 2015 2014 Benefit (provision) for income taxes $34 $(760) $— $794 $(760) (104)% —% The Royalty Monetization resulted in a taxable gain of more than $60.0 million in the year ended December 31, 2015, the majority of which was offsetwith net operating loss carryforwards; however, we were subject to U.S. federal alternative minimum taxes in 2015, as reflected in our provision forincome taxes in 2015. 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 in 2017 andmay incur significant losses and negative cash flows from operations for the foreseeable future. We have funded our operations primarily through issuanceof equity securities, borrowings, payments from our commercial partner, Grünenthal, monetization of certain future royalties and commercial salesmilestones from the sales of ZALVISO by Grünenthal, and our contracts with the DoD. On June 21, 2016, we entered into a Controlled Equity Offering Sales Agreement, or the Sales Agreement, with Cantor Fitzgerald & Co., or Cantor, asagent, pursuant to which AcelRx may offer and sell, from time to time through Cantor, shares of the Company’s common stock, or the Common Stock,having an aggregate offering price of up to $40.0 million. For a detailed description, see Note 11 “Stockholders’ Equity.” To date, we have not sold anyshares of the Company’s common stock under the Sales Agreement. As of December 31, 2016, we had cash, cash equivalents and investments totaling $80.3 million compared to $113.5 million as of December 31, 2015.The decrease was primarily due to cash required to fund our continuing operations, as we continue our research and development and pre-commercialization activities and support Grünenthal’s launch of ZALVISO in the EU. We anticipate that our existing capital resources will permit us tomeet our capital and operational requirements through at least the first quarter of 2018. While we believe we have sufficient capital to meet ouroperational requirements through at least the first quarter of 2018, our expectations may change depending on a number of factors. For example, althoughthe FDA has reviewed the protocol we submitted for the requested clinical trial for ZALVISO, IAP312, they may in the future require a scope or designchange that is beyond what our current and estimated future capital resources can support. Our existing capital resources likely will not be sufficient tofund our operations until such time as we may be able to generate sufficient revenues to sustain our operations. Additional capital may not be availableon terms acceptable to us, or at all. If adequate funds are not available, or if the terms underlying potential funding sources are unfavorable, our businessand our ability to develop our product candidates would be harmed. 73SM On September 18, 2015, we sold a portion of the expected royalty stream and commercial milestone payments from the sales of ZALVISO in the EU byGrünenthal to PDL. As mentioned above, we received net proceeds of $61.2 million in the Royalty Monetization. PDL will receive 75% of the Europeanroyalties under the Amended License Agreement with Grünenthal, as well as 80% of the first four commercial milestones worth $35.6 million (or 80% of$44.5 million), subject to the capped amount of $195.0 million. We are entitled to receive all remaining amounts under the Amended License Agreementwhich include 25% of the European royalties, 20% of the first four commercial milestones, 100% of the remaining commercial milestones and alldevelopment milestones of $43.5 million, including the $15.0 million payment for the EC approval of the MAA for ZALVISO, which we received in thefourth quarter of 2015. The total liability related to sale of future royalties to PDL as of December 31, 2016 was $73.0 million. On December 16, 2013, AcelRx and Grünenthal entered into the License Agreement, and related Manufacture and Supply Agreement, or the MSA, andtogether with the License Agreement, the Agreements. The License Agreement grants Grünenthal rights to commercialize ZALVISO, or the Product, in theTerritory for human use in the Field. We retain rights with respect to the Product in countries outside the Territory, including the United States, Asia andLatin America. We entered into amendments to the License Agreement effective as of July 17, 2015 and September 20, 2016, or the License Amendments,and together with the License Agreement, the Amended License Agreement, and an amendment to the MSA effective as of July 17, 2015, or the MSAAmendment, and together with the MSA, the Amended MSA, and together, the Amended Agreements. Under the terms of the Amended Agreements, we received an upfront cash payment of $30.0 million, a milestone payment of $5.0 million related to theMAA submission in the third quarter of 2014 and an additional $15.0 million milestone payment related to the EC approval of the MAA for ZALVISO inSeptember 2015. In addition, under the terms of the Amended Agreements, we are eligible to receive approximately $194.5 million in additionalmilestone payments, based upon successful regulatory and product development efforts ($28.5 million) and net sales target achievements ($166.0million). Grünenthal will also make tiered royalty, supply and trademark fee payments in the mid-teens up to the mid-twenties percent range, dependingon the level of sales achieved, on net sales of ZALVISO in the Territory. A portion of the tiered royalty payment, exclusive of the supply and trademarkfee payments, will be paid to PDL in connection with the Royalty Monetization, as discussed above. On December 16, 2013, we entered into the Original Loan Agreement with the Lenders, under which we may borrow up to $40.0 million in three tranches.The loans were represented by secured convertible term promissory notes, collectively, the 2013 Notes. The Original Loan Agreement amended andrestateed the Loan and Security Agreement between AcelRx and the Lenders dated as of June 29, 2011. We borrowed the first tranche of $15.0 millionupon closing of the transaction on December 16, 2013, and the second tranche of $10.0 million on June 16, 2014. We used approximately $8.6 million ofthe proceeds from the first tranche to repay our obligations under a prior Loan and Security Agreement with the Lenders. We recorded the new debt at anestimated fair value of $24.9 million as of December 31, 2014. On September 24, 2014, we entered into Amendment No. 1 to the Original Loan Agreement with the Lenders which extended the time period under whichwe could draw down the third tranche, of up to $15.0 million, from March 15, 2015 to August 1, 2015, subject to AcelRx obtaining FDA approval forZALVISO. We did not receive FDA approval of ZALVISO by August 1, 2015 and as such, did not have access to the third tranche. On September 18, 2015, concurrently with the closing of the Royalty Monetization, we entered into a Consent and Amendment No. 2 to the OriginalLoan Agreement with the Lenders which includes an interest only period from October 1, 2015 through March 31, 2016, with further extension toSeptember 30, 2016 upon satisfaction of certain conditions, which have since been satisfied. On September 30, 2016, we entered into Amendment No. 3to the Original Loan Agreement, which extended the interest only period from October 1, 2016 to April 1, 2017. On March 2, 2017, we refinanced theOriginal Loan Agreement in its entirety into a 36-month term loan with an additional six month interest only period. Loans under the Amended LoanAgreement now mature in March 2020. Refer to Note 7 “Long-Term Debt” and Note 19 “Subsequent Event” for additional information. In addition, subject to the achievement of certain milestones, we may be able to extend the maturity date to September 2020 or March 2021 and extendthe interest only period up to a total of 12 or 18 months. Among other things, the further amendment and restatement reflects changes to the interest rate,the maturity date, certain covenants, and prepayment penalties, and includes up to $10 million of additional loans to be made available to us on the sameterms, which would be subject to approval by Hercules Technology II, L.P.’s, or the Agent’s, investment committee (such approval to be granted orwithheld at such committee’s sole discretion). As of December 31, 2016, the accrued balance due under the Original Loan Agreement was $21.5 million. 74 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. Cash Flows Years Ended December 31, 2016 2015 2014 (in thousands) Net cash used in operating activities $(29,395) $(19,953) $(34,456)Net cash provided by (used in) investing activities 1,809 8,203 (5,776)Net cash (used in) provided by financing activities (26) 59,634 11,869 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 product candidates, DSUVIA and ZALVISO, in addition to the support of Grünenthal’s launch of ZALVISO in the EU. Our cashused for operating activities also reflected changes in our working capital, net of adjustments for non-cash charges, such as depreciation and amortizationof our fixed assets, stock-based compensation, non-cash interest expense related to the sale of future royalties, interest expense related to our debtfinancings and the revaluation of our PIPE warrant liability and the contingent put option liability. Cash used in operating activities of $29.4 million during the year ended December 31, 2016, reflected a net loss of $43.2 million, partially offset byaggregate non-cash charges of $16.0 million, and a net change of $2.2 million in our net operating assets and liabilities. Non-cash charges included $9.4million in non-cash interest expense on the liability related to the royalty monetization, $4.5 million for stock-based compensation, $2.1 million indepreciation expense, and $0.9 million in interest expense related to the Original Loan Agreement, partially offset by $0.8 million for the change in fairvalue of our PIPE warrant liability and contingent put liability. The net change in our operating assets and liabilities included an increase in accountsreceivable of $2.5 million. Cash used in operating activities of $20.0 million during the year ended December 31, 2015, reflected a net loss of $24.4 million, partially offset byaggregate non-cash charges of $8.8 million, and a net change of $4.4 million in our net operating assets and liabilities. Non-cash charges included $5.0million for stock-based compensation, $2.0 million for depreciation and amortization of our fixed assets, and $2.4 million of non-cash interest expenserelated to the Royalty Monetization, partially offset by a $2.1 million for the change in fair value of our PIPE warrant liability and contingent putliability. The net change in our operating assets and liabilities included a $3.3 million increase in accounts receivable. 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. 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, 2016, cash provided by investing activities of $1.8 million was primarily a result of $6.5 million in proceeds frommaturity of investments, offset by $1.0 million for purchases of investments and $3.7 million for purchases of property and equipment. During the year ended December 31, 2015, cash provided by investing activities of $8.2 million was primarily as a result of $16.9 million in proceedsfrom maturity of investments, partially offset by $7.2 million for purchases of investments and $1.5 million for purchases of property and equipment. 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. 75 Cash Flows from Financing Activities Cash flows from financing activities primarily reflect proceeds from the sale of future royalties, proceeds from the sale of our securities, proceeds from ourdebt financings and payments made on such debt financings. As of December 31, 2016, the total liability related to the sale of future royalties was $73.0million and the accrued balance of the outstanding debt under the Original Loan Agreement was $21.5 million. During the year ended December 31, 2016, cash used in financing activities of $26,000 was a result of the payment of debt modification transaction costsoffset by stock purchases made under our 2011 Employee Stock Purchase Plan. During the year ended December 31, 2015, cash provided by financing activities of $59.6 million was primarily due to net proceeds from the RoyaltyMonetization of $61.2 million, proceeds from the issuance of common stock upon the exercise of common stock options and ESPP issuances of $3.2million, partially offset by payments of long-term debt of $4.5 million under the Original Loan Agreement. 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 under the Original Loan Agreement of $10.0 million. 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 ARX-04 in the EU, ZALVISO in the United States and the potential commercialization of our product candidates, if approved outside of theGrünenthal Territory. We anticipate that our existing capital resources will permit us to meet our capital and operational requirements through at least thefirst quarter of 2018. Our current operating plan includes the continued development of ARX-04 in the EU, specifically the filing of the MAA in the firsthalf of 2017, completion of the IAP312 clinical trial and resubmission of the NDA for ZALVISO by the end of 2017, and expenditures related to ourpreparation for the potential commercialization of DSUVIA in the United States. These assumptions may change as a result of many factors. For example,based on feedback from the FDA, we expanded the planned clinical program for DSUVIA by 176 additional patients to include individuals from specificpopulations and settings. As a result, the completion of the Phase 3 clinical program for DSUVIA was extended and our clinical trial expenses haveincreased. In addition, although the FDA has provided feedback on both the DSUVIA clinical program and reviewed the protocol for IAP312, theadditional clinical trial for ZALVISO, the FDA may in the future require us to complete additional work prior to approving the NDA for DSUVIA and/orresubmitting the NDA for ZALVISO. We will continue to evaluate the work necessary to gain approval of DSUVIA and ZALVISO in the U.S. and intendto update our cash forecasts accordingly. Our forecast of the period of time through which our financial resources will be adequate to support ouroperations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. Additional capital may not beavailable on terms acceptable to us, or at all. If adequate funds are not available, or if the terms underlying potential funding sources are unfavorable, ourbusiness and our ability to develop our 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 for DSUVIA (known as ARX-04 outside the United States) and ZALVISO; •the initiation, progress, timing and completion of clinical trials for our product candidates, including ARX-04 in the EU and ZALVISO; •expenditures related to the activities required in support of our resubmission of the ZALVISO NDA, including an additional clinical trial forZALVISO, as requested by the FDA; •expenditures related to our preparation for the potential commercialization of DSUVIA; •future manufacturing, selling and marketing costs related to DSUVIA and ZALVISO, including our contractual obligations to Grünenthal forZALVISO; •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 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; 76 •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 any possible litigation. We will need substantial funds to: •commercialize any products we market, including DSUVIA and ZALVISO, if approved outside of the Grünenthal Territory; •manufacture and market our product candidates; •conduct preclinical and clinical testing of our product candidates, and; •conduct research and development programs. Our existing capital resources likely will not be sufficient to fund our operations until such time as we may be able to generate sufficient revenues tosustain our operations. To the extent that our capital resources are insufficient to meet our future capital requirements, we will have to raise additionalfunds through the sale of our equity securities, monetization of current and future assets, issuance of debt or debt-like securities or from development andlicensing arrangements to continue our development programs. We may be unable to raise such additional capital on favorable terms, or at all. If we raiseadditional capital by selling our equity or convertible debt securities, the issuance of such securities could result in dilution of our shareholders’ equitypositions. If adequate funds are not available we may have to: •significantly curtail or put on hold 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 summarizes our long-term contractual obligations at December 31, 2016: Payments Due by Period Contractual obligations Total 2017 2018–2020 2021–2022 Thereafter (in thousands) Operating leases $799 $737 $62 $— $— Purchase obligations 200 — 200 — — Principal payments on long-term debt 23,701 3,734 19,967 — — Interest payments on long-term debt 4,126 1,944 2,182 — — Repayment of liability related to the sale of futureroyalties 194,993 764 28,920 36,208 129,101 Total contractual obligations $223,819 $7,179 $51,331 $36,208 $129,101 Operating lease includes base rent for facilities we occupy in Redwood City, California. We issue inventory and research and development program related purchase orders in the normal course of business. We do not consider purchaseorders to be firm inventory or research and development program related commitments; therefore, they are excluded from the table above. If we choose tocancel a purchase order, we may be obligated to reimburse the vendor for unrecoverable outlays incurred prior to cancellation. The Amended and Restated Loan and Security Agreement dated as of March 2, 2017 includes a $1.7 million balloon payment due in October 2017,and a $1.3 million balloon payment due on maturity of the loan, in March 2020, which are included in the table above. See Note 7 “Long-Term Debt”and Note 19 “Subsequent Event” for additional information. 77(1)(2)(3)(1)(2)(3) Operating leases In December 2011, we entered into a non-cancelable lease agreement, or the Existing Lease, for approximately 13,787 square feet of office and laboratoryfacilities in Redwood City, California, or the Current Premises, which serve as the Company headquarters, effective April 2012. Rent expense from thefacility 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 the lease. In May 2014, we entered into an amendment, or the Lease Amendment, to the Existing Lease. Pursuant to the Lease Amendment, the term of the ExistingLease has been extended for a period of twenty (20) months and twenty-two (22) days and expiring January 31, 2018, or the Expiration Date, unlesssooner terminated pursuant to the terms of the Existing Lease. In addition, the Lease Amendment included a new lease on an additional 12,106 squarefeet of office space, or the Expansion Space, which is adjacent to the Current Premises. The new lease for the Expansion Space has a term of 42 monthscommencing on August 1, 2014, and expiring on the Expiration Date. In October 2015, we executed an agreement to sublease 11,871 square feet of the Expansion Space for a term of 26 months commencing on December 1,2015. The sublessee is entitled to abatement of the first two monthly installments of rent. Subsequent monthly installments of rent start at a rental rate of$2.05 per square foot (subject to agreed nominal increases). Purchase obligations Patheon 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 ZALVISO. Under the terms of the Services Agreement, we have agreed to purchase, subject to Patheon’s continued material compliance with the terms of the ServicesAgreement, all of our sufentanil sublingual tablet requirements for the United States, Canada and Mexico from Patheon during the Initial Term of theServices Agreement (as defined below), and at least eighty percent (80%) of its sufentanil sublingual tablet requirements for such territories after theInitial Term. The term of the Services Agreement extends until December 31, 2017, or the Initial Term, and will automatically renew thereafter for periodsof two years, unless terminated by either party upon eighteen months’ prior written notice; provided, however, that the Services Agreement may not beterminated without cause prior to the end of the Initial Term. We also entered into a Capital Expenditure and Equipment Agreement, or the Capital Agreement, with Patheon. Under the terms of the CapitalAgreement, as amended in January 2014, or the Amended Capital Agreement, we have made and have the option to make certain future modifications toPatheon’s Cincinnati facility and which would be our responsibility. If additional equipment and facility modifications are required to meet our Productneeds, we may be required to contribute to the cost of such additional equipment and facility modifications. Under the Amended Capital Agreement, wemade payments in 2012 and 2013 totaling $480,000 to Patheon to partially offset taxes incurred and paid by Patheon in connection with facilitymodifications already completed by Patheon. We can seek reimbursement from Patheon for these payments if we receive approval from the U.S. Food andDrug Administration for ZALVISO. The Amended Capital Agreement further requires that we pay a maximum “overhead fee” of $200,000 annuallyduring the term of the Services Agreement, which amount may be reduced to $0 based on the amount of annual revenues earned by Patheon under theServices Agreement and pre-existing development agreements with Patheon. No fee was due in 2014, 2015 or 2016 based on the amount of revenuesearned by Patheon from AcelRx in 2013, 2014 and 2015, respectively. In addition, no payment will be due to Patheon in 2017 or 2018, as the Companymet the annual revenue threshold in 2016 and 2017, respectively. The potential purchase obligation commitment in 2019 is reflected in the contractualobligations table above. Long-term debt Amended and Restated Loan and Security Agreement On December 16, 2013, we entered into an Amended and Restated Loan and Security Agreement with Hercules Technology II, L.P. and HerculesTechnology Growth Capital, Inc., together, the Lenders, or the Original Loan Agreement, under which we may borrow up to $40.0 million in threetranches. On September 24, 2014, we entered into Amendment No. 1 to the Original Loan Agreement. Amendment No. 1 extended the time period underwhich we could draw down the third tranche, of up to $15.0 million, from March 15, 2015 to August 1, 2015, subject to AcelRx obtaining approval forZALVISO from the FDA. We did not receive FDA approval of ZALVISO by August 1, 2015 and as such, did not have access to the third tranche. OnSeptember 18, 2015, concurrently with the closing of the Royalty Monetization, we entered into a Consent and Amendment No. 2, or Amendment No. 2,to the Original Loan Agreement with the Lenders. Amendment No. 2 includes an interest only period from October 1, 2015 through March 31, 2016, withthe potential for further extension to September 30, 2016 upon satisfaction of certain conditions, which have since been satisfied. On September 30, 2016,we entered into Amendment No. 3 to the Original Loan Agreement which, among other things, extended the interest only period from October 1, 2016 toApril 1, 2017. On March 2, 2017, we refinanced the Original Loan Agreement in its entirety into a 36-month term note with an additional six monthinterest only period. The scheduled maturity date is now March 2020. Refer to Note 7 “Long-Term Debt” and Note 19 “Subsequent Event” for additionalinformation. 78 The interest rate for each tranche will be calculated at a rate equal to the greater of either (i) 9.55% plus the prime rate as reported from time to time in TheWall Street Journal minus 3.50%, and (ii) 9.55%. Our obligations under the Amended Loan Agreement are secured by a security interest in substantiallyall of our assets, other than our intellectual property and those assets sold under the Royalty Monetization. In addition, subject to the achievement of certain milestones, we may be able to extend the maturity date to September 2020 or March 2021 and extendthe interest only period up to a total of 12 or 18 months. Among other things, the further amendment and restatement reflects changes to the interest rate,the maturity date, certain covenants, and prepayment penalties, and includes up to $10 million of additional loans to be made available to us on the sameterms, which would be subject to approval by Hercules Technology II, L.P.’s, or the Agent’s, investment committee (granted or withheld to be granted orwithheld at such committee’s sole discretion). Liability related to the sale of future royalties Royalty Monetization with PDL In September 2015, we sold certain royalty and milestone payment rights from the sales of ZALVISO in the European Union by our commercial partner,Grünenthal, pursuant to the Collaboration and License Agreement, dated as of December 16, 2013, as amended, to PDL for an upfront cash purchase priceof $65.0 million. PDL will receive 75% of the European royalties under the Amended License Agreement with Grünenthal, as well as 80% of the first fourcommercial milestones worth $35.6 million (or 80% of $44.5 million), subject to the capped amount of $195.0 million. The Royalty Monetization hasbeen accounted for as a liability that will be amortized using the interest method over the life of the arrangement. The timing and the amount of therepayment of this liability is contingent upon the receipt of the related royalty and milestone payments from Grünenthal. Upon receipt of these royaltyand milestone payments from Grünenthal, we will remit the applicable portion to PDL. Off-Balance Sheet Arrangements Through December 31, 2016, 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, 2016, consisted primarily of money market funds and U.S. government agencysecurities. We do not have any auction rate securities on our Consolidated Balance Sheet, as they are not permitted by our investment policy. Our cash isinvested in accordance with an investment policy approved by our Board of Directors which specifies the categories, allocations, and ratings of securitieswe may consider 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, 2016, 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. 79 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. 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 of December 31, 2016. 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, 2016. 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, 2016 and hasconcluded that such internal control over financial reporting was effective. OUM & Co. LLP, our independent registered public accounting firm, has attested to and issued a report on the effectiveness of our internal control overfinancial reporting, which is included herein. 80 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders ofAcelRx Pharmaceuticals, Inc. We have audited AcelRx Pharmaceuticals, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established inInternal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).AcelRx Pharmaceuticals, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over FinancialReporting included in Item 9A. 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 standards requirethat we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performingsuch other procedures 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 financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internalcontrol over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accuratelyand fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on thefinancial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree ofcompliance 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 of December 31,2016, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balancesheets of AcelRx Pharmaceuticals, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of comprehensive loss, stockholders’(deficit) equity, and cash flows for each of the two years in the period ended December 31, 2016, and our report dated March 2, 2017 expressed anunqualified opinion thereon. /s/ OUM & CO. LLP San Francisco, CaliforniaMarch 2, 2017 Item 9B. Other Information On March 2, 2017, the Company entered into an Amended and Restated Loan and Security Agreement, or the Amended Loan Agreement with HerculesCapital Funding Trust 2014-1 and Hercules Technology II, L.P., together, Hercules, under which the Company may borrow up to approximately $30.466million in two tranches. The loans are represented by secured convertible term promissory notes, collectively, the Notes. The Amended Loan Agreementamends and restates the Amended and Restated Loan and Security Agreement between the Company and the Lenders dated as of December 16, 2013, asamended, or the Original Loan Agreement. 81  The Company borrowed the first tranche of approximately $20.466 million upon closing of the transaction on March 2, 2017. The Company used all ofthe proceeds from the first tranche to repay its obligations under the Original Loan Agreement. The second tranche, of up to $10.0 million, can be drawnat any time between April 1, 2017 and December 31, 2017, but only if (a) the Company has obtained approval for the new drug application filed by theBorrower with the U.S. Food and Drug Administration for product DSUVIA (formerly known as ARX-04 in the United States) on or before December 31,2017, or the Tranche 2 Milestone and (b) the extension of the second tranche has been approved by Agent’s investment committee, such approval to begranted or withheld in its sole discretion. The interest rate for each tranche will be calculated at a rate equal to the greater of either (i) 9.55% plus theprime rate as reported from time to time in The Wall Street Journal minus 3.50%, and (ii) 9.55%. Payments under the Amended Loan Agreement areinterest only until October 1, 2017 (which will be extended until April 1, 2018 if the Company shall have received at least $40 million in net proceedsraised as a combination of up-front cash proceeds from out-licensing or commercial partnering relating to DSUVIA and ZALVISO and new equity afterMarch 2, 2017 and on or before December 31, 2017, or the Liquidity Milestone, and which will be further extended until October 1, 2018 if the Companyhas achieved the Liquidity Milestone and the Tranche 2 Milestone) followed by equal monthly payments of principal and interest through the scheduledmaturity date on March 1, 2020 (which would be extended until September 1, 2020 if the Company achieves the Liquidity Milestone and March 1, 2021if the Company achieves the Liquidity Milestone and the Tranche 2 Milestone) (as applicable, or the Maturity Date). A final payment equal to $1.7million will be due in connection with the loans made under the Original Loan Agreement on the earliest of (i) October 1, 2017, (ii) prepayment in full ofthe loans (other than by a refinancing with the Lenders) or (iii) the date on which the loans under the Loan Agreement become due and payable. Inaddition, a final payment equal to 6.5% of the aggregate principal amount of loans funded under the Amended Loan Agreement will be due on theearliest of (i) the maturity date, (ii) prepayment in full of the loans (other than by a refinancing with the Lenders) or (iii) the date on which the loans underthe Amended Loan Agreement become due and payable. The Company’s obligations under the Amended Loan Agreement are secured by a securityinterest in substantially all of its assets, other than its intellectual property. If the Company prepays the loan prior to the maturity date, it will pay the Lenders a prepayment charge, based on a percentage of the then outstandingprincipal balance, equal to 3% if the prepayment occurs prior to March 2, 2018, 2% if the prepayment occurs after March 2, 2018, but prior to March 2,2019, or 1% if the prepayment occurs after March 2, 2019. 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 Lenders’ 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 the Lenders maydeclare all outstanding obligations immediately due and payable and take such other actions as set forth in the Amended Loan Agreement. 82 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 2017 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, 2016. 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 securitiesremaining available for futureissuanceunder equity compensationplans(excluding securities reflectedincolumn A) Equity compensation plans approved bysecurity holders 6,307,756 $5.00 3,910,996 Equity compensation plans not approved bysecurity holders — $— — Total 6,307,756 3,910,996 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, 2016,2,774,854 shares of common stock were available for issuance under the 2011 Incentive Plan and 1,136,142 shares of common stock were availablefor issuance 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 the executionand delivery of the underwriting agreement for our IPO, and (ii) an additional 1,823,307 new shares. The number of shares of our 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 our common stock outstanding on December 31 of the preceding calendar year, orsuch lesser number of shares of common stock as determined by our Board of Directors. The initial aggregate number of shares of common stock thatmay be issued pursuant to purchase rights granted to our employees or to employees of any of our designated affiliates under the ESPP was 250,000shares. The number of shares of our common stock reserved for issuance will automatically increase on January 1st each year, starting January 1, 2012and continuing through January 1, 2020, in an amount equal to the lower of (i) 2% of the total number of shares of our common stock outstanding onDecember 31 of the preceding calendar year, and (ii) a number of shares of common stock as determined by our Board of 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. 83(3)(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 Item 16. Form 10-K Summary None. 84 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 2, 2017AcelRx Pharmaceuticals, Inc. (Registrant) /s/ Howard B. Rosen Howard B. RosenChief Executive Officer and Director(Principal Executive Officer) /s/ Timothy E. Morris Timothy E. MorrisChief Financial Officer and Head of Business Development(Principal Financial and Accounting Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Howard B. Rosen 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: SignatureTitleDate /s/ Howard B. RosenChief Executive Officer and DirectorMarch 2, 2017Howard B. Rosen(Principal Executive Officer) /s/ Timothy E. MorrisChief Financial OfficerMarch 2, 2017Timothy E. Morris(Principal Financial and Accounting Officer) /s/ Adrian AdamsChairmanMarch 2, 2017Adrian Adams /s/ Pamela P. Palmer, M.D., Ph.D.Chief Medical Officer and DirectorMarch 2, 2017Pamela P. Palmer, M.D., Ph.D. /s/ Mark G. EdwardsDirectorMarch 2, 2017Mark G. Edwards /s/ Stephen J. Hoffman, Ph.D., M.D.DirectorMarch 2, 2017Stephen J. Hoffman, Ph.D., M.D. /s/ Richard Afable, M.D.DirectorMarch 2, 2017Richard Afable, M.D. /s/ Mark WanDirectorMarch 2, 2017Mark Wan 85 ACELRX PHARMACEUTICALS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReports of Independent Registered Public Accounting FirmsF-2Consolidated Balance Sheets at December 31, 2016 and 2015F-4Consolidated Statements of Comprehensive Loss for each of the three years in the period ended December 31, 2016F-5Consolidated Statements of Stockholders’ (Deficit) Equity for each of the three years in the period ended December 31, 2016F-6Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2016F-7Notes to Consolidated 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 consolidated balance sheets of AcelRx Pharmaceuticals, Inc. as of December 31, 2016 and 2015, and the relatedconsolidated statements of comprehensive loss, stockholders’ (deficit) equity, and cash flows for each of the two years in the period ended December 31,2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide areasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position ofAcelRx Pharmaceuticals, Inc. at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the two years inthe period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), AcelRx Pharmaceuticals,Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 2, 2017 expressed an unqualifiedopinion thereon. /s/ OUM & CO. LLP San Francisco, CaliforniaMarch 2, 2017 F-2 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of AcelRx Pharmaceuticals, Inc. We have audited the accompanying consolidated statement of operations, comprehensive loss, stockholders’ (deficit) equity, and cash flows in the yearended December 31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion onthese financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believethat 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 consolidated financial position of AcelRxPharmaceuticals, Inc. at December 31, 2014, and the consolidated results of its operations and its cash flows in the year ended December 31, 2014, inconformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Redwood City, California March 12, 2015except for Note 1 and 7, as to which the date isMarch 7, 2016  F-3 AcelRx Pharmaceuticals, Inc. Consolidated Balance Sheets(in thousands, except share data) December 31,2016 December 31,2015 Assets Current Assets: Cash and cash equivalents $80,310 $107,922 Short-term investments — 5,542 Accounts receivable, net 5,833 3,286 Inventories 2,154 466 Prepaid expenses and other current assets 756 1,731 Total current assets 89,053 118,947 Property and equipment, net 10,712 8,610 Restricted cash 178 178 Other assets 50 50 Total Assets $99,993 $127,785 Liabilities and Stockholders’ (Deficit) Equity Current Liabilities: Accounts payable $1,558 $1,561 Accrued liabilities 4,595 3,956 Long-term debt, current portion 2,912 4,541 Deferred revenue, current portion 362 2,604 Liability related to the sale of future royalties, current portion 764 118 Total current liabilities 10,191 12,780 Deferred rent, net of current portion 43 245 Long-term debt, net of current portion 18,637 16,381 Deferred revenue, net of current portion 3,824 593 Liability related to the sale of future royalties, net of current portion 72,223 63,494 Contingent put option liability 124 266 Warrant liability 288 913 Total liabilities 105,330 94,672 Commitments and Contingencies Stockholders’ (Deficit) Equity: Common stock, $0.001 par value—100,000,000 shares authorized as of December 31, 2016 andDecember 31, 2015; 45,333,790 and 45,273,772 shares issued and outstanding as of December 31,2016 and December 31, 2015 45 45 Additional paid-in capital 240,977 236,274 Accumulated deficit (246,362) (203,205)Accumulated other comprehensive income (loss) 3 (1)Total stockholders’ (deficit) equity (5,337) 33,113 Total Liabilities and Stockholders’ (Deficit) Equity $99,993 $127,785 See notes to consolidated financial statements. F-4 AcelRx Pharmaceuticals, Inc. Consolidated Statements of Comprehensive Loss(in thousands, except share and per share data) Year Ended December 31, 2016 2015 2014 Revenue: Collaboration agreement $6,440 $14,857 $5,217 Contract and other 10,917 4,406 — Total revenue 17,357 19,263 5,217 Operating costs and expenses: Cost of goods sold 12,315 1,770 — Research and development 21,402 22,488 24,520 General and administrative 15,597 14,203 18,346 Restructuring costs — 756 — Total operating costs and expenses 49,314 39,217 42,866 Loss from operations (31,957) (19,954) (37,649)Other (expense) income: Interest expense (2,770) (2,977) (2,639)Interest income and other income (expense), net 918 1,720 6,935 Non-cash interest expense on liability related to sale of future royalties (9,382) (2,428) — Total other (expense) income (11,234) (3,685) 4,296 Net loss before income taxes (43,191) (23,639) (33,353)Benefit (provision) for income taxes 34 (760) — Net loss (43,157) (24,399) (33,353)Other comprehensive income (loss): Unrealized gains (losses) on available for sale securities 4 3 (5)Comprehensive loss $(43,153) $(24,396) $(33,358)Net loss per share of common stock, basic $(0.95) $(0.55) $(0.77)Net loss per share of common stock, diluted $(0.95) $(0.60) $(0.91)Shares used in computing net loss per share of common stock, basic 45,313,118 44,300,099 43,427,111 Shares used in computing net loss per share of common stock, diluted –see Note 14 45,313,118 44,468,440 44,322,297 See notes to consolidated financial statements. F-5 AcelRx Pharmaceuticals, Inc. Consolidated Statements of Stockholders’ (Deficit) Equity(in thousands, except share data) Common Stock AdditionalPaid-inCapital AccumulatedDeficit OtherComprehensiveIncome (loss) TotalStockholders’(Deficit)Equity Shares Amount 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 Stock-based compensation — — 5,010 — — 5,010 Issuance of common stock uponexercise of stock options 938,497 1 2,769 — — 2,770 Issuance of common stock uponexercise of stock warrants 527,101 1 2,543 — — 2,544 Modification of warrants — — 100 — — 100 Issuance of common stock upon ESPPpurchase 95,811 — 429 — — 429 Change in unrealized gains and losseson investments — — — — 3 3 Net loss — — — (24,399) — (24,399)Balance as of December 31, 2015 45,273,772 45 236,274 (203,205) (1) 33,113 Stock-based compensation — — 4,479 — — 4,479 Modification of warrants — — 45 — — 45 Issuance of common stock upon ESPPpurchase 60,018 — 179 — — 179 Change in unrealized gains and losseson investments — — — — 4 4 Net loss — — — (43,157) — (43,157)Balance as of December 31, 2016 45,333,790 $45 $240,977 $(246,362) $3 $(5,337) See notes to consolidated financial statements. F-6 AcelRx Pharmaceuticals, Inc. Consolidated Statements of Cash Flows(in thousands) Year Ended December 31, 2016 2015 2014 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(43,157) $(24,399) $(33,353)Adjustments to reconcile net loss to net cash used in operating activities: Non-cash royalty revenue related to royalty monetization (7) — — Non-cash interest expense on liability related to royalty monetization 9,382 2,428 — Depreciation and amortization 2,052 1,984 866 Amortization of premium/discount on investments, net 17 114 216 Non-cash interest expense related to debt financing 877 897 553 Stock-based compensation 4,479 5,010 4,440 Revaluation of put option and PIPE warrant liabilities (767) (2,136) (7,040)Loss on disposal and impairment of property and equipment — 573 — Changes in operating assets and liabilities: Accounts receivable (2,547) (3,286) — Inventories (1,688) (466) — Prepaid expenses and other assets 975 (783) 137 Restricted cash — 72 — Accounts payable (437) (786) 90 Accrued liabilities 639 325 (126)Deferred revenue 989 784 (217)Deferred rent (202) (284) (22)Net cash used in operating activities (29,395) (19,953) (34,456)CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (3,720) (1,456) (5,505)Purchase of investments (996) (7,266) (17,430)Proceeds from maturities of investments 6,525 16,925 17,159 Net cash provided by (used in) investing activities 1,809 8,203 (5,776)CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from sale of future royalties — 61,184 — Proceeds from the issuance of long-term debt — — 10,000 Payment of long-term debt — (4,534) — Payment of debt modification transaction costs (205) (215) — Net proceeds from issuance of common stock through equity plans and exerciseof warrants 179 3,199 1,869 Net cash (used in) provided by financing activities (26) 59,634 11,869 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (27,612) 47,884 (28,363)CASH AND CASH EQUIVALENTS—Beginning of period 107,922 60,038 88,401 CASH AND CASH EQUIVALENTS—End of period $80,310 $107,922 $60,038 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $1,893 $2,115 $1,752 Income taxes (refunded) paid $(55) $782 $— NONCASH INVESTING AND FINANCING ACTIVITIES: Issuance of common stock upon cashless exercise of warrants $— $2,544 $546 Modification of warrants for common stock $45 $100 $— Tenant improvement allowance receivable $— $— $239 Purchases of property and equipment in Accounts payable $532 $98 $182 Purchases of property and equipment in Accrued liabilities $— $— $23 See notes to consolidated financial statements. F-7 AcelRx Pharmaceuticals, Inc. Notes to Consolidated 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’s lead product candidate, DSUVIA (known as ARX-04 outside of the United States), and its follow-on product candidate, ZALVISO, utilizesublingual sufentanil, delivered via a non-invasive route of sublingual administration. AcelRx anticipates developing a distribution capability andcommercial organization in the United States to market and sell DSUVIA in the United States by itself, and potentially, in certain European EconomicArea, or EEA, countries, either alone or with strategic partners. In geographies where AcelRx decides not to commercialize itself, the Company wouldseek to out-license commercialization rights. AcelRx intends to seek regulatory approval for ZALVISO in the United States and, if successful, potentiallypromote ZALVISO as a follow-on product to DSUVIA, either by itself or with strategic partners. The Company has two late-stage development candidates based on sublingual sufentanil. The first, DSUVIA, is a 30 mcg sufentanil sublingual tablet in asingle-dose applicator intended for the treatment of moderate-to-severe acute pain administered by a healthcare professional. DSUVIA was initiallydeveloped at the request of the U.S. Department of Defense as a replacement for injections of morphine on the battlefield. In addition to the militaryapplication, AcelRx is developing DSUVIA as an investigational product for the treatment of patients suffering from moderate-to-severe acute pain inmultiple settings, such as emergency room patients; patients who are recovering from short-stay or ambulatory surgery and do not require more long-termpatient-controlled analgesia; post-operative patients who are transitioning from the operating room to the recovery floor; and patients being transportedby paramedics. The Company has completed the Phase 3 clinical program for DSUVIA and submitted to the U.S. Food and Drug Administration, or FDA,a New Drug Application, or NDA, for DSUVIA for the treatment of moderate-to-severe acute pain to be administered by a healthcare professional inmedically supervised settings in December 2016. The DSUVIA NDA was accepted for filing by the FDA with a Prescription Drug User Fee Act, or PDUFA,goal date of October 12, 2017. The Company’s other late-stage investigational product candidate, ZALVISO, delivers 15 mcg sufentanil sublingually through a non-invasive deliveryroute via a pre-programmed, patient-controlled analgesia device. ZALVISO is approved in the European Union, or EU, as well as Norway, Iceland andLiechtenstein and is in late-stage development in the U.S. In response to the NDA the Company submitted to the FDA seeking approval for ZALVISO, theCompany received a Complete Response Letter, or CRL, on July 25, 2014. Subsequently, the FDA requested an additional clinical study, IAP312, whichthe Company initiated in September 2016. The Company expects to complete this study in mid-2017. Pending successful completion of the IAP312 trial,the Company anticipates resubmitting the NDA for ZALVISO by the end of 2017. On December 16, 2013, AcelRx and Grünenthal GmbH, or Grünenthal, entered into a Collaboration and License Agreement, or the License Agreement,which was amended effective July 17, 2015 and September 20, 2016, or the Amended License Agreement, which grants Grünenthal rights tocommercialize ZALVISO, the Company’s novel sublingual patient-controlled analgesia, or PCA, system, or the Product, in the countries of the EU,Switzerland, Liechtenstein, Iceland, Norway and Australia, or the Territory, for human use in pain treatment within, or dispensed by, hospitals, hospices,nursing homes and other medically supervised settings, or the Field. In September 2015, the European Commission approved the MarketingAuthorization Application, or MAA, previously submitted to the European Medicines Agency, or EMA, for ZALVISO for the management of acutemoderate-to-severe post-operative pain in adult patients. The approval allows Grünenthal to market ZALVISO in the 28 EU member states as well as forthe European Economic Area countries, Norway, Iceland and Liechtenstein, or EEA. Also on December 16, 2013, AcelRx and Grünenthal, entered into arelated Manufacture and Supply Agreement, or the MSA, and together with the License Agreement, the Agreements. Under the MSA, the Company willexclusively manufacture and supply the Product to Grünenthal for the Field in the Territory. On July 22, 2015, the Company entered into an amendmentto the MSA, or the MSA Amendment, and together with the MSA, the Amended MSA, between the Company and Grünenthal, effective as of July 17,2015, and together with the Amended License Agreement, the Amended Agreements. Grünenthal has initially deployed the ZALVISO System in a limited number of hospitals in targeted countries under a pilot program, whereby the hospitalwill use ZALVISO in a small number of post-operative patients. Pilot programs are expected to last several months after which ZALVISO may be availablefor commercial sale. ZALVISO has been commercially launched in Germany, France, the UK, and Italy, and is expected to be commercially launched inthe second quarter of 2017 in the Netherlands, Belgium, Portugal, Ireland, Spain, Austria and the Nordics. Royalty revenues and non-cash royaltyrevenues from the commercial sales of ZALVISO in the EU are expected to be minimal for 2017. F-8® AcelRx Pharmaceuticals, Inc. Notes to Consolidated Financial Statements The Company has incurred recurring operating losses and negative cash flows from operating activities since inception and expects to continue to incurnegative cash flows. Although ZALVISO has been approved for sale in the EU, the Company sold the majority of the royalty rights and certaincommercial sales milestones it is entitled to receive under the Amended License Agreement with Grünenthal to PDL BioPharma, Inc., or PDL. As a result,the Company expects to continue to incur negative cash flows. When we refer to "we," "our," "us," the "Company" or "AcelRx" in this document, we mean the current Delaware corporation, or AcelRx Pharmaceuticals,Inc., and its predecessor, as well as its consolidated subsidiary. 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 Consolidated Financial Statements and the accompanying notes. Actual results could differ fromthose estimates. Reclassifications Certain prior year amounts in the Consolidated Financial Statements have been reclassified to conform to the current year's presentation. Refer to“Recently Issued Accounting Standards” below for additional information. Principles of Consolidation The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiary, ARPI LLC, which was formed inSeptember 2015 for the sole purpose of facilitating the monetization transaction with PDL of the expected royalty stream and milestone payments duefrom the sales of ZALVISO in the European Union by its commercial partner, Grünenthal, pursuant to the Amended License Agreement, or the RoyaltyMonetization. All intercompany accounts and transactions have been eliminated in consolidation. Refer to Note 8 “Liability Related to Sale of FutureRoyalties” for additional information. 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 Consolidated Financial Statements and accompanying notes. Management evaluates itsestimates on an ongoing basis including critical accounting policies. Estimates are based on historical experience and on various other market-specificand other relevant assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from thoseestimates. 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. All marketable securities are classified as available-for-sale and consist of U.S. government sponsored enterprise debt securities. These securities arecarried at estimated fair value, which is based on quoted market prices or observable market inputs of almost identical assets, with unrealized gains andlosses included in accumulated other comprehensive income (loss). The amortized cost of securities is adjusted for amortization of premiums andaccretion of discounts to maturity. Such amortization and accretion is included in interest income or expense. The cost of securities sold is based onspecific identification. The Company’s investments are subject to a periodic impairment review for other-than-temporary declines in fair value. TheCompany’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. 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; F-9 AcelRx Pharmaceuticals, Inc. Notes to Consolidated Financial Statements 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. Segment Information The Company operates in a single segment, the development and commercialization of product candidates for the treatment of pain. The Company’scontract revenue relates to sales in the United States. The Company’s collaboration revenue relates to the Amended License Agreement with Grünenthalto commercialize ZALVISO in the countries of the European Union, Switzerland, Liechtenstein, Iceland, Norway and Australia. 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 U.S.government sponsored agencies and overnight deposits. The Company is exposed to credit risk in the event of default by the institutions holding thecash equivalents and available-for-sale securities to the extent recorded on the Consolidated Balance Sheet. The Company relies on a single third-party supplier for the supply of sufentanil, the active pharmaceutical ingredient in ZALVISO, and various sole-source third-party contract manufacturer organizations to manufacture the ZALVISO drug cartridge and device components, including the controller, thedispenser kit and the accessories. To date, the Company has had only two customers. These two customers account for 100% of the revenues for the years ended December 31, 2016, 2015and 2014. One of these customers accounted for 71% and 84% of the accounts receivable balance as of December 31, 2016 and 2015, respectively. TheCompany did not have an accounts receivable balance as of December 31, 2014. The Company has not experienced any losses with respect to the collection of its accounts receivable and believes that the entire accounts receivablebalance as of December 31, 2016 is collectible. Accounts Receivable, Net The Company has receivables from its collaboration partner and the U.S. Department of Defense, or DoD. To date, the Company has not had a bad debtallowance because of the limited number of financially sound customers who have historically paid their balances timely. The need for a bad debtallowance is evaluated each reporting period based on the Company’s assessment of the credit worthiness of its customers or any other potentialcircumstances that could result in bad debt. Inventories Inventories are valued at the lower of cost and net realizable value. Cost is determined using the first-in, first-out method for all inventories. Inventoryincludes the cost of the active pharmaceutical ingredients, or API, raw materials and third-party contract manufacturing and packaging services. Indirectoverhead costs associated with production and distribution are allocated to the appropriate cost pool and then absorbed into inventory based on the unitsproduced or distributed, assuming normal capacity, in the applicable period. Indirect overhead costs in excess of normal capacity are recorded as periodcosts in the period incurred. The Company's policy is to write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable valueand inventory in excess of expected requirements. The Company periodically evaluates the carrying value of inventory on hand for potential excessamount over demand using the same lower of cost or market approach as that used to value the inventory. Because selling prices to Grünenthal are set torecover only direct costs with minimal mark up, all inventories are carried at net realizable value. F-10 AcelRx Pharmaceuticals, Inc. Notes to Consolidated 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. Expenditures for repairs and maintenance, which do not extend the useful life of the property andequipment, are expensed as incurred. Upon retirement, the asset cost and related accumulated depreciation are relieved from the accompanyingConsolidated Balance Sheets. Gains and losses associated with dispositions are reflected as a component of Other (expense) income in the accompanyingConsolidated Statements of Comprehensive Loss. 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, commercial manufacturing of ZALVISO forGrünenthal and potential commercialization of its other product candidates. If the Company does not receive regulatory approval for its other productcandidates, the Company may determine that it is no longer probable that the Company will realize the future economic benefit associated with the costsof these assets through future manufacturing activities, and if so, the Company would record an impairment charge associated with these assets. As ofSeptember 30, 2015, the Company remeasured on a non-recurring basis a portion of its leasehold improvements in its corporate offices using Level IIIvaluation techniques. The write down to fair value of these long-lived assets resulted in an impairment charge of $0.5 million in the year ended December31, 2015, which was recorded in interest income and other income (expense), net in the Consolidated Statements of Comprehensive Loss. As ofDecember 31, 2016, the Company has not written down any additional 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 Consolidated Balance Sheets. Debt Issuance Costs Debt issuance costs, which are included in long-term debt, net of current portion, are amortized as interest expense over the contractual terms of therelated credit facilities. 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 the Lenders, is recorded as a liability. Changes in the fair value of the contingent put option arerecognized as interest income and other income (expense), net in the Consolidated Statements of Comprehensive Loss. For additional informationregarding the contingent put option, see Note 7 “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 9 “Warrants”). Changes in the fair value of the warrants arerecognized as interest income and other income (expense), net in the Consolidated Statements of Comprehensive Loss. F-11 AcelRx Pharmaceuticals, Inc. Notes to Consolidated Financial Statements 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. 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. Contract and Other Revenue In May 2015, the Company entered into the DoD Contract with the USAMRMC to support the development of DSUVIA. The DoD Contract provides forthe reimbursement of qualified expenses for development, manufacturing, regulatory and clinical costs outlined in the contract in order to submit an NDAto the FDA, including reimbursement for certain personnel and overhead expenses, as defined under the terms of the contract. Revenue under the contractis recognized when the related qualified expenses are incurred. The Company is entitled to reimbursement of overhead costs associated with the studycosts incurred under the DoD Contract. The Company estimates this overhead rate by utilizing forecasted expenditures. Final reimbursable overheadexpenses are dependent on direct labor and direct reimbursable expenses throughout the life of the DoD Contract, so it may increase or decrease based onactual expenses incurred. F-12 AcelRx Pharmaceuticals, Inc. Notes to Consolidated Financial Statements Cost of Goods Sold Under the Amended Agreements with Grünenthal, the Company will sell ZALVISO to Grünenthal at direct cost with minimal markup and will recognizeindirect costs as period costs where they are in excess of normal capacity and not realizable on a lower of cost or market basis. Cost of goods sold forZALVISO shipped to Grünenthal includes the inventory costs of API, third-party contract manufacturing costs, packaging and distribution costs,shipping, handling and storage costs, depreciation and costs of the employees involved with production. 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. Stock-Based Compensation Compensation expense for all share-based payment awards made to employees and directors, including employee stock options and restricted stock unitsrelated to the 2011 Equity Incentive Plan, or 2011 EIP, and employee share purchases related to the 2011 Employee Stock Purchase Plan, or ESPP, isbased on estimated fair values at grant date. The Company determines the grant date fair value of the awards using the Black-Scholes option-pricingmodel and generally recognizes the fair value as stock-based compensation expense on a straight-line basis over the vesting period of the respectiveawards. 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. Restructuring Costs The Company's restructuring costs consist of employee termination benefit costs. Liabilities for costs associated with the cost reduction plan arerecognized when the liability is incurred and are measured at fair value. One-time termination benefits are expensed at the date the entity notifies theemployee, unless the employee must provide future service, in which case the benefits are expensed ratably over the future service period. Non-Cash Interest Expense on Liability Related to Sale of Future Royalties In September 2015, the Company sold certain royalty and milestone payment rights from the sales of ZALVISO in the European Union by its commercialpartner, Grünenthal, pursuant to the Collaboration and License Agreement, dated as of December 16, 2013, as amended, to PDL for an upfront cashpurchase price of $65.0 million, referred to as the Royalty Monetization. The Company continues to have significant continuing involvement in theRoyalty Monetization primarily due to an obligation to act as the intermediary for the supply of ZALVISO to Grünenthal. Under the relevant accountingguidance, because of the Company’s significant continuing involvement, the Royalty Monetization has been accounted for as a liability that will beamortized using the interest method over the life of the arrangement. In order to determine the amortization of the liability, the Company is required toestimate the total amount of future royalty and milestone payments to be received by PDL and payments the Company is required to make to PDL, up to acapped amount of $195.0 million, over the life of the arrangement. The sum of the capped amount of $195.0 million, less the $61.2 million of netproceeds the Company received will be recorded as interest expense over the life of the liability. Consequently, the Company imputes interest on theunamortized portion of the liability and record interest expense using an estimated interest rate for an arms-length debt transaction. The Company’sestimate of the interest rate under the arrangement is based on the amount of royalty and milestone payments expected to be received by PDL over the lifeof the arrangement. The Company’s estimate of this total interest expense resulted in an effective annual interest rate of approximately 14%. TheCompany will periodically assess the expected royalty and milestone payments using a combination of historical results, internal projections andforecasts from external sources. To the extent such payments are greater or less than its initial estimates or the timing of such payments is materiallydifferent than its original estimates, the Company will prospectively adjust the amortization of the liability and the interest rate. The Company will record non-cash royalty revenues and non-cash interest expense within its Consolidated Statements of Comprehensive Loss over theterm of the PDL agreement. F-13 AcelRx Pharmaceuticals, Inc. Notes to Consolidated Financial Statements Comprehensive Loss Comprehensive loss is comprised of net loss and other comprehensive income (loss) and is disclosed in the Consolidated Statements of ComprehensiveLoss. For the Company, other comprehensive income (loss) consists of changes in unrealized gains and losses on the Company’s investments. 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. 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 14 “Net Lossper Share of Common Stock”. Recently Adopted Accounting Pronouncement In August 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-15, Disclosure ofUncertainties about an Entity’s Ability to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s abilityto continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions orevents raise substantial doubt about the entity’s ability to continue as a going concern. The ASU applies to all entities and is effective for annual periodsending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The adoption of ASU No. 2014-15 in the year endedDecember 31, 2016, did not have a material impact on the Company’s financial statements. Recently Issued Accounting Pronouncements In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU No. 2016-18 is intended to reducediversity in practice in the classification and presentation of changes in restricted cash on the Consolidated Statement of Cash Flows. The ASU requiresthat the Consolidated Statement of Cash Flows explain the change in total cash and equivalents and amounts generally described as restricted cash orrestricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. The ASU also requires a reconciliation betweenthe total of cash and equivalents and restricted cash presented on the Consolidated Statement of Cash Flows and the cash and equivalents balancepresented on the Consolidated Balance Sheet. ASU 2016-18 is effective retrospectively on January 1, 2018, with early adoption permitted. The Companyhas not yet selected a transition date. The Company does not expect the adoption of ASU 2016-18 to have a material effect on its results of operations,financial condition or cash flows. F-14 AcelRx Pharmaceuticals, Inc. Notes to Consolidated Financial Statements In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and CashPayments, addressing eight specific cash flow issues in an effort to reduce diversity in practice. The amended guidance is effective for fiscal yearsbeginning after December 31, 2017, and for interim periods within those years. Early adoption is permitted. The Company does not expect the amendedguidance to have a material impact on its statements of cash flows. In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718), which is part of the FASB's SimplificationInitiative. The updated guidance simplifies the accounting for share-based payment transactions. The amended guidance is effective for fiscal years, andinterim periods within those years, beginning after December 15, 2016, with early adoption permitted. The Company does not expect the adoption of thisupdated guidance to have a material impact on its consolidated financial statements. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes a new lease accounting model for lessees. The updatedguidance requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additionalqualitative and quantitative disclosures. The amended guidance is effective for fiscal years, and interim periods within those years, beginning afterDecember 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidatedfinancial statements. In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330) Related to Simplifying the Measurement of Inventory which applies to allinventory measured using first-in, first-out (“FIFO”) or average cost. Inventory within the scope of the new guidance should be measured at the lower ofcost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs ofcompletion, disposal, and transportation. The amendments will be effective for the Company beginning in fiscal 2017, including interim periods withinfiscal 2017. The new guidance should be applied prospectively, and earlier application is permitted as of the beginning of an interim or annual reportingperiod. The Company does not expect the adoption of ASU 2014-11 to have a material impact on its consolidated financial statements. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, to provide guidance on revenue recognition. ASU No. 2014-09 requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration towhich the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make moreestimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variableconsideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August 2015, the FASBissued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which provided for the adoption of the newstandard for fiscal years beginning after December 15, 2017. Accordingly, ASU No. 2014-09 is effective for the Company in the first quarter of 2018.Early adoption up to the first quarter of 2017 is permitted. Upon adoption, ASU No. 2014-09 can be applied retrospectively to all periods presented oronly to the most current period presented with the cumulative effect of changes reflected in the opening balance of retained earnings in the most currentperiod presented. The FASB has also issued the following standards which clarify ASU No. 2014-09 and have the same effective date as the originalstandard: ●ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Grossversus Net); ●ASU No. 2016-10, Identifying Performance Obligations and Licensing (Topic 606); ●ASU No. 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because ofAccounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting; and ●ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The Company currently anticipates adoption of the new standard effective January 1, 2018 under the modified retrospective transition method. Theinitial analysis identifying areas that will be impacted by the new guidance is substantially complete, and the Company is currently analyzing thepotential impacts to the consolidated financial statements and related disclosures, including the areas of variable consideration and new disclosurerequirements. The Company believes that the DOD contract will not be a contract in transition upon adoption. While the Company is still in the processof its evaluation of the Amended Agreements with its collaboration partner Grünenthal, the Company currently believes that the impact of adoption ofthe new standard to its financial statements will not be material. As the Company completes its evaluation of the new standard, new information may arisethat could change the Company’s understanding of the impact to its financial statements. The Company will continue to monitor additionalmodifications, clarifications or interpretations undertaken by the FASB that may impact its current conclusions, and will expand its analysis to includeany new revenue arrangements initiated prior to adoption. F-15 AcelRx Pharmaceuticals, Inc. Notes to Consolidated Financial Statements 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, 2016 Amortized Cost Gross UnrealizedGains Gross UnrealizedLosses FairValue Cash and cash equivalents: Cash $49,833 $— $— $49,833 U.S. government agency securities 30,474 3 — 30,477 Total cash and cash equivalents 80,307 3 — 80,310 Total cash, cash equivalents and investments $80,307 $3 $— $80,310 As of December 31, 2015 Amortized Cost Gross UnrealizedGains Gross UnrealizedLosses FairValue Cash and cash equivalents: Cash $83,112 $— $— $83,112 U.S. government agency securities 24,809 1 — 24,810 Total cash and cash equivalents 107,921 1 — 107,922 Marketable securities: U.S. government agency securities 5,544 — (2) 5,542 Total marketable securities 5,544 — (2) 5,542 Total cash, cash equivalents and investments $113,465 $1 $(2) $113,464 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, 2016 and 2015. There were no other-than-temporary impairments for these securities as of December 31, 2016 or 2015. No gross realizedgains or losses were recognized on the available-for-sale securities and, accordingly, there were no amounts reclassified out of accumulated othercomprehensive income to earnings during the years ended December 31, 2016 and 2015. As of December 31, 2016 and 2015, the contractual maturity of all investments held was less than one year. F-16 AcelRx Pharmaceuticals, Inc. Notes to Consolidated Financial Statements Fair Value Measurement The Company’s financial instruments consist of Level II assets and Level III liabilities. Level II instruments, the Company estimates fair value byutilizing third party pricing services in developing fair value measurements where fair value is based on valuation methodologies such as models usingobservable market inputs, including benchmark yields, reported trades, broker/dealer quotes, bids, offers and other reference data. Such Level IIinstruments typically include U.S. treasury and U.S. government agency obligations. As of December 31, 2016 and December 31, 2015, the Companyheld, in addition to Level II assets, a contingent put option liability associated with the Company’s Amended and Restated Loan and Security Agreement,or the Original Loan Agreement, with Hercules Technology II, L.P. and Hercules Capital, Inc., formerly known as Hercules Technology Growth Capital,Inc., collectively referred to as the Lenders, which amends and restates the loan and security agreement dated as of June 29, 2011, which was classified asa Level III liability. See Note 7 “Long-Term Debt” for further description. The Company’s estimate of fair value of the contingent put option liability wasdetermined by using a risk-neutral valuation model, wherein the fair value of the underlying debt facility is estimated both with and without the presenceof the default provisions, holding all other assumptions constant. The resulting difference between the two estimated fair values is the estimated fair valueof the default provisions, or the contingent put option. Changes to the estimated fair value of these liabilities are recorded in interest income and otherincome (expense), net in the Consolidated Statements of Comprehensive Loss. The fair value of the underlying debt facility is estimated by calculatingthe expected cash flows in consideration of an estimated probability of default and expected recovery rate in default, and discounting such cash flowsback to the reporting date using a risk-free rate. As of December 31, 2016 and 2015, the Company also held a Level III liability associated with warrants,or PIPE warrants, issued in connection with the Company’s private placement equity offering, completed in June 2012. For a detailed description, seeNote 11 “Stockholders’ Equity”. The PIPE warrants are considered a liability and are valued using the Black-Scholes option-pricing model, the inputs forwhich include exercise price of the PIPE warrants, market price of the underlying common shares, expected term, volatility based on a group of theCompany’s peers and the risk-free rate corresponding to the expected term of the PIPE warrants. Changes to any of these inputs can have a significantimpact to the estimated fair value of the PIPE warrants. As of September 30, 2015, the Company remeasured on a non-recurring basis a portion of itsleasehold improvements in its corporate offices using Level III valuation techniques. The write down to fair value of these long-lived assets resulted in animpairment charge of $0.5 million in the year ended December 31, 2015, which was recorded in interest income and other income (expense), net in theConsolidated Statements of Comprehensive Loss. 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, 2016 Fair Value Level I Level II Level III Assets U.S. government agency obligations $30,477 $— $30,477 $— Total assets measured at fair value $30,477 $— $30,477 $— Liabilities PIPE warrants $288 — — $288 Contingent put option liability 124 — — 124 Total liabilities measured at fair value $412 $— $— $412 As of December 31, 2015 Fair Value Level I Level II Level III Assets U.S. government agency obligations $30,352 $— $30,352 $— Total assets measured at fair value $30,352 $— $30,352 $— Liabilities PIPE warrants $913 — — $913 Contingent put option liability 266 — — 266 Total liabilities measured at fair value $1,179 $— $— $1,179 F-17 AcelRx Pharmaceuticals, Inc. Notes to Consolidated Financial Statements 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, 2016 and 2015: As ofDecember 31,2016 As ofDecember 31,2015 Market Price $2.60 $3.85 Exercise Price $3.40 $3.40 Risk-free interest rate 0.85% 1.06%Expected volatility 81.0% 80.0%Expected life (in years) 0.92 1.92 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 31,2016 and 2015 (in thousands): Year EndedDecember 31,2016 Fair value—beginning of period $1,179 Change in fair value of PIPE warrants (625)Change in fair value of contingent put option associated with Original Loan Agreement (142)Fair value—end of period $412 Year EndedDecember 31,2015 Fair value—beginning of period $5,859 Change in fair value of PIPE warrants (2,120)Exercise of PIPE warrants (2,544)Change in fair value of contingent put option associated with Original Loan Agreement (16)Fair value—end of period $1,179 3. Inventories Inventories consist of finished goods, raw materials and work in process and are stated at the lower of cost or market and consist of the following (inthousands): As of December 31, 2016 2015 Raw materials $1,126 $140 Work-in-process 296 181 Finished goods 732 145 Inventories $2,154 $466 F-18 AcelRx Pharmaceuticals, Inc. Notes to Consolidated Financial Statements 4. Property and Equipment Property and equipment consist of the following (in thousands): As of December 31, 2016 2015 Laboratory equipment $3,775 $3,522 Leasehold improvements 4,469 4,609 Computer equipment and software 266 266 Construction in process 7,816 3,950 Tooling 1,074 1,062 Furniture and fixtures 48 55 17,448 13,464 Less accumulated depreciation and amortization (6,736) (4,854)Property and equipment, net $10,712 $8,610 Depreciation and amortization expense was $2.1 million, $2.0 million and $0.9 million during the years ended December 31, 2016, 2015 and 2014,respectively. Property and equipment, net in the Consolidated Balance Sheets at December 31, 2016 and 2015, includes $1.5 million and $3.0 million,respectively, related to certain modifications the Company has made at Patheon Pharmaceutical Inc.’s, or Patheon’s, Cincinnati facility under the terms ofthe Capital Expenditure and Equipment Agreement, or the Capital Agreement. 5. U.S. Department of Defense Funding On May 11, 2015, the Company entered into a new award contract supported by the USAMRMC, within the U.S. Department of Defense, or the DoD, inwhich the DoD agreed to provide up to $17.0 million to the Company in order to support the development of the Company’s product candidate, DSUVIA(sufentanil sublingual tablet, 30 mcg), a proprietary, non-invasive, single-use tablet in a disposable, pre-filled single-dose applicator, or SDA, for thetreatment of moderate-to-severe acute pain, referred to as the DoD Contract. The DoD Contract supports development of DSUVIA. Under the terms of thecontract, the DoD has and continues to reimburse the Company for costs incurred for development, manufacturing, regulatory and clinical costs outlinedin the contract in order to submit an NDA to the FDA, including reimbursement for certain personnel and overhead expenses. The period of performanceunder the contract began on May 11, 2015. The contract gives the DoD the option to extend the term of the contract and provide additional funding forthe research. On March 2, 2016, the DoD Contract was amended to approve enrollment of additional patients in the SAP302 study, approve the additionof the SAP303 study, and extend the contract period of performance by four months from November 10, 2016 to March 9, 2017, to accommodate theincreased SAP302 patient enrollment and the SAP303 study. The costs for these changes have been absorbed within the current contract value. If DSUVIAis approved by the FDA, the DoD has the option to purchase a certain number of units of commercial product pursuant to the terms of the contract. Revenue is recognized based on expenses incurred by the Company in conducting research and development activities, including overhead, as set forthin the agreement. Revenue attributable to the work performed under the DoD Contract, recorded as Contract and other revenue in the ConsolidatedStatements of Comprehensive Loss, was $10.9 million and $4.4 million for the years ended December 31, 2016 and 2015, respectively. There was norevenue recognized under the DOD Contract for the year ended December 31, 2014. 6. Collaboration Agreement On December 16, 2013, AcelRx and Grünenthal, entered into a Collaboration and License Agreement, or the License Agreement, and related Manufactureand Supply Agreement, or the MSA, and together with the License Agreement, the Agreements. The License Agreement grants Grünenthal rights tocommercialize ZALVISO in the Territory, for human use in the Field. The Company retains rights with respect to the Product in countries outside theTerritory, including the United States, Asia and Latin America. Under the MSA, the Company will exclusively manufacture and supply the Product toGrünenthal for the Field in the Territory. The Collaboration and License Agreement, or the License Agreement, was amended effective July 17, 2015 andSeptember 20, 2016, or the License Amendments, and together with the License Agreement, the Amended License Agreement, and the MSA was amendedeffective July 17, 2015, or the MSA Amendment, and together with the MSA, the Amended MSA, and together with the Amended License Agreements,the Amended Agreements. In the Amended Agreements, the parties amended the Product supply configurations and packaging of Product components and accessories, andassociated pricing therefor, which the Company will manufacture and supply to Grünenthal for the Territory. The parties agreed to increase the pricing ofthe Product components and accessories in exchange for a reduction of $5.5 million in the total milestone payments due from Grünenthal contingentupon achieving specified net sales targets from a total of $171.5 million to $166.0 million. The parties also updated the development plan for the Productin the Territory, providing for additional near-term development services to be rendered by AcelRx in exchange for payments by Grünenthal of $0.7million. In accordance with the terms of the Amended MSA, AcelRx also received a binding Product forecast from Grünenthal for approximately $3.7million. F-19 AcelRx Pharmaceuticals, Inc. Notes to Consolidated Financial Statements Amended License Agreement Under the terms of the Amended License Agreement, Grünenthal has the exclusive right to commercialize the Product in the Field in the Territory. TheCompany retains 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, apart from the $0.7million included under the Amended Agreements. Grünenthal is exclusively responsible for marketing approval applications and other regulatory filingsrelating to the sufentanil sublingual tablet drug cartridge for the Product in the Field in the Territory, while the Company is responsible for the CE Markand other regulatory filings relating to device portions of the Product. In July 2014, Grünenthal submitted an MAA to the European Medicines Agency,or EMA, for ZALVISO (15 micrograms sufentanil sublingual tablets) for the management of acute moderate-to-severe post-operative pain in adultpatients. A CE Mark for ZALVISO was obtained in the fourth quarter of 2014 which specifies AcelRx as the device design authority and manufacturer. InSeptember 2015, the European Commission approved the MAA for ZALVISO for the 28 EU member states as well as for the EEA. In April 2016,Grünenthal completed the first commercial sale of ZALVISO. 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, and an additional $15.0 million milestone payment upon the European Commission, or EC, approval ofthe MAA for ZALVISO, which was approved in September 2015. Under the Amended License Agreement, the Company is eligible to receiveapproximately $194.5 million in additional milestone payments, based upon successful regulatory and product development efforts ($28.5 million) andnet sales target achievements ($166.0 million). Grünenthal will also make tiered royalty and supply and trademark fee payments in the mid-teens up tothe mid-twenties percent range, depending on the level of sales achieved, on net sales of ZALVISO. A portion of the tiered royalty payment, exclusive ofthe supply and trademark fee payments, will be paid to PDL in connection with the Royalty Monetization. For additional information on the RoyaltyMonetization with PDL, see Note 7 “Liability Related to Sale of Future Royalties”. Unless earlier terminated, the Amended License Agreement continuesin effect until the expiration of the obligation of Grünenthal to make royalty and supply and trademark fee payments, which supply and trademark feecontinues for so long as the Company continues to supply the Product to Grünenthal. The Amended License Agreement is subject to earlier terminationin the event the parties mutually agree, by a party in the event of an uncured material breach by the other party, upon the bankruptcy or insolvency ofeither party, or by Grünenthal for convenience. Amended MSA Under the terms of the Amended MSA, the Company will manufacture and supply the Product for use in the Field for the Territory exclusively forGrünenthal. Grünenthal shall purchase from AcelRx, during the first five years after the effective date of the MSA, 100% and thereafter 80% ofGrünenthal’s and its sublicensees’ and distributors’ requirements of Product for use in the Field for the Territory. The Product will be supplied at pricesapproximating the Company’s manufacturing cost, subject to certain caps, as defined in the MSA Amendment. The MSA Amendment 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 Amended MSA continues in effect until the later of the expiration of the obligation of Grünenthal to make royalty andsupply and trademark fee payments or the end of any transition period for manufacturing obligations due to the expiration or termination of the AmendedLicense Agreement. The Amended MSA is subject to earlier termination in connection with certain termination events in the Amended 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 original Agreements: 1) intellectual property(license), 2) the obligation to provide research and development services, 3) the significant and incremental discount on the manufacturing of ZALVISOfor commercial purposes, and 4) the obligation to participate on the joint steering committee. F-20 AcelRx Pharmaceuticals, Inc. Notes to Consolidated Financial Statements At the time the Amended Agreements were executed, with the exception of the intellectual property license, these obligations remained partiallyundelivered. Additionally, the Company identified the following three performance deliverables under the License Amendment and the MSAAmendment: 1) the obligation to provide additional research and development services, 2) the obligation to provide ZALVISO demonstration devicesystems, and 3) the obligation to manufacture and deliver Product under the binding forecast. The Company determined that the License Amendment andMSA Amendment are modifications to the original Agreements. 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. The Company’s management determined that the license under the originalLicense Agreement had standalone value and represented a separate unit of accounting because the rights conveyed permitted Grünenthal to perform allefforts necessary to commercialize and begin selling the product upon regulatory approval. In addition, Grünenthal has the appropriate development,regulatory and commercial expertise with products similar to the product licensed under the agreement and has the ability to engage third parties tomanufacture the product allowing Grünenthal to realize the value of the license without receiving any of the remaining deliverables. Grünenthal can alsosublicense its license rights to third parties. Also, the Company’s management determined that the research and development services, ZALVISOdemonstration device systems, joint steering committee participation, the significant and incremental discount on the manufacturing of ZALVISO, andthe obligation to manufacture and deliver Products each represent individual units of accounting, as Grünenthal could perform such services and/or couldacquire these on a separate basis. The Company believes that none of the deliverables have vendor-specific objective evidence, or VSOE, or sufficient third-party evidence, or TPE, ofselling price, as none of them have been sold separately by the Company, and as there is only limited information about third party pricing for similardeliverables. Accordingly, the Company developed best estimates of selling prices, or BESP, for each deliverable in order to allocate the noncontingentarrangement consideration to the units of accounting, based on current information available as of the modification date. 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, the Company’smanagement estimated the selling price based on the market level of contract manufacturing margin it could have received if it were engaged to supplyproducts to a customer in a separate transaction, the estimated cost of manufacturing, and the anticipated volume of Grünenthal’s orders over the course ofthe agreement, to which the discount would apply. For the ZALVISO demonstration devices and the obligation to manufacture and deliver Product, theCompany’s management estimated the selling price based on the binding volume of such devices and Products, the estimated cost of manufacturing, andthe market level of contract manufacturing margin. BESP of the license, research and development and committee participation services and the discounton manufacturing services were updated at the time the Amended Agreements were executed for purposes of allocating the amended arrangementconsideration. The Amended Agreements entitle the Company to receive additional payments upon the achievement of certain development and sales milestones. Basedon ASC Topic 605-28, Revenue Recognition — Milestone Method, the Company evaluates contingent milestones at inception or modification of theagreement, and recognizes consideration that is contingent upon the achievement of a milestone in its entirety as revenue in the period in which themilestone is achieved only if the milestone is considered substantive in its entirety. Milestones are events which have the following characteristics: (i)they can be achieved based in whole or in part on either the Company’s performance or on the occurrence of a specific outcome resulting from theCompany’s performance, (ii) there was substantive uncertainty at the date the agreement was entered into that the event would be achieved and, (iii) theywould result in additional payments due to the Company. A milestone is considered substantive if the following criteria are met: (i) the consideration iscommensurate 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 ofa specific outcome resulting from the entity’s performance to achieve the milestone, (ii) the consideration relates solely to past performance and, (iii) theconsideration is reasonable relative to all of the other deliverables and payment terms, including other potential milestone consideration, within thearrangement. 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 original Agreements 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 requires 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-21 AcelRx Pharmaceuticals, Inc. Notes to Consolidated Financial Statements In addition to substantive milestones, two milestones associated with the original Agreements were deemed not to be substantive. These milestonespertain to regulatory developments for ZALVISO in Europe, which the Company’s management deemed to be not substantive due to the high likelihoodof achievement, both at inception of the original Agreements and at the time the Amended Agreements were executed. Aggregate potential payments forthese milestones totaled $20.0 million. In July 2014, Grünenthal submitted an MAA to the EMA for ZALVISO for the management of acute moderate-to-severe post-operative pain in adult patients, triggering the first of these two milestones, a cash payment of $5.0 million. In September of 2015, the MAAwas approved by the European Commission, triggering the second of these two milestones, a cash payment of $15.0 million. Amounts received underthese non-substantive milestones were allocated to performance deliverables based on the relative selling price method and recognized as appropriate forsuch deliverables. The Amended Agreements also include milestone payments related to specified net sales targets, totaling $166.0 million. These 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. At the time the Amended Agreements were executed, approximately $33.3 million of revenue had been recognized, and $1.7 million remainedunrecognized from the aggregate to-date consideration of $35.0 million received under the original Agreements. Upon execution of the AmendedAgreements, the Company updated the allocation of this arrangement consideration, along with the consideration owed under the Amended Agreementstotaling $54.4 million, consisting of $0.7 million related to research and development services and the demonstration device systems, and $3.7 millionrelated to the Product binding purchase forecast, to all of the identified deliverables in the arrangement (both delivered and undelivered) using theirrelative selling prices. Further, the $15.0 million non-substantive milestone achieved in September of 2015 was also allocated to the deliverables in thesame manner. As a result of such allocations, additional amounts of $13.2 million and $0.5 million were allocated to the previously delivered license andresearch and development and committee participation services, respectively. A total of $4.4 million was allocated to the significant and incrementaldiscount on manufacturing services, and is expected to be recognized over the period such discount is made available to Grünenthal, beginning inFebruary 2016, on a straight-line basis over the estimated period through 2029. An additional $0.2 million has been allocated to committee participationservices and is recognized on a straight-line basis over the performance obligation period extending through 2018. A total of $2.3 million was allocatedto manufacturing services for the binding forecast of Products. The remaining $0.5 million was allocated to the additional research and developmentservices under the Amended License Agreement and demonstration device systems, and manufacturing and delivery of the Products, and will berecognized as those services are performed or as the devices are delivered, as applicable. Below is a summary of revenue recognized under the Amended Agreements during the years ended December 31, 2016, 2015, and 2014 (in thousands): Years Ended December 31, 2016 2015 2014 License $— $13,167 $4,560 Product sales 5,742 — — Joint steering committee, research and development services 688 1,690 657 Non-cash royalty revenue related to Royalty Monetization (SeeNote 8) 7 — — Royalty revenue 3 — — Total $6,440 $14,857 $5,217 As of December 31, 2016, the Company had current and noncurrent portions of the deferred revenue balance under the Amended Agreements of$0.4 million and $3.8 million, respectively. F-22 AcelRx Pharmaceuticals, Inc. Notes to Consolidated Financial Statements 7. Long-Term Debt Amended Loan and Security Agreement In June 2011, AcelRx entered into the Loan and Security Agreement, with Hercules Technology II, L.P. and Hercules Capital, Inc., formerly known asHercules Technology Growth Capital, Inc., together, the Lenders, under which AcelRx borrowed $20.0 million in two tranches of $10.0 million each,represented by secured convertible term promissory notes. The Company’s obligations associated with the agreement are secured by a security interest insubstantially all of its assets, other than its intellectual property and those assets sold under the Royalty Monetization. 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 interest rate for eachtranche was 8.50%. In connection with the loan, the Company issued the Lenders seven-year warrants to purchase an aggregate of 274,508 shares ofcommon stock at a price of $3.06 per share which have been exercised. On December 16, 2013, AcelRx entered into an Amended and Restated Loan and Security Agreement with the Lenders, or the Original Loan Agreement,under which the Company was provided the ability to borrow up to $40.0 million in three tranches. The loans were represented by secured convertibleterm promissory notes, collectively, the 2013 Notes. The Original Loan Agreement amended and restated the prior Loan Agreement between theCompany and the Lenders dated as of June 29, 2011. The Company borrowed the first tranche of $15.0 million upon closing of the transaction onDecember 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 thefirst tranche to repay its obligations under the prior Loan and Security Agreement with the Lenders. The Company recorded the new debt at an estimatedfair value of $24.9 million as of December 31, 2014. In connection with the Original Loan Agreement, the Company issued a warrant to each Lenderwhich, collectively, are exercisable for an aggregate of 176,730 shares of common stock and each carried an exercise price of $6.79 per share. On September 24, 2014, the Company entered into Amendment No. 1 to the Original Loan Agreement with the Lenders. Amendment No. 1 extended thetime period under which the Company could draw down the third tranche, of up to $15.0 million, from March 15, 2015 to August 1, 2015, subject to theCompany obtaining approval for ZALVISO from the FDA. The Company did not receive FDA approval of ZALVISO by August 1, 2015 and as such, didnot have access to the third tranche. On September 18, 2015, concurrently with the closing of the Royalty Monetization, the Company entered into a Consent and Amendment No. 2, orAmendment No. 2, to the Original Loan Agreement with the Lenders. Amendment No. 2 includes an interest only period from October 1, 2015 throughMarch 31, 2016, with further extension to September 30, 2016 upon satisfaction of certain conditions. These conditions were satisfied in the third quarterof 2015 and the interest only period was extended through September 30, 2016. Loans under the Original Loan Agreement were scheduled to mature onOctober 1, 2017. In connection with Amendment No. 2, the Company reduced the exercise price of the warrants already held by the Lenders, which areexercisable for an aggregate of 176,730 shares of Common Stock, from the previous exercise price of $6.79 per share to $3.88 per share. On September 30, 2016, the Company entered into Amendment No. 3 to the Original Loan Agreement with the Lenders. Among other things, AmendmentNo. 3 extended the interest-only period from October 1, 2016 to April 1, 2017. In connection with Amendment No. 3, the Company reduced the exerciseprice of the existing warrants held by the Lenders, which are exercisable for an aggregate of 176,730 shares of common stock, from the current exerciseprice of $3.88 per share to $3.07 per share. On March 2, 2017, we refinanced the Original Loan Agreement in its entirety into a 36-month term loan withan additional six-month interest only period. The scheduled maturity date is now March 2020. Refer to Note 19 “Subsequent Event” for additionalinformation. In addition, subject to the achievement of certain milestones, the Company may be able to extend the maturity date to September 2020 or March 2021and extend the interest only period up to a total of 12 or 18 months. Among other things, the further amendment and restatement reflects changes to theinterest rate, the maturity date, certain covenants, and prepayment penalties, and includes up to $10 million of additional loans to be made available tothe Company on the same terms, which would be subject to approval by Hercules Technology II, L.P.’s, or the Agent’s, investment committee (suchapproval to be granted or withheld at such committee’s sole discretion). Currently, the interest rate for each tranche is calculated at a rate equal to the greater of either (i) 9.55% plus the prime rate as reported from time to time inThe Wall Street Journal minus 3.50%, and (ii) 9.55%. Payments under the Amended Loan Agreement are interest only until October 1, 2017 (which willbe extended until April 1, 2018 if the Company shall have received at least $40 million in net proceeds raised as a combination of up-front cash proceedsfrom out-licensing or commercial partnering relating to ARX-04 and Zalviso and new equity after March 2, 2017 and on or before December 31, 2017, orthe Liquidity Milestone, and which will be further extended until October 1, 2018 if the Company has achieved the Liquidity Milestone and the Tranche2 Milestone) followed by equal monthly payments of principal and interest through the scheduled maturity date on March 1, 2020 (which would beextended until September 1, 2020 if the Company achieves the Liquidity Milestone and March 1, 2021 if the Company achieves the Liquidity Milestoneand the Tranche 2 Milestone) (as applicable, or the Maturity Date). A final payment equal to $1.7 million will be due in connection with the loans madeunder the Original Loan Agreement on the earliest of (i) October 1, 2017, (ii) prepayment in full of the loans (other than by a refinancing with theLenders) or (iii) the date on which the loans under the Amended Loan Agreement become due and payable. In addition, a final payment equal to 6.5% ofthe aggregate principal amount of loans funded under the Amended Loan Agreement will be due on the earliest of (i) the maturity date, (ii) prepayment infull of the loans (other than by a refinancing with the Lenders) or (iii) the date on which the loans under the Amended Loan Agreement become due andpayable. The Company’s obligations under the Amended Loan Agreement are secured by a security interest in substantially all of its assets, other than itsintellectual property and those assets sold under the Royalty Monetization. F-23 AcelRx Pharmaceuticals, Inc. Notes to Consolidated Financial Statements If the Company prepays the loan prior to the maturity date, it will pay the Lenders a prepayment charge, based on a percentage of the then outstandingprincipal balance, equal to 3% if the prepayment occurs prior to March 2, 2018, 2% if the prepayment occurs after March 2, 2018, but prior to March 2,2019, or 1% if the prepayment occurs after March 2, 2019. 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 the Lenders’ 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 the Lenders maydeclare all outstanding obligations immediately due and payable and take such other actions as set forth in the Amended Loan Agreement. Upon an event of default, including a change of control, the Lenders had the option to accelerate repayment of the Original Loan Agreement, includingpayment of any applicable prepayment charges. This option was considered a contingent put option liability, as the holder of the loan had the ability toexercise the option in the event of default, and was considered an embedded derivative, which must be valued and separately accounted for in theCompany’s financial statements. As the Original Loan Agreement entered into on December 16, 2013 was considered an extinguishment, the contingentput option liability associated with the prior Loan Agreement, which had an estimated fair value of $32,000 at the time of the amendment, was written offas a part of the loss on extinguishment, and a new contingent put option liability was established. As of December 31, 2016 and December 31, 2015, theestimated fair value of the contingent put option liability was $124,000 and $266,000, respectively, which was determined by using a risk-neutralvaluation model, wherein the fair value of the underlying debt facility is estimated both with and without the presence of the default provisions, holdingall other assumptions constant. The resulting difference between the two estimated fair values is the estimated fair value of the default provisions, or thecontingent put option. The fair value of the underlying debt facility is estimated by calculating the expected cash flows in consideration of an estimatedprobability of default and expected recovery rate in default, and discounting such cash flows back to the reporting date using a risk-free rate. Thecontingent put option liability is revalued at the end of each reporting period and any change in the fair value is recognized in interest income and otherincome (expense), net in the condensed consolidated statements of comprehensive loss. The Company performed an analysis of Amendments No. 2 and No. 3 to determine if each amendment was a modification or extinguishment of the debtunder the Original Loan Agreement. The Company assumed immediate prepayment of both the pre-modification debt and post-modification debt,including the change in the fair value due to the warrant amendments, and concluded that Amendments No. 2 and No. 3 were each modifications ratherthan extinguishments of the debt. The accrued balance due under the Original Loan Agreement was $21.5 million at December 31, 2016, and $20.9 million at December 31, 2015. Interestexpense related to the Original Loan Agreement was $2.8 million, $3.0 million, and $2.6 million for the years ended December 31, 2016, 2015 and 2014,respectively. F-24 AcelRx Pharmaceuticals, Inc. Notes to Consolidated Financial Statements 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, 2016 (in thousands): 2017 $5,678 2018 9,235 2019 9,235 2020 3,679 Total payments 27,827 Less amount representing interest (4,126)Notes payable, gross 23,701 Unamortized portion of final payment (2,143)Unamortized discount on notes payable (9) 21,549 Less current portion of notes payable, including unamortized discount (2,912)Long-term debt, current portion $18,637 We reclassified these obligations from current liabilities to long-term debt as of December 31, 2016, as it was our intention at that time to refinance theshort-term obligations on a long-term basis and we consummated the refinancing prior to the issuance of our Form 10-K. See Note 19 “Subsequent Event”for further details. 8. Liability Related to Sale of Future Royalties On September 18, 2015, the Company consummated the Royalty Monetization, in which it sold certain royalty and milestone payment rights to its newlyformed wholly owned subsidiary, ARPI LLC, pursuant to a Purchase and Sale Agreement, or PSA. Subsequently, ARPI LLC sold the royalty andmilestone payment rights to PDL for an upfront cash purchase price of $65.0 million, subject to a capped amount of $195.0 million pursuant to theSubsequent Purchase and Sale Agreement, or SPSA. Under the SPSA, PDL will receive 75% of the European royalties under the Amended LicenseAgreement as well as 80% of the first four commercial milestones, worth $35.6 million (or 80% of $44.5 million), subject to the capped amount. TheCompany is entitled to receive 25% of the royalties, 20% of the first four commercial milestones, 100% of the remaining commercial milestones and allremaining development milestones of $43.5 million, including the $15.0 million payment for the EC approval of the MAA for ZALVISO. The Company and ARPI LLC continue to retain certain duties and obligations under the Amended License Agreement. These include the collection ofthe royalty and milestones amounts due and enforcement of related provisions under the Amended License Agreement, among others. In addition, theCompany must prepare a quarterly distribution report relating to the Amended License Agreement, containing among other items, the amount of royaltyand milestone payments received, reimbursable expenses and set-offs. The Company and ARPI LLC must also provide PDL with notice of certaincommunications, events or actions with respect to the Amended License Agreement and infringement of any underlying intellectual property. The Company has significant continuing involvement in the Royalty Monetization primarily due to an obligation to act as the intermediary for thesupply of ZALVISO to Grünenthal. Under the relevant accounting guidance, because of its significant continuing involvement, the RoyaltyMonetization has been accounted for as a liability that will be amortized using the interest method over the life of the arrangement. In order to determinethe amortization of the liability, the Company is required to estimate the total amount of future royalty and milestone payments to be received by PDLand payments the Company is required to make to PDL, up to a capped amount of $195.0 million, over the life of the arrangement. The sum of the cappedamount of $195.0 million, less the $61.2 million of net proceeds the Company received will be recorded as interest expense over the life of the liability.Consequently, the Company imputes interest on the unamortized portion of the liability and records interest expense. The Company’s estimate of theinterest rate under the arrangement is based on the amount of royalty and milestone payments expected to be received by PDL over the life of thearrangement. The Company’s estimate of this total interest expense resulted in an effective annual interest rate of approximately 14%. The Company will periodically assess the expected royalty and milestone payments using a combination of historical results, internal projections andforecasts from external sources. To the extent such payments are greater or less than our initial estimates or the timing of such payments is materiallydifferent than our original estimates, the Company will prospectively adjust the amortization of the liability and the interest rate. F-25 AcelRx Pharmaceuticals, Inc. Notes to Consolidated Financial Statements The following table shows the activity within the liability account during the year ended December 31, 2016 (in thousands): Year endedDecember 31,2016 Period frominception to December 31,2016 Liability related to sale of future royalties — beginning balance $63,612 $— Proceeds from sale of future royalties — 61,184 Non-cash royalty revenue (7) (7)Non-cash interest expense recognized 9,382 11,810 Liability related to sale of future royalties as of December 31, 2016 72,987 72,987 Less: current portion (764) (764)Liability related to sale of future royalties — net of current portion $72,223 $72,223 As royalties are remitted to PDL from ARPI LLC, as described in Note 1 “Organization and Summary of Significant Accounting Policies,” the balance ofthe liability will be effectively repaid over the life of the agreement. The Company will record non-cash royalty revenues and non-cash interest expensewithin its Consolidated Statements of Comprehensive Loss over the term of the Royalty Monetization. 9. Warrants Series A Warrants As of December 31, 2016, warrants to purchase 3,425 shares of common stock had not been exercised and were still outstanding. These warrants expire inMarch 2017. Amended and Restated Loan Agreement Warrants In connection with the Original Loan Agreement, executed in December 2013, the Company issued warrants to the Lenders which were exercisable for anaggregate of 176,730 shares of common stock with an exercise price of $6.79 per share, or the Warrants. In connection with Amendment No. 2 to theOriginal Loan Agreement, the Company reduced the exercise price of the warrants already held by the Lenders from the previous exercise price of $6.79per share to $3.88 per share, or the First Warrant Amendments. In connection with Amendment No. 3 to the Original Loan Agreement, the Companyreduced the exercise price of the warrants already held by the Lenders from the previous exercise price of $3.88 per share to $3.07 per share, or the SecondWarrant Amendments. Each Warrant may be exercised on a cashless basis. The Warrants are exercisable for a term beginning on the date of issuance andending on the earlier to occur of five years from the date of issuance or the consummation of certain acquisitions of the Company as set forth in theWarrants. The number of shares for which the Warrants are exercisable and the associated exercise price are subject to certain proportional adjustments asset forth in the Warrants. The Company estimated the fair value of these Warrants as of the issuance date to be $1.1 million, which was used in theestimating the fair value of the amended debt instrument and was recorded as equity. The fair value of the Warrants was calculated using the Black-Scholes option-valuation model, and was based on the original strike price of $6.79, the stock price at issuance of $9.67, the five-year contractual term ofthe warrants, a risk-free interest rate of 1.55%, expected volatility of 71% and 0% expected dividend yield. The Company estimated the fair value of themodification of the First Warrant Amendments, as of the issuance date to be $0.1 million, which was used in estimating the fair value of the amended debtinstrument in September 2015 and was recorded as equity, as well as the Second Warrant Amendments, which fair value was estimated to be $45,000 atthe issuance date, and which was used in estimating the fair value of the amended debt instrument in September 2016 and was recorded as equity. As of December 31, 2016, warrants to purchase 176,730 shares of common stock issued to the Lenders had not been exercised and were still outstanding.These warrants expire in December 2018. 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 Consolidated Statements of Comprehensive Loss in interest income and other income(expense), net. The Black-Scholes assumptions used to value the PIPE warrants are disclosed in Note 2 “Investments and Fair Value Measurement.” F-26 AcelRx Pharmaceuticals, Inc. Notes to Consolidated Financial Statements 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, 2016, the fair value of the PIPE warrants was estimated to be $0.3 million. The change in fair value for the years ended December 31, 2016,2015, and 2014, which was recorded as other income, was $0.6 million, $2.1 million, and $7.0 million, respectively. During the year ended December 31, 2015, PIPE warrants to purchase 847,058 shares were net exercised for 527,101 shares of common stock. During theyear ended December 31, 2014, PIPE warrants to purchase 135,000 shares were net exercised for 91,488 shares of common stock. As of December 31,2016, PIPE warrants to purchase 512,456 shares of common stock issued in connection with the Private Placement had not been exercised and wereoutstanding. These warrants expire in November 2017. 10. 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. Rent expense from the facility lease is recognized on astraight-line basis from the inception of the lease in December 2011, the early access date, through the end of the lease. 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. On October 2, 2015, the Company executed an agreement to sublease 11,871 sq. of its Expansion Space located at 301 Galveston Drive, Redwood City,California for a term of 26 months commencing on December 1, 2015. The sublessee is entitled to abatement of the first two monthly installments of rent.Subsequent monthly installments of rent start at a rental rate of $2.05 per square foot (subject to agreed nominal increases). Minimum rents expected to bereceived under this sublease are $301,000 and $25,000 for the years ending December 31, 2017 and 2018, respectively. Rent expense was $0.3 million, $0.6 million and $0.5 million during the years ended December 31, 2016, 2015 and 2014, respectively. Future minimum payments under the lease agreement as of December 31, 2016, are as follows (in thousands): Year Ending December 31: 2017 $737 2018 62 Total minimum payments $799 F-27 AcelRx Pharmaceuticals, Inc. Notes to Consolidated Financial Statements 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 From time to time the Company may be involved in legal proceedings arising in the ordinary course of business. The Company does not have contingentliabilities established for any litigation matters. 11. Stockholders’ Equity Common Stock 2016 ATM Agreement On June 21, 2016, the Company entered into a Controlled Equity Offering Sales Agreement, or the Sales Agreement, or 2016 ATM Agreement, withCantor Fitzgerald & Co., or Cantor, as agent, pursuant to which the Company may offer and sell, from time to time through Cantor, shares of theCompany’s common stock, or the Common Stock having an aggregate offering price of up to $40.0 million, or the Shares. The Company is not obligatedto make any sales of common stock under the Sales Agreement. The offering of Shares pursuant to the Sales Agreement will terminate upon the earlier of(a) the sale of all of the Shares subject to the Sales Agreement or (b) the termination of the Sales Agreement by Cantor or the Company, as permittedtherein. The Company will pay Cantor a commission rate in the low single digits on the aggregate gross proceeds from each sale of Shares and haveagreed to provide Cantor with customary indemnification and contribution rights. As of December 31, 2016, the Company has not sold any Sharespursuant to the 2016 ATM Agreement. Stock Plans 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. 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. The term of the option is determined by the Board ofDirectors on the date of grant but shall not be longer than 10 years. Options under the 2011 Equity Incentive Plan generally vest over four years, and alloptions expire after 10 years. The Company issues new shares for settlement of vested restricted stock units and exercises of stock options. The Companydoes not have a policy of purchasing its shares relating to its share-based programs. F-28SM AcelRx Pharmaceuticals, Inc. Notes to Consolidated 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, orthe ESPP, 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. As of December 31, 2016, 410,166 shares have been issued to employees and there are 1,136,142 shares available for issuance under the ESPP. Theweighted average fair value of shares issued under the ESPP in 2016, 2015 and 2014 was $2.98, $4.48 and $4.35 per share, respectively. 12. Stock-Based Compensation The Company recorded total stock-based compensation expense for stock options, stock awards and the ESPP as follows (in thousands): December 31,2016 December 31,2015 December 31,2014 Cost of goods sold $302 $67 $— Research and development 2,308 2,587 2,252 General and administrative 1,869 2,356 2,188 Total $4,479 $5,010 $4,440 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, 2015 4,618,949 $5.77 Granted 1,891,650 3.25 Forfeited (135,313) 5.65 Expired (67,530) 7.70 Exercised — — December 31, 2016 6,307,756 $5.00 7.1 $124 Vested and exercisable options—December 31, 2016 3,854,199 $5.32 6.0 $124 Vested and expected to vest—December 31, 2016 6,162,353 $5.02 7.0 $124 As of December 31, 2016, there were 2,774,854 shares available for future grant under the 2011 Plan. In January 2017, an additional 1,813,352 shareswere authorized for issuance under the 2011 Incentive Plan. F-29 AcelRx Pharmaceuticals, Inc. Notes to Consolidated Financial Statements Additional information regarding the Company’s stock options outstanding and vested and exercisable as of December 31, 2016 is summarized below: Options Outstanding Options Vested and Exercisable Exercise Prices Number ofStock OptionsOutstanding Weighted-AverageRemainingContractualLife(Years) Weighted-AverageExercise PriceperShare Shares Subjectto StockOptions Weighted-AverageExercise PriceperShare $1.20-$2.56 462,897 3.1 $2.33 462,897 $2.33 $2.80-$4.24 3,170,953 7.8 $3.41 1,383,802 $3.56 $4.73-$7.35 1,775,906 6.7 $5.85 1,335,300 $5.68 $8.18-$10.55 898,000 7.2 $10.30 672,200 $10.29 6,307,756 7.1 $5.00 3,854,199 $5.32 The weighted average grant-date fair value of options granted during the years ended December 31, 2016, 2015 and 2014 was $2.24, $2.69 and $5.57 pershare, respectively. As of December 31, 2016, total stock-based compensation expense related to unvested options to be recognized in future periods was$6.7 million which is expected to be recognized over a weighted-average period of 2.4 years. The grant date fair value of shares vested during the yearsended December 31, 2016, 2015 and 2014 was $3.9 million, $5.4 million and $3.2 million, respectively. The total intrinsic value of options exercisedduring the years ended December 31, 2016, 2015 and 2014 was $0, $1.3 million and $2.3 million, respectively. The Company used the following assumptions to calculate the fair value of each employee stock option: Year Ended December 31, 2016 2015 2014 Expected term (in years) 5.25-6.25 5.25-6.25 5.25-6.25 Risk-free interest rate 1.24%-1.47% 1.35%-1.82% 1.76%-1.92% Expected volatility 80% 72% 69-72% 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, 2016, 2015 and 2014, there were no RSUs outstanding. The expense related to RSUs during the years endedDecember 31, 2016, 2015 and 2014 was $0, $0 and $56,000, respectively. 13. Restructuring Costs On March 19, 2015, the Board of Directors of the Company, in connection with its efforts to reduce operating costs, conserve capital, focus theCompany's financial and development resources on working with the FDA to seek marketing approval for ZALVISO, and continuing development ofDSUVIA, implemented a cost reduction plan. The cost reduction plan reduced the Company’s workforce by 19 employees, approximately 36% of totalheadcount, in the first quarter of 2015. Employee termination benefits related to this restructuring, are charged to restructuring costs in the ConsolidatedStatements of Comprehensive Loss, and totaled $756,000 in the year ended December 31, 2015. The restructuring liability was fully disbursed as ofDecember 31, 2015. 14. 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. F-30 AcelRx Pharmaceuticals, Inc. Notes to Consolidated Financial Statements During the year ended December 31, 2016, the exercise price of the PIPE warrants exceeded the average of AcelRx’s closing share price in the period. As aresult, the PIPE warrants were anti-dilutive during the year ended December 31, 2016. However, during the years ended December 31, 2015 and 2014, thePIPE warrants had a dilutive impact to net loss per share due to a lower share price at December 31, 2015 and 2014, compared to the closing share price onDecember 31, 2014 and 2013, respectively. The decrease in share price created a lower Black-Scholes value and lower liability for the PIPE warrants,which resulted in other income during the years ended December 31, 2015 and 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, 2016, 2015 and 2014: Years Ended December 31, 2016 2015 2014 (in thousands, except share and per share amounts) Numerator: Net loss used to compute net loss per share Basic $(43,157) $(24,399) $(33,353)Adjustments for change in fair value of warrant liability — (2,120) (6,988)Diluted $(43,157) $(26,519) $(40,341)Denominator: Weighted average shares outstanding used to compute net loss pershare: Basic 45,313,118 44,300,099 43,427,111 Dilutive effect of warrants — 168,341 895,186 Diluted 45,313,118 44,468,440 44,322,297 Net loss per share—basic $(0.95) $(0.55) $(0.77)Net loss per share—diluted $(0.95) $(0.60) $(0.91) 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, 2016 2015 2014 ESPP and stock options to purchase common stock 6,395,879 4,699,121 6,411,003 Convertible debt into common stock 553,763 553,763 553,763 Common stock warrants 692,611 180,155 180,155 15. Accrued Liabilities Accrued liabilities consist of the following (in thousands): December 31, 2016 2015 Accrued compensation and employee benefits $2,556 $2,876 Inventory and other contract manufacturing accruals 1,218 272 Other accrued liabilities 821 808 Total accrued liabilities $4,595 $3,956 F-31 AcelRx Pharmaceuticals, Inc. Notes to Consolidated Financial Statements 16. 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 matching contribution of up to 4% of the related compensation. Under the vesting schedule,employees have ownership in the matching Employer Contributions based on the number of years of vesting service completed. Company contributionswere $276,000, $263,000 and $201,000 for the years ended December 31, 2016, 2015 and 2014, respectively. 17. Related Party Transaction Stephen Hoffman is a Senior Advisor to PDL and a member of the Company's Board of Directors, or the Board. The Board was aware of Dr. Hoffman’sstatus as an interested party in the Royalty Monetization and Dr. Hoffman recused himself from all deliberations and actions taken by the Board withrespect to the Royalty Monetization. Dr. Hoffman’s consulting compensation from PDL is composed, in part, of a success fee which is formula drivenbased on a minimum dollar value of deals and the total dollar value of the deals, his relative contribution to each of the concluded deals, and the totaldollar value deployed in 2015. PDL estimates the amount attributable to the AcelRx transaction in the year ended December 31, 2015 to beapproximately $260,000. The Company makes royalty payments to PDL in connection with the Royalty Monetization as described in Note 8 “LiabilityRelated to Sale of Future Royalties.” 18. Income Taxes The Company recorded a benefit for income taxes of $34,000 during the year ended December 31, 2016, and a provision for income taxes of $760,000during the year ended December 31, 2015. The Company did not record a provision for income taxes during the year ended December 31, 2014. Netdeferred tax assets as of December 31, 2016 and 2015 consist of the following (in thousands): December 31,2016 December 31,2015 Deferred tax assets: Accruals and other $3,746 $3,162 Research credits 5,670 5,105 Net operating loss carryforward 36,224 30,294 Section 59(e) R&D expenditures 16,782 12,785 Deferred revenue 24,836 21,677 AMT credit 703 742 Total deferred tax assets 87,961 73,765 Valuation allowance (87,961) (73,765)Net deferred tax assets $— $— Reconciliations of the statutory federal income tax to the Company’s effective tax during the years ended December 31, 2016, 2015 and 2014 are asfollows (in thousands): Year Ended December 31, 2016 2015 2014 Tax at statutory federal rate $(14,685) $(8,037) $(11,392)State tax—net of federal benefit (73) 2,853 (2,501)PIPE Warrant liability (260) (726) (2,393)General Business credits (360) (455) (628)Stock Options 1,115 1,559 543 Other 33 73 20 Change in valuation allowance 14,196 5,493 16,351 (Benefit) provision for income taxes $(34) $760 $— 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 $14.2 million, $5.5 million and $16.4 million during the years ended December 31, 2016, 2015 and 2014, respectively. F-32 AcelRx Pharmaceuticals, Inc. Notes to Consolidated Financial Statements As of December 31, 2016, the Company had federal net operating loss carryforwards of $91.5 million, which begin to expire in 2029. As of December 31,2016, the Company had state net operating loss carryforwards of $106.6 million, which begin to expire in 2017. As of December 31, 2016, approximately $2.9 million of federal and $2.0 million of state net operating loss is attributable to stock-based compensationdeductions in excess of book expense. When realized, the benefit of the tax deduction related to these options will be accounted for as a credit tostockholders’ equity rather than as a reduction of the income tax provision. As of December 31, 2016, the Company had a federal alternative minimum tax credit carryover of $0.7 million. As of December 31, 2016, the Company had federal research credit carryovers of $5.4 million, which begin to expire in 2026. As of December 31, 2016,the Company had state research credit carryovers of $3.2 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, 2013, 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, 2016, 2015 and 2014 is asfollows (in thousands): Year Ended December 31, 2016 2015 2014 Unrecognized benefit—beginning of period $1,939 $1,667 $1,341 Gross decreases—prior period tax positions — — — Gross increases—current period tax positions 223 272 326 Unrecognized benefit—end of period $2,162 $1,939 $1,667 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 2005 through 2016 remain open in both jurisdictions. The Company is not currentlyunder examination by income tax authorities in federal, state or other foreign jurisdictions. The Company does not anticipate any significant changeswithin 12 months of this reporting date of its uncertain tax positions. F-33 AcelRx Pharmaceuticals, Inc. Notes to Consolidated Financial Statements 19. Subsequent Events On March 2, 2017, the Company entered into an Amended and Restated Loan and Security Agreement, or the Amended Loan Agreement with HerculesCapital Funding Trust 2014-1 and Hercules Technology II, L.P., together, Hercules, under which the Company may borrow up to approximately $30.466million in two tranches. The loans are represented by secured convertible term promissory notes, collectively, the Notes. The Amended Loan Agreementamends and restates the Amended and Restated Loan and Security Agreement between the Company and the Lenders dated as of December 16, 2013, asamended, or the Original Loan Agreement. The Company borrowed the first tranche of approximately $20.466 million upon closing of the transaction on March 2, 2017. The Company used all ofthe proceeds from the first tranche to repay its obligations under the Original Loan Agreement. The second tranche, of up to $10.0 million, can be drawnat any time between April 1, 2017 and December 31, 2017, but only if (a) the Company has obtained approval for the new drug application filed by theBorrower with the U.S. Food and Drug Administration for product DSUVIA (formerly known as ARX-04 in the United States) on or before December 31,2017, or the Tranche 2 Milestone and (b) the extension of the second tranche has been approved by Agent’s investment committee, such approval to begranted or withheld in its sole discretion. The interest rate for each tranche will be calculated at a rate equal to the greater of either (i) 9.55% plus theprime rate as reported from time to time in The Wall Street Journal minus 3.50%, and (ii) 9.55%. Payments under the Amended Loan Agreement areinterest only until October 1, 2017 (which will be extended until April 1, 2018 if the Company shall have received at least $40.0 million in net proceedsraised as a combination of up-front cash proceeds from out-licensing or commercial partnering relating to DSUVIA and ZALVISO and new equity afterMarch 2, 2017 and on or before December 31, 2017, or the Liquidity Milestone, and which will be further extended until October 1, 2018 if the Companyhas achieved the Liquidity Milestone and the Tranche 2 Milestone) followed by equal monthly payments of principal and interest through the scheduledmaturity date on March 1, 2020 (which would be extended until September 1, 2020 if the Company achieves the Liquidity Milestone and March 1, 2021if the Company achieves the Liquidity Milestone and the Tranche 2 Milestone) (as applicable, or the Maturity Date). A final payment equal to $1.7million will be due in connection with the loans made under the Original Loan Agreement on the earliest of (i) October 1, 2017, (ii) prepayment in full ofthe loans (other than by a refinancing with the Lenders) or (iii) the date on which the loans under the Loan Agreement become due and payable. Inaddition, a final payment equal to 6.5% of the aggregate principal amount of loans funded under the Amended Loan Agreement will be due on theearliest of (i) the maturity date, (ii) prepayment in full of the loans (other than by a refinancing with the Lenders) or (iii) the date on which the loans underthe Amended Loan Agreement become due and payable. The Company’s obligations under the Amended Loan Agreement are secured by a securityinterest in substantially all of its assets, other than its intellectual property. If the Company prepays the loan prior to the maturity date, it will pay the Lenders a prepayment charge, based on a percentage of the then outstandingprincipal balance, equal to 3% if the prepayment occurs prior to March 2, 2018, 2% if the prepayment occurs after March 2, 2018, but prior to March 2,2019, or 1% if the prepayment occurs after March 2, 2019. 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 Lenders’ 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, andthe Lenders may declareall outstanding obligations immediately due and payable and take such other actions as set forth in the Amended Loan Agreement. F-34 AcelRx Pharmaceuticals, Inc. Notes to Consolidated Financial Statements 20. 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, 2016. 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. 2016 2015 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Revenues $3,025 $4,531 $3,366 $6,435 $181 $1,924 $15,428 $1,730 Operating costs and expenses $11,547 $12,853 $11,341 $13,573 $11,581 $10,047 $8,323 $9,266 Net income / (loss) $(10,981) $(11,092) $(11,402) $( 9,682) $(10,026) $(8,896) $5,069 $(10,546)Net income / (loss) per share(basic) $(0.24) $(0.24) $(0.25) $(0.21) $(0.23) $(0.20) $0.11 $(0.24)Net income / (loss) per share(diluted) $(0.25) $(0.24) $(0.25) $(0.21) $(0.27) $(0.20) $0.11 $(0.24) F-35 EXHIBIT INDEX Incorporation By Reference ExhibitNumber Exhibit Description Form SECFile No. Exhibit Filing Date 3.1 Amended and Restated Certificate of Incorporation of the Registrant, currently in effect. 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 theRegistrant and 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 HerculesTechnology II, 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 HerculesTechnology Growth 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 SecuritiesPurchase Agreement dated May 29, 2012, between the Registrant and thepurchasers identified therein. 8-K 001-35068 4.8 5/30/2012 4.7 Warrant Modification Agreement to Purchase Common Stock of the Registrant,issued to Hercules Technology II, L.P. dated as of September 17, 2015. 10-Q 001-35068 4.7 11/3/2015 4.8 Warrant Modification Agreement to Purchase Common Stock of the Registrant,issued to Hercules Technology Growth Capital, Inc. dated as of September 17,2015. 10-Q 001-35068 4.8 11/3/2015 4.9 Warrant Modification Agreement to Purchase Common Stock of the Registrant,issued to Hercules Technology II, L.P. dated as of September 30, 2016. 10-Q 001-35068 4.9 11/2/2016 4.10 Warrant Modification Agreement to Purchase Common Stock of the Registrant,issued to Hercules Capital, Inc., formerly known as Hercules TechnologyGrowth Capital, Inc., dated as of September 30, 2016. 10-Q 001-35068 4.10 11/2/2016 10.1+ Form of Indemnification Agreement between the Registrant and each of itsdirectors and 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 StockOption Exercise 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 Agreementunder 2011 Equity Incentive Plan. 10-K 001-35068 10.5 3/30/2011 10.6+ Forms of Restricted Stock Unit Grant Notice and Restricted Stock UnitAgreement under 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  Incorporation By ReferenceExhibitNumber Exhibit Description Form SECFile No. Exhibit Filing Date 10.9 Amendment to Lease between Metropolitan Life Insurance and the Registrant,dated May 2, 2014 8-K 001-35068 10.1 5/7/2014 10.10 Amended and Restated Loan and Security Agreement among the Registrant,Hercules Technology II, L.P. and Hercules Technology Growth Capital, Inc.,dated as of December 16, 2013. 10-K 001-35068 10.10 3/17/2014 10.11 Consent and Amendment No. 2 to Amended and Restated Loan and SecurityAgreement, dated as of December 16, 2013, and amended as of September 24,2014, among the Registrant, Hercules Technology II, L.P. and HerculesTechnology Growth Capital, Inc. 10-Q 001-35068 10.8 11/3/2015 10.12 Amendment No. 3 to Amended and Restated Loan and Security Agreement,dated as of December 16, 2013, and amended as of September 30, 2016, amongthe Registrant, Hercules Technology II, L.P. and Hercules Capital, Inc.,formerly known as Hercules Technology Growth Capital, Inc. 10-Q 001-35068 10.2 11/2/2016 10.13+ Amended and Restated Offer Letter between the Registrant and Larry Hamel,dated December 31, 2010. S-1 333-170594 10.14 1/7/2011 10.14+ 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 10.15+ Amended and Restated Offer Letter between the Registrant and Pamela Palmer,dated December 29, 2010. S-1 333-170594 10.16 1/7/2011 10.16+ Offer Letter between the Registrant and Timothy E. Morris, dated March 24,2014. 10-Q 001-35068 10.3 5/8/2014 10.17+ Offer Letter between the Registrant and Jane Wright-Mitchell, dated June 13,2014. 10-K 001-35068 10.3 5/8/2014 10.18+ Offer Letter between the Registrant and Howard B. Rosen, effective as of April1, 2016. 10-Q 001-35068 10.3 5/2/2016 10.19+ Non-Employee Director Compensation Policy. 10-K 001-35068 Item 11 3/12/2013 10.20+ 2016 Cash Bonus Plan Summary. 8-K 001-35068 10.1 2/17/2016 10.21+ 2017 Cash Bonus Plan Summary. 8-K 001-35068 10.1 2/9/2017 10.22+ Amended and Restated Severance Benefit Plan effective as of February 7,2017. 8-K 001-35068 10.2 2/9/2017 10.23 Supply Agreement between the Registrant and Mallinckrodt LLC, effective asof May 31, 2013. 10-Q 001-35068 10.1 11/5/2013 10.24# Manufacture and Supply Agreement between the Registrant and GrünenthalGmbH, effective as of December 16, 2013. 10-K 001-35068 10.28 3/17/2014 10.25# Collaboration and License Agreement between the Registrant and GrünenthalGmbH, effective as of December 16, 2013. 10-K 001-35068 10.29 3/17/2014 10.26# First Amendment to the Manufacture and Supply Agreement between theRegistrant and Grünenthal GmbH, effective as of July 17, 2015. 10-Q 001-35068 10.2 11/3/2015 10.27# First Amendment to the Collaboration and License Agreement between theRegistrant and Grünenthal GmbH, effective as of July 17, 2015. 10-Q 001-35068 10.1 11/3/2015 10.28 Second Amendment to the Collaboration and License Agreement between theRegistrant and Grünenthal GmbH, effective as of September 20, 2016. 10-Q -001-35068 10.1 11/2/2016  Incorporation By ReferenceExhibitNumber Exhibit Description Form SECFile No. Exhibit Filing Date 10.29 Manufacturing Services Agreement between Registrant and PatheonPharmaceuticals, Inc., dated as of January 18, 2013 10-Q 001-35068 10.1 5/8/2013 10.30 Amended and Restated Capital Expenditure Agreement between Registrantand Patheon Pharmaceuticals, Inc., dated as of January 18, 2013 10-Q 001-35068 10.2 5/8/2013 10.31 Second Amendment to Amended and Restated Capital Expenditure andEquipment Agreement, between the Registrant and Patheon Pharmaceuticals,Inc. effective as of January 30, 2014. 10-Q 001-35068 10.4 5/8/2014 10.32# Amendment #1 to Manufacturing Services Agreement between the Registrantand Patheon Pharmaceuticals, Inc., effective as of January 19, 2016. 10-Q 001-35068 10.6 5/2/2016 10.33# Award/Contract between the Registrant and the U.S. Army Medical Researchand Materiel Command, dated May 11, 2015. 10-Q 001-35068 10.2 8/4/2015 10.34 Modification of Contract W81XWH-15-C-0046 between the Registrant and theU.S. Army Medical Research and Materiel Command, effective August 6, 2015. 10-Q 001-35068 10.3 11/3/2015 10.35 Modification of Contract W81XWH-15-C-0046 between the Registrant and theU.S. Army Medical Research and Materiel Command, effective August 12,2015. 10-Q 001-35068 10.4 11/3/2015 10.36 Modification of Contract W81XWH-15-C-0046 between the Registrant and theU.S. Army Medical Research and Materiel Command, effective September 4,2015. 10-Q 001-35068 10.5 11/3/2015 10.37# Modification of Contract W81XWH-15-C-0046 between the Registrant and theU.S. Army Medical Research and Materiel Command, effective January 22,2016. 10-Q 001-35068 10.4 5/2/2016 10.38 Modification of Contract W81XWH-15-C-0046 between the Registrant and theU.S. Army Medical Research and Materiel Command, effective March 3, 2016. 10-Q 001-35068 10.5 5/2/2016 10.39 Modification of Contract W81XWH-15-C-0046 between the Registrant and theU.S. Army Medical Research and Materiel Command, effective June 14, 2016. 10-Q 001-35068 10.3 7/29/2016 10.40# Purchase and Sale Agreement between Registrant and ARPI LLC, dated as ofSeptember 18, 2015. 10-Q 001-35068 10.6 11/3/2015 10.41# Subsequent Purchase and Sale Agreement between ARPI LLC (a wholly ownedsubsidiary of the Registrant) and PDL BioPharma, Inc., dated as of September18, 2015. 10-Q 001-35068 10.7 11/3/2015 10.42 Controlled Equity Offering Sales Agreement between the Registrant andCantor Fitzgerald & Co., dated as of June 21, 2016. 8-K 001-35068 10.1 6/21/2016 10.43 Amended and Restated Loan and Security Agreement among the Registrant,Hercules Technology II, L.P., Hercules Capital Funding Trust 2014-1 andHercules Technology II, L.P., dated as of March 2, 2017. 21.2 Subsidiaries of the Registrant. - 23.1 Consent of OUM & Co., LLP, Independent Registered Public Accounting Firm. SM Incorporation By ReferenceExhibitNumber Exhibit Description Form SECFile No. Exhibit Filing Date 23.2 Consent of Ernst & Young, LLP, Independent Registered Public AccountingFirm. 24.1 Power of Attorney (included in signature page). 31.1 Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and15d-14(a) promulgated under the Securities Exchange Act of 1934, asamended. 31.2 Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and15d-14(a) promulgated under the Securities Exchange Act of 1934, asamended. 32.1 Certifications of Chief Executive Officer and Chief Financial Officer pursuantto 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 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 10.43 AMENDED AND RESTATEDLOAN AND SECURITY AGREEMENT THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (the “Agreement”) is made and dated as of March 2, 2017, and isentered into by and between ACELRX PHARMACEUTICALS, INC., a Delaware corporation (sometimes referred to herein as the “Company”), each of itsDomestic Subsidiaries (hereinafter collectively referred to as the “Borrower”), HERCULES TECHNOLOGY II, L.P., a Delaware limited partnership, in itscapacity as administrative agent and collateral agent for itself and the Lender (in such capacity, “Agent”), HERCULES CAPITAL FUNDING TRUST2014-1 and HERCULES TECHNOLOGY II, L.P., a Delaware limited partnership (collectively, the “Lender”) and amends and restates in its entirety thatcertain Amended and Restated Loan and Security Agreement between Borrower, as the borrower and Hercules Technology II, L.P., a Delaware limitedpartnership, and Hercules Capital, Inc. (formerly known as Hercules Technology Growth Capital, Inc.), collectively as the lender, dated December 16,2013 (as amended by that certain Amendment No. 1 to Amended and Restated Loan and Security Agreement dated as of September 24, 2014, by thatcertain Amendment No. 2 to Amended and Restated Loan and Security Agreement dated as of September 18, 2015, and by that certain Amendment No. 3to Amended and Restated Loan and Security Agreement dated as of September 30, 2016, the “2013 Agreement”). RECITALS A. Borrower, Lender and Agent previously have entered into that certain 2013 Agreement, pursuant to which Lender has agreed to extend andmake available to Borrower certain advances of money, $20,466,325.15 (the “Existing Term Loan”) of which is currently outstanding. B. Borrower has requested Lender to make available to Borrower a loan in an aggregate principal amount of up to Thirty Million FourHundred Sixty-Six Thousand Three Hundred Twenty-Five and 15/100 Dollars ($30,466,325.15) (the “Term Loan”); C. The proceeds of the Term Loan will be used to refinance the Existing Term Loan funded under the 2013 Agreement and for generalcorporate purposes; and D. Lender is willing to extend the Term Loan on the terms and conditions set forth in this Agreement. AGREEMENT NOW, THEREFORE, Borrower, Agent and Lender agree as follows: SECTION 1. DEFINITIONS AND RULES OF CONSTRUCTION 1.1 Unless otherwise defined herein, the following capitalized terms shall have the following meanings: “Account Control Agreement(s)” means any agreement entered into by and among the Agent, Borrower and a third party Bank or otherinstitution (including a Securities Intermediary) in which Borrower maintains a Deposit Account or an account holding Investment Property and whichgrants Agent a perfected first priority security interest in the subject account or accounts.  “AcelRx Intellectual Property Rights” has the meaning set forth in the PSA. “ACH Authorization” means the ACH Debit Authorization Agreement in substantially the form of Exhibit H, which account numbersshall be redacted for security purposes if and when filed publicly by the Borrower. “Advance(s)” means a Term Loan Advance. “Advance Date” means the funding date of any Advance. “Advance Request” means a request for an Advance submitted by Borrower to Agent in substantially the form of Exhibit A, whichaccount numbers shall be redacted for security purposes if and when filed publicly by the Borrower. “Affiliate” means any Person that directly or indirectly controls, is controlled by, or is under common control with the Person inquestion. As used in the definition of “Affiliate,” the term “control” means the possession, directly or indirectly, of the power to direct or cause thedirection of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise. “Agent” has the meaning given to it in the preamble to this Agreement. “Agreement” has the meaning given to it in the preamble to this Agreement. “Amortization Date” means October 1, 2017; provided that, if Borrower achieves Interest Only Extension Conditions A, then theAmortization Date shall be April 1, 2018; provided further that, if Borrower achieves Interest Only Extension Conditions B, then the Amortization Dateshall be October 1, 2018. “ARX-04 NDA” means the new drug application filed by the Borrower with the FDA for product ARX-04. “Assignee” has the meaning given to it in Section 11.13. “Borrower Products” means all products, software, service offerings, technical data or technology currently being designed,manufactured or sold by Borrower or which Borrower intends to sell, license, or distribute in the future including any products or service offerings underdevelopment, collectively, together with all products, software, service offerings, technical data or technology that have been sold, licensed or distributedby Borrower since its incorporation. 2 “Cash” means all cash, cash equivalents and liquid funds. “Change in Control” means any reorganization, recapitalization, consolidation or merger (or similar transaction or series of relatedtransactions) of Company, sale or exchange of outstanding shares (or similar transaction or series of related transactions) of Company in which the holdersof Company’s outstanding shares immediately before consummation of such transaction or series of related transactions do not, immediately afterconsummation of such transaction or series of related transactions, retain shares representing more than fifty percent (50%) of the voting power of thesurviving entity of such transaction or series of related transactions (or the parent of such surviving entity if such surviving entity is wholly owned bysuch parent), in each case without regard to whether Company is the surviving entity. “Claims” has the meaning given to it in Section 11.10. “Closing Date” means the date of this Agreement. “Collateral” means the property described in Section 3. “Common Stock” means the Common Stock, $0.001 par value per share, of the Company. “Company Collection Account” has the meaning set forth in the PSA. “Company Distribution Account” has the meaning set forth in the PSA. “Confidential Information” has the meaning given to it in Section 11.12. “Contingent Obligation” means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person withrespect to (i) any Indebtedness, lease, dividend, letter of credit or other obligation of another, including any such obligation directly or indirectlyguaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectlyliable; (ii) any obligations with respect to undrawn letters of credit, corporate credit cards or merchant services issued for the account of that Person; and(iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, orother agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices;provided, however, that the term “Contingent Obligation” shall not include endorsements for collection or deposit in the ordinary course of business. Theamount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect ofwhich such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof asdetermined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligationsunder the guarantee or other support arrangement. 3 “Copyright License” means any written agreement granting any right to use any Copyright or Copyright registration, now owned orhereafter acquired by Borrower or in which Borrower now holds or hereafter acquires any interest. “Copyrights” means all copyrights, whether registered or unregistered, held pursuant to the laws of the United States of America, anyState thereof, or of any other country. “Deposit Accounts” means any “deposit accounts,” as such term is defined in the UCC, and includes any checking account, savingsaccount, or certificate of deposit. “Domestic Subsidiary” means any Subsidiary that is not a Foreign Subsidiary. “ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and the regulations promulgated thereunder. “Event of Default” has the meaning given to it in Section 9. “Excluded Assets” means the Licensed Product, the AcelRx Intellectual Property Rights, the Purchased Assets, the Purchased Interest,the Purchaser Portion, the Licensor Retained Amounts, the Payment Rights, the Royalties, the Grunenthal Agreements, the Company Collection Accountand the Company Distribution Account and all money, deposits, investment property, and other property now or at any time hereafter therein, and anyfunds deposited therein, and any interest thereon, any and all other rights, duties and obligations of Borrower under the Transaction Documents and theGrunenthal Agreements, and in each case all Proceeds of each of the foregoing and all additions and accessions to, all improvements to, substitutions andreplacements for, and rents, profits and products of each of the foregoing, so long as the PSA and SPSA are in effect. “Facility Charge” means one percent (1.0%) of the aggregate Term Loan Advances funded under this Agreement, payable on the dateeach such Term Loan Advance is funded. “FDA” means the U.S. Food and Drug Administration or any successor entity performing similar functions. “Financial Statements” has the meaning given to it in Section 7.1. “Foreign Subsidiary” means any Subsidiary other than a Subsidiary that is organized and existing under the laws of the United States ofAmerica or any state or commonwealth thereof or under the laws of the District of Columbia. “GAAP” means generally accepted accounting principles in the United States of America, as in effect from time to time. “Grunenthal License” means collectively that certain Collaboration and License Agreement entered into as of December 16, 2013between Company and Grunenthal GmbH, as amended, modified, supplemented or restated from time to time, including by that certain First Amendmentto the Collaboration and License Agreement effective as of July 17, 2015. 4 “Grunenthal Manufacture and Supply Agreement” means collectively that certain Manufacture and Supply Agreement entered into asof December 16, 2013 between Company and Grunenthal GmbH, as amended, modified, supplemented or restated from time to time, including by thatcertain First Amendment to the Manufacture and Supply Agreement effective as of July 17, 2015. “Grunenthal Agreements” means collectively the Grunenthal License and the Grunenthal Manufacture and Supply Agreement. “Indebtedness” means indebtedness of any kind, including (a) all indebtedness for borrowed money or the deferred purchase price ofproperty or services (excluding trade credit entered into in the ordinary course of business due within ninety (90) days of invoice date), includingreimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similarinstruments, (c) all capital lease obligations, and (d) all Contingent Obligations. “Indemnified Person” has the meaning given to it in Section 6.3. “Insolvency Proceeding” is any proceeding by or against any Person under the United States Bankruptcy Code, or any other bankruptcyor insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seekingreorganization, arrangement, or other similar relief. “Intellectual Property” means all of Borrower’s Copyrights; Trademarks; Patents; Licenses; trade secrets and inventions; mask works;Borrower’s applications therefor and reissues, extensions, or renewals thereof; and Borrower’s goodwill associated with any of the foregoing, togetherwith Borrower’s rights to sue for past, present and future infringement of Intellectual Property and the goodwill associated therewith, but specificallyexcluding any such property licensed to Grunenthal GmbH pursuant to the Grunenthal Agreements or to any other Person pursuant to a New LicenseAgreement for so long as the PSA and the SPSA remain in effect. “Interest Only Extension Conditions A” shall mean satisfaction of each of the following events: (a) no Event of Default shall haveoccurred and be continuing; and (b) Borrower shall have achieved the Liquidity Milestone. “Interest Only Extension Conditions B” shall mean satisfaction of each of the following events: (a) no Event of Default shall haveoccurred and be continuing; (b) Borrower shall have achieved the Liquidity Milestone; and (c) Borrower shall have achieved the Tranche 2 Milestone. “Investment” means any beneficial ownership (including stock, partnership or limited liability company interests) of or in any Person,or any loan, advance or capital contribution to any Person or the acquisition of all, or substantially all, of the assets of another Person. 5 “Joinder Agreements” means, for each Domestic Subsidiary, a completed and executed Joinder Agreement in substantially the formattached hereto as Exhibit G. “Lender” has the meaning given to it in the preamble to this Agreement. “Liabilities” has the meaning given to it in Section 6.3. “License” means any Copyright License, Patent License, Trademark License or other license of rights or interests. “Licensed Product” has the meaning set forth in the PSA. “Licensor Retained Amounts” has the meaning set forth in the PSA. “Lien” means any mortgage, deed of trust, pledge, hypothecation, assignment for security, security interest, encumbrance, levy, lien orcharge of any kind, whether voluntarily incurred or arising by operation of law or otherwise, against any property, any conditional sale or other titleretention agreement, and any lease in the nature of a security interest. “Liquidity Milestone” means Borrower shall have received at least $40,000,000 in net proceeds raised as a combination of up-frontcash proceeds from outlicensing or commercial partnering relating to ARX-04 and Zalviso to the extent such outlicensing or commercial partneringtransactions constitute Permitted Transfers, and from new equity after the Closing Date and on or before December 31, 2017. “Loan” means the Advances made under this Agreement. “Loan Documents” means this Agreement, the Notes (if any), the ACH Authorization, the Account Control Agreements, the JoinderAgreements, all UCC Financing Statements, the Warrant, and any other documents executed in connection with the Secured Obligations or thetransactions contemplated hereby, as the same may from time to time be amended, modified, supplemented or restated. “Material Adverse Effect” means a material adverse effect upon: (i) the business, operations, properties, assets, or condition (financial orotherwise) of Company and its Subsidiaries taken as a whole; or (ii) the ability of Borrower to perform or pay the Secured Obligations in accordance withthe terms of the Loan Documents, or the ability of Agent or Lender to enforce any of its rights or remedies with respect to the Secured Obligations; or (iii)the Collateral or Agent’s Liens on the Collateral or the priority of such Liens. “Maximum Term Loan Amount” means Thirty Million Four Hundred Sixty-Six Thousand Three Hundred Twenty-Five and 15/100Dollars ($30,466,325.15). “Maximum Rate” shall have the meaning assigned to such term in Section 2.3. 6 “New License Agreement” has the meaning set forth in the PSA. “Note” means a Secured Term Promissory Note in substantially the form of Exhibit B. “Patent License” means any written agreement granting any right with respect to any invention on which a Patent is in existence or aPatent application is pending, in which agreement Borrower now holds or hereafter acquires any interest. “Patents” means all letters patent of, or rights corresponding thereto, in the United States of America or in any other country, allregistrations and recordings thereof, and all applications for letters patent of, or rights corresponding thereto, in the United States of America or any othercountry. “Payment Rights” has the meaning set forth in the PSA. “PDL” means PDL BioPharma, Inc. “Permitted Indebtedness” means: (i) Indebtedness of Borrower in favor of Lender arising under this Agreement or any other LoanDocument; (ii) Indebtedness existing on the Closing Date which is disclosed in Schedule 1A; (iii) Indebtedness of up to $5,000,000 outstanding at anytime secured by a Lien described in clause (vii) of the defined term “Permitted Liens,” provided such Indebtedness does not exceed the lesser of the costor fair market value of the Equipment financed with such Indebtedness (measured at the time of incurrence); (iv) Indebtedness to trade creditors incurredin the ordinary course of business, including Indebtedness incurred in the ordinary course of business with corporate credit cards; (v) Indebtedness thatalso constitutes a Permitted Investment; (vi) Subordinated Indebtedness; (vii) reimbursement obligations in connection with letters of credit and cashmanagement services (including credit cards, debit cards and similar instruments) that are secured by cash or cash equivalents and issued on behalf of theBorrower or a Subsidiary thereof in an amount not to exceed $200,000 at any time outstanding; (viii) Indebtedness secured by a Lien described in clause(xi) of the defined term “Permitted Liens”; (ix) intercompany Indebtedness as long as either (A) each of the Subsidiary obligor and the Subsidiary obligeeunder such Indebtedness has executed a Joinder Agreement or (B) such Indebtedness constitutes a Permitted Investment; (x) obligations of Borrowerunder the Transaction Documents; (xi) other Indebtedness in an amount not to exceed $500,000 at any time outstanding; and (xii) extensions,refinancings and renewals of any items of Permitted Indebtedness, provided that the principal amount is not increased or the terms modified to imposematerially more burdensome terms upon Borrower or its Subsidiary, as the case may be. 7 “Permitted Investment” means: (i) Investments existing on the Closing Date which are disclosed in Schedule 1B; (ii) (a) marketabledirect obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one year fromthe date of acquisition thereof, (b) commercial paper maturing no more than one year from the date of creation thereof and currently having a rating of atleast A-2 or P-2 from either Standard & Poor’s Corporation or Moody’s Investors Service, (c) certificates of deposit issued by any bank with assets of atleast $500,000,000 maturing no more than one year from the date of investment therein, and (d) money market accounts; (iii) Investments consisting ofthe endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; (iv) repurchases of stockfrom current or former employees, directors, or consultants of Borrower under the terms of applicable repurchase agreements at the original issuance priceof such securities in an aggregate amount not to exceed $250,000 in any fiscal year, provided that no Event of Default has occurred, is continuing orwould exist after giving effect to the repurchases; (v) Investments accepted in connection with Permitted Transfers; (vi) Investments (including debtobligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, andother disputes with, customers or suppliers arising in the ordinary course of Borrower’s business; (vii) Investments consisting of notes receivable of, orprepaid royalties and other credit extensions, to customers and suppliers who are not Affiliates, in the ordinary course of business, provided that thissubparagraph (vii) shall not apply to Investments of Borrower in any Subsidiary; (viii) Investments consisting of loans not involving the net transfer on asubstantially contemporaneous basis of cash proceeds to employees, officers or directors relating to the purchase of capital stock of Borrower pursuant toemployee stock purchase plans or other similar agreements approved by Borrower’s Board of Directors; (ix) Investments consisting of travel advances,employee relocation loans and other employee loans and advances in the ordinary course of business and not in excess of $500,000 in the aggregate; (x)Investments in Domestic Subsidiaries, whether now existing or newly formed, provided that each such Domestic Subsidiary is party to a JoinderAgreement or enters into a Joinder Agreement promptly after its formation and has executed or executes such other related Loan Documents as arereasonably requested by Agent; (x) Investments in Foreign Subsidiaries approved in advance in writing by Agent; (xi) joint ventures or strategic alliancesin the ordinary course of Borrower’s business consisting of the nonexclusive licensing of technology, the development of technology or the providing oftechnical support, provided that any cash Investments by Borrower do not exceed $100,000 in the aggregate in any fiscal year; (xiii) Investmentsconstituting mergers or acquisitions permitted by Section 7.10; and (xiv) additional Investments that do not exceed $500,000 in the aggregate. 8 “Permitted Liens” means any and all of the following: (i) Liens in favor of Lender; (ii) Liens existing on the Closing Date which aredisclosed in Schedule 1C; (iii) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in goodfaith by appropriate proceedings; provided, that Borrower maintains adequate reserves therefor in accordance with GAAP to the extent required thereby;(iv) Liens securing claims or demands of materialmen, artisans, mechanics, carriers, warehousemen, landlords and other like Persons arising in theordinary course of Borrower’s business and imposed without action of such parties; provided, that the payment thereof is not overdue; (v) Liens arisingfrom judgments, decrees or attachments in circumstances which do not constitute an Event of Default hereunder; (vi) deposits to secure the performanceof obligations (including by way of deposits to secure letters of credit issued to secure the same) under commercial supply and/or manufacturingagreements in the ordinary course of business and the following deposits, to the extent made in the ordinary course of business: deposits under worker’scompensation, unemployment insurance, social security and other similar laws, or to secure the performance of bids, tenders or contracts (other than forthe repayment of borrowed money) or to secure indemnity, performance or other similar bonds for the performance of bids, tenders or contracts (other thanfor the repayment of borrowed money) or to secure statutory obligations (other than liens arising under ERISA or environmental liens) or surety or appealbonds, or to secure indemnity, performance or other similar bonds; (vii) Liens on Equipment or software or other intellectual property constitutingpurchase money liens, liens in connection with capital leases and liens securing Indebtedness permitted in clause (iii) of “Permitted Indebtedness”; (viii)Liens incurred in connection with Subordinated Indebtedness; (ix) leasehold interests in leases or subleases and licenses and sublicenses granted in theordinary course of business and not interfering in any material respect with the business of the licensor; (x) Liens in favor of customs and revenueauthorities arising as a matter of law to secure payment of custom duties that are promptly paid on or before the date they become due; (xi) Liens oninsurance proceeds securing the payment of financed insurance premiums that are promptly paid on or before the date they become due (provided thatsuch Liens extend only to such insurance proceeds and not to any other property or assets); (xii) statutory and common law rights of set-off and othersimilar rights as to deposits of cash and securities in favor of banks, other depository institutions and brokerage firms; (xiii) easements, zoningrestrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business so long as they do notmaterially impair the value or marketability of the related property; (xiv) Liens on cash or cash equivalents securing obligations permitted under clause(vii) of the definition of Permitted Indebtedness; (xv) Liens on Excluded Assets, for so long as the PSA and the SPSA are in effect; (xvi) Liens incurred inconnection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (i) through (xi) above;provided, that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount ofthe indebtedness being extended, renewed or refinanced (as may have been reduced by any payment thereon) does not increase. “Permitted Transfers” means (i) sales of Inventory in the normal course of business, (ii) non-exclusive licenses and similar arrangementsfor the use of Intellectual Property in the ordinary course of business and licenses that could not result in a legal transfer of title of the licensed propertybut that may be exclusive in respects other than territory and that may be exclusive as to territory only as to discrete geographical areas outside of theUnited States in the ordinary course of business, (iii) dispositions of worn-out, obsolete or surplus Equipment at fair market value in the ordinary course ofbusiness, (iv) dispositions expressly permitted under Section 7.7, 7.8 or 7.10 hereof, (v) dispositions arising from the abandonment of fixtures and othersimilar tenant improvements in connection with office relocations, (vi) transfers of Excluded Assets pursuant to the Grunenthal Agreements, any NewLicense Agreement, the PSA, the SPSA and the Servicing Agreement, including without limitation transfers of Royalties, Payment Rights, PurchasedAssets, the Purchaser Portion and the Purchased Interest, in each case for so long as the PSA and the SPSA are in effect; and (vii) other Transfers of assetshaving a fair market value of not more than $250,000 in the aggregate in any fiscal year. “Person” means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association,corporation, limited liability company, institution, other entity or government. 9 “Preferred Stock” means at any given time any equity security issued by Company that has any rights, preferences or privileges seniorto Company’s Common Stock. “Prepayment Charge” shall have the meaning assigned to such term in Section 2.5. “PSA” means that certain Purchase and Sale Agreement between Company, as seller, and ARPI LLC, as purchaser, dated as of September18, 2015, as amended, modified, supplemented or restated from time to time. “Publicity Materials” has the meaning given to it in Section 11.17. “Purchased Assets” has the meaning set forth in the PSA. “Purchased Interest” has the meaning set forth in the SPSA. “Purchaser Portion” has the meaning set forth in the PSA. “Receivables” means (i) all of Borrower’s Accounts, Instruments, Documents, Chattel Paper, Supporting Obligations, letters of credit,proceeds of any letter of credit, and Letter of Credit Rights, and (ii) all customer lists, software, and business records related thereto, but specificallyexcluding with respect to clauses (i) and (ii) any such property received under the Grunenthal Agreements or any New License Agreement, as applicable,and any Servicing Files, in each case for so long as the PSA and the SPSA are in effect. “Royalties” has the meaning set forth in the PSA. “Rule 144” means Rule 144 under the Securities Act. “Required Lenders” means, at any time, the holders of more than 50% of the aggregate unpaid principal amount of the Term Loans thenoutstanding. “SBA” shall have the meaning assigned to such term in Section 7.15. “SBIC” shall have the meaning assigned to such term in Section 7.15. “SBIC Act” shall have the meaning assigned to such term in Section 7.15. “SEC” means the Securities and Exchange Commission. “Secured Obligations” means Borrower’s obligations under this Agreement and any Loan Document, including any obligation to payany amount now owing or later arising. Notwithstanding the foregoing, the Secured Obligations shall not include any of Borrower’s obligations,liabilities or duties under the Warrant. “Securities Act” means the Securities Act of 1933, as amended. 10 “Servicing Agreement” means that certain Servicing Agreement by and among ARPI LLC, PDL and AcelRx, dated as of September 18,2015, as amended, modified, supplemented or restated from time to time. “Servicing Files” has the meaning set forth in the Servicing Agreement. “SPSA” means that certain Subsequent Purchase and Sale Agreement between ARPI LLC, as seller, and PDL, as purchaser, dated as ofSeptember 18, 2015, as amended, modified, supplemented or restated from time to time. “Subordinated Indebtedness” means Indebtedness subordinated to the Secured Obligations in amounts and on terms and conditionssatisfactory to Agent in its sole discretion. “Subsidiary” means an entity, whether corporate, partnership, limited liability company, joint venture or otherwise, in which Borrowerowns or controls 50% or more of the outstanding voting securities, including each entity listed on Schedule 1 hereto, but specifically excluding ARPILLC. “Term Commitment” means as to any Lender, the obligation of such Lender, if any, to make a Term Loan Advance to the Borrower in aprincipal amount not to exceed the amount set forth under the heading “Term Commitment” opposite such Lender’s name on Schedule 1.1. “Term Loan Advance” means any Term Loan funds advanced under this Agreement. “Term Loan Interest Rate” means for any day a per annum rate of interest equal to the greater of either (i) 9.55% plus the prime rate asreported in The Wall Street, minus 3.50%, and (ii) 9.55%. “Term Loan Maturity Date” means March 1, 2020, and if Borrower achieves Interest Only Extension Conditions A, then September 1,2020, and if Borrower achieves Interest Only Extension Conditions B, then March 1, 2021. “Trademark License” means any written agreement granting any right to use any Trademark or Trademark registration, now owned orhereafter acquired by Borrower or in which Borrower now holds or hereafter acquires any interest. “Trademarks” means all trademarks (registered, common law or otherwise) and any applications in connection therewith, includingregistrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States ofAmerica, any State thereof or any other country or any political subdivision thereof. “Tranche 1 Term Loan Advance” means an Advance in the amount of $20,466,325.15 to refinance the Existing Term Loan. 11 “Tranche 2 Milestone” means the FDA’s approval of the ARX-04 NDA on or before December 31, 2017. “Tranche 2 Term Loan Advance” means an Advance in an aggregate amount not to exceed $10,000,000 subject to Borrower’sachievement of the Tranche 2 Milestone and approval by Agent’s investment committee, such approval to be granted or withheld in its sole discretion. “UCC” means the Uniform Commercial Code as the same is, from time to time, in effect in the State of California; provided, that in theevent that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of, or remedies with respect to, Agent’s Lien onany Collateral is governed by the Uniform Commercial Code as the same is, from time to time, in effect in a jurisdiction other than the State of California,then the term “UCC” shall mean the Uniform Commercial Code as in effect, from time to time, in such other jurisdiction solely for purposes of theprovisions thereof relating to such attachment, perfection, priority or remedies and for purposes of definitions related to such provisions. “Transaction Documents” has the meaning set forth in the PSA. “Warrant” means any warrant, as amended from time to time, entered into in connection with the Loan. Unless otherwise specified, all references in this Agreement or any Annex or Schedule hereto to a “Section,” “subsection,” “Exhibit,” “Annex,”or “Schedule” shall refer to the corresponding Section, subsection, Exhibit, Annex, or Schedule in or to this Agreement. Unless otherwise specificallyprovided herein, any accounting term used in this Agreement or the other Loan Documents shall have the meaning customarily given such term inaccordance with GAAP, and all financial computations hereunder shall be computed in accordance with GAAP, consistently applied. Unless otherwisedefined herein or in the other Loan Documents, terms that are used herein or in the other Loan Documents and defined in the UCC shall have themeanings given to them in the UCC. SECTION 2. THE LOAN 2.1 Reserved. 2.2 Term Loan. (a) Advances. Subject to the terms and conditions of this Agreement, on the Closing Date Lender will severally (and not jointly) makea Tranche 1 Term Loan Advance in an amount not to exceed its respective Term Commitment, and Borrower agrees to draw a Tranche 1 TermLoan Advance of $20,466,325.15. Beginning April 1, 2017 and continuing through December 31, 2017, subject to Borrower’s achievement ofTranche 2 Milestone and approval by Agent’s investment committee, such approval to be granted or withheld in its sole discretion, Borrowermay request Tranche 2 Term Loan Advances in an aggregate amount up to $10,000,000 in minimum increments of $2,500,000. The aggregateoutstanding Term Loan Advances in connection with the Term Loan may be up to the Maximum Term Loan Amount. 12 (b) Advance Request. To obtain a Term Loan Advance, Borrower shall complete, sign and deliver an Advance Request (at least fivebusiness days before the Advance Date). Lender shall fund the Term Loan Advance in the manner requested by the Advance Request providedthat each of the conditions precedent to such Term Loan Advance is satisfied as of the requested Advance Date. (c) Interest. The principal balance of each Term Loan Advance shall bear interest thereon from such Advance Date at the Term LoanInterest Rate based on a year consisting of 360 days, with interest computed daily based on the actual number of days elapsed. The Term LoanInterest Rate will float and change on the day the Prime Rate changes from time to time. (d) Payment. Borrower will pay interest on each Term Loan Advance on the first day of each month, beginning the month after theClosing Date. Borrower shall repay the aggregate Term Loan principal balance that is outstanding on the day immediately preceding theAmortization Date, in equal monthly installments of principal and interest (mortgage style) beginning on the Amortization Date and continuingon the first business day of each month thereafter until the Secured Obligations (other than inchoate indemnity obligations) are repaid. Theentire Term Loan principal balance and all accrued but unpaid interest hereunder, shall be due and payable on the Term Loan Maturity Date.Borrower shall make all payments under this Agreement without setoff, recoupment or deduction and regardless of any counterclaim or defense.Lender will initiate debit entries to the Borrower’s account as authorized on the ACH Authorization (i) on each payment date of all periodicobligations payable to Lender under each Note or Term Loan Advance and (ii) for out-of-pocket legal fees and costs incurred by Agent or Lenderin connection with Section 11.11 of this Agreement. 2.3 Maximum Interest. Notwithstanding any provision in this Agreement, the Notes or any other Loan Document, it is the parties’ intentnot to contract for, charge or receive interest at a rate that is greater than the maximum rate permissible by law that a court of competent jurisdictionshall deem applicable hereto (which under the laws of the State of California shall be deemed to be the laws relating to permissible rates of intereston commercial loans) (the “Maximum Rate”). If a court of competent jurisdiction shall finally determine that Borrower has actually paid to Lenderan amount of interest in excess of the amount that would have been payable if all of the Secured Obligations had at all times borne interest at theMaximum Rate, then such excess interest actually paid by Borrower shall be deemed retroactively applied as of the date of receipt of such paymentas follows: first, to the payment of the Secured Obligations consisting of the outstanding principal; second, after all principal is repaid, to thepayment of Lender’s accrued interest, costs, expenses, professional fees and any other Secured Obligations; and third, after all Secured Obligationsare repaid, the excess (if any) shall be refunded to Borrower. 13 2.4 Default Interest. In the event any payment is not paid on the scheduled payment date, an amount equal to five percent (5%) of thepast due amount shall be payable on demand. In addition, upon the occurrence and during the continuation of an Event of Default hereunder, allSecured Obligations, including principal, interest, compounded interest, and professional fees payable in accordance with Section 11.11, shall bearinterest at a rate per annum equal to the rate set forth in Section 2.2(c) plus five percent (5%) per annum. In the event any interest is not paid whendue hereunder, delinquent interest shall be added to principal and shall bear interest on interest, compounded at the rate set forth in Section 2.2(c)or this Section 2.4, as applicable. 2.5 Prepayment. At its option upon at least seven (7) business days prior notice to Agent, Borrower may prepay all, but not less than all,of the outstanding Advances by paying the entire principal balance and all accrued and unpaid interest thereon, together with a prepayment chargeequal to the following percentage of the Advance amount being prepaid: if such Advance amounts are prepaid in any of the first twelve (12)months following the Closing Date, 3.0%; after twelve (12) months but prior to twenty four (24) months, 2.0%; and thereafter, 1.0% (each, a“Prepayment Charge”). Borrower agrees that the Prepayment Charge is a reasonable calculation of Lender’s lost profits in view of the difficultiesand impracticality of determining actual damages resulting from an early repayment of the Advances. Borrower shall prepay the outstandingamount of all principal and accrued interest through the prepayment date and the Prepayment Charge upon the occurrence of a Change in Control.Notwithstanding the above, no Prepayment Charge shall be due in connection with term loan advances funded under the Original Agreement. 2.6 End of Term Charge. (a) On the earliest to occur of (i) October 1, 2017, (ii) the date that Borrower prepays the outstanding Secured Obligations (other thanany inchoate indemnity obligations and any other obligations which, by their terms, are to survive the termination of this Agreement) in full(except to the extent refinanced hereunder), or (iii) the date that the Secured Obligations become due and payable, Borrower shall pay Lender acharge of $1,700,000 in connection with the term loan funded under the 2013 Agreement. Notwithstanding the required payment date of suchcharge, it shall be deemed earned by Lender as of December 16, 2013. (b) On the earliest to occur of (i) the Term Loan Maturity Date, (ii) the date that Borrower prepays the outstanding SecuredObligations (other than any inchoate indemnity obligations and any other obligations which, by their terms, are to survive the termination ofthis Agreement) in full (except to the extent refinanced hereunder), or (iii) the date that the Secured Obligations become due and payable,Borrower shall pay Lender a charge equal to 6.5% of the aggregate principal amount funded under the Term Loan. Notwithstanding the requiredpayment date of such charge, it shall be deemed earned by Lender as of the Closing Date. 14 2.7 Notes and Lender Investment Representations. If so requested by Lender by written notice to Borrower, then Borrower shall executeand deliver to Lender (and/or, if applicable and if so specified in such notice, to any Person who is an assignee of Lender pursuant to Section11.13) (promptly after the Borrower’s receipt of such notice) a Note or Notes to evidence Lender’s Loans. This Agreement and any Note are beingissued to Lender in reliance upon the following representations and covenants of Lender (which, for the avoidance of doubt, are being madeseverally, but not jointly, by each Lender): (a) Investment Purpose. The Note has been or to the extent not yet issued will be acquired by Lender for investment and not with aview to the sale or distribution of any part thereof, and Lender has no present intention of selling or engaging in any public distribution of thesame except pursuant to a registration under the Securities Act or an exemption from the registration requirements of the Securities Act. Lender isnot a registered broker-dealer under Section 15 of the Securities and Exchange Act of 1934 or an entity engaged in a business that would requireit to be so registered as a broker-dealer. (b) Financial Risk. The Lender has such knowledge and experience in financial and business matters as to be capable of evaluatingthe merits and risks of its investment in the Note, and has the ability to bear the economic risks of its investment. (c) Accredited Investor. The Lender is an “accredited investor” within the meaning of Rule 501 of Regulation D promulgated underthe Securities Act. (d) No Short Sales. The Lender has not engaged, and will not engage, in “short sales” of the Common Stock of the Company. The term“short sale” shall mean any sale of a security which the seller does not own or any sale which is consummated by the delivery of a securityborrowed by, or for the account of, the seller. 2.8 Pro Rata Treatment. Each payment (including prepayment) on account of any fee and any reduction of the Term Loans shall bemade pro rata according to the Term Commitments of the relevant Lender. SECTION 3. SECURITY INTEREST 3.1 As security for the prompt, complete and indefeasible payment when due (whether on the payment dates or otherwise) of all theSecured Obligations, Borrower grants to Agent and Lender a security interest in all of Borrower’s personal property now owned or hereafteracquired, including the following (collectively, the “Collateral”): (a) Receivables; (b) Equipment; (c) Fixtures; (d) General Intangibles (other thanIntellectual Property); (e) Inventory; (f) Investment Property; (g) Deposit Accounts; (h) Cash; (i) Goods; and other tangible and intangible personalproperty of Borrower whether now or hereafter owned or existing, leased, consigned by or to, or acquired by, Borrower and wherever located; and,to the extent not otherwise included, all Proceeds of each of the foregoing and all accessions to, substitutions and replacements for, and rents,profits and products of each of the foregoing; provided, however, that the Collateral shall include all Accounts and General Intangibles that consistof rights to payment and proceeds from the sale, licensing or disposition of all or any part, or rights in, the Intellectual Property (the “Rights toPayment”). Notwithstanding the foregoing, if a judicial authority (including a U.S. Bankruptcy Court) holds that a security interest in theunderlying Intellectual Property is necessary to have a security interest in the Rights to Payment, then the Collateral shall automatically, andeffective as of the date of this Agreement, include the Intellectual Property to the extent necessary to permit perfection of Lender’s security interestin the Rights to Payment. Upon payment in full in cash of the Secured Obligations (other than inchoate indemnity obligations and any otherobligations which, by their terms, are to survive the termination of this Agreement) and at such time as this Agreement has been terminated, theAgent and Lender shall, at Borrower’s sole cost and expense, release their Liens in the Collateral and all rights therein shall revert to Borrower. 15 3.2 Notwithstanding anything else set forth herein, the Collateral shall specifically exclude the Excluded Assets for so long as the PSAand SPSA remain in effect, but upon the termination or expiration of the PSA and the SPSA, the Excluded Assets (to the extent they do not consistof Intellectual Property) shall automatically be subject to the security interest granted in favor of Agent and Lender hereunder and become part ofthe Collateral. 3.3 Notwithstanding the broad grant of the security interest set forth in Section 3.1, above, the Collateral shall not include more than65% of the presently existing and hereafter arising issued and outstanding shares of capital stock owned by Borrower of any Foreign Subsidiarywhich shares entitle the holder thereof to vote for directors or any other matter. SECTION 4. CONDITIONS PRECEDENT TO LOAN The obligations of Lender to make the Loan hereunder are subject to the satisfaction by Borrower of the following conditions: 4.1 Initial Advance. On or prior to the Closing Date, Borrower shall have delivered to Agent the following: (a) executed copies of the Loan Documents (other than the Warrant, which shall be an original), Account Control Agreements, a legalopinion of Borrower’s counsel and all other documents and instruments reasonably required by Agent to effectuate the transactionscontemplated hereby or to create and perfect the Liens of Agent with respect to all Collateral, in all cases in form and substance reasonablyacceptable to Agent; (b) certified copy of resolutions of Borrower’s board of directors evidencing approval of (i) the Loan and other transactions evidencedby the Loan Documents; and (ii) the Warrant and transactions evidenced thereby; (c) certified copies of the Certificate of Incorporation and the Bylaws, as amended through the Closing Date, of Borrower; 16 (d) a certificate of good standing for Borrower from its state of incorporation and similar certificates from all other jurisdictions inwhich it does business and where the failure to be qualified would have a Material Adverse Effect; (e) payment of a Facility Charge in the amount of $204,663.25 and reimbursement of Agent’s and Lender’s current expensesreimbursable pursuant to this Agreement, which amounts may be deducted from the initial Advance; and (f) such other documents as Agent may reasonably request. 4.2 All Advances. On each Advance Date: (a) Agent shall have received (i) an Advance Request for the relevant Advance as required by Section 2.2(b), each duly executed byCompany’s Chief Executive Officer or Chief Financial Officer, and (ii) any other documents Agent may reasonably request. (b) The representations and warranties set forth in this Agreement shall be true and correct in all material respects on and as of theAdvance Date with the same effect as though made on and as of such date, except to the extent such representations and warranties expresslyrelate to an earlier date. (c) Borrower shall be in compliance with all the terms and provisions set forth herein and in each other Loan Document on its part tobe observed or performed, and at the time of and immediately after such Advance no Event of Default shall have occurred and be continuing. (d) Each Advance Request shall be deemed to constitute a representation and warranty by Borrower on the relevant Advance Date asto the matters specified in paragraphs (b) and (c) of this Section 4.2 and as to the matters set forth in the Advance Request. 4.3 No Default. As of the Closing Date and each Advance Date, (i) no fact or condition exists that would (or would, with the passage oftime, the giving of notice, or both) constitute an Event of Default and (ii) no event that has had or could reasonably be expected to have a MaterialAdverse Effect has occurred and is continuing. SECTION 5. REPRESENTATIONS AND WARRANTIES OF BORROWER Borrower represents and warrants that: 5.1 Corporate Status. Borrower is a corporation duly organized, legally existing and in good standing under the laws of the State ofDelaware, and is duly qualified as a foreign corporation in all jurisdictions in which the nature of its business or location of its properties requiresuch qualifications and where the failure to be qualified could reasonably be expected to have a Material Adverse Effect. Borrower’s present name,former names (if any), locations, place of formation, tax identification number, organizational identification number and other information arecorrectly set forth in Exhibit C, as may be updated by Borrower in a written notice (including any Compliance Certificate) provided to Lender afterthe Closing Date. 17 5.2 Collateral. Borrower owns the Collateral and the Intellectual Property, free of all Liens, except for Permitted Liens. Borrower has thepower and authority to grant to Lender a Lien in the Collateral as security for the Secured Obligations. 5.3 Consents. Borrower’s execution, delivery and performance of the Notes, this Agreement and all other Loan Documents, andBorrower’s execution of the Warrant, (i) have been duly authorized by all necessary corporate action of Borrower, (ii) will not result in the creationor imposition of any Lien upon the Collateral, other than Permitted Liens and the Liens created by this Agreement and the other Loan Documents,(iii) do not violate any provisions of Borrower’s Certificate or Articles of Incorporation (as applicable), bylaws, or any, law, regulation, order,injunction, judgment, decree or writ to which Borrower is subject and (iv) except as described on Schedule 5.3, do not violate any contract oragreement or require the consent or approval of any other Person which has not already been obtained. The individual or individuals executing theLoan Documents and the Warrant are duly authorized to do so. 5.4 Material Adverse Effect. Since June 30, 2016, no event that has had or could reasonably be expected to have a Material AdverseEffect has occurred and is continuing. Borrower is not aware of any event likely to occur that is reasonably expected to result in a Material AdverseEffect. 5.5 Actions Before Governmental Authorities. Except as described on Schedule 5.5, there are no actions, suits or proceedings at law orin equity or by or before any governmental authority now pending or, to the knowledge of Borrower, threatened in writing against or affectingBorrower or its property that could reasonably be expected to result in a Material Adverse Effect. 5.6 Laws. Borrower is not in violation of any law, rule or regulation, or in default with respect to any judgment, writ, injunction ordecree of any governmental authority, where such violation or default is reasonably expected to result in a Material Adverse Effect. Borrower is notin default in any manner under any provision of any agreement or instrument evidencing material Indebtedness, or any other material agreement towhich it is a party or by which it is bound. Borrower, its Subsidiaries, and, to the extent of the actual knowledge (but not implied knowledge) of theBorrower, its Affiliates and any agent or other party acting on behalf of Borrower, its Subsidiaries or its Affiliates are in compliance with allapplicable anti-money laundering, economic sanctions and anti-bribery laws and regulations, and none of the funds to be provided under thisAgreement will be used by Borrower or any of its Subsidiaries, directly or indirectly, for any activities in violation of such laws and regulations. 18 5.7 Information Correct and Current. No information, report, Advance Request, financial statement, exhibit or schedule furnished, by oron behalf of Borrower to Agent in connection with any Loan Document or included therein or delivered pursuant thereto contained, or, when takenas a whole, contains or will contain any material misstatement of fact or, when taken together with all other such information or documents,omitted, omits or will omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which theywere, are or will be made, not materially misleading at the time such statement was made or deemed made. Additionally, any and all financial orbusiness projections provided by Borrower to Agent, whether prior to or after the Closing Date, shall be (i) provided in good faith and based on themost current data and information available to Borrower, and (ii) the most current of such projections provided to Borrower’s Board of Directors (itbeing understood that such projections are subject to significant uncertainties and contingencies, many of which are beyond the control ofBorrower, that no assurance is given that any particular projections will be realized, that actual results may differ). 5.8 Tax Matters. Except as described on Schedule 5.8 and except those being contested in good faith with adequate reserves underGAAP, (a) Borrower has filed all material federal, state and local tax returns that it is required to file, (b) Borrower has duly paid or fully reserved forall taxes (other than de minimis amounts not exceeding Twenty Five Thousand Dollars ($25,000) in the aggregate) or installments thereof(including any interest or penalties) as and when due, which have or may become due pursuant to such returns, and (c) Borrower has paid or fullyreserved for any tax assessment received by Borrower for the three (3) years preceding the Closing Date, if any (including any taxes beingcontested in good faith and by appropriate proceedings). 5.9 Intellectual Property Claims. Borrower is the sole owner of, or otherwise has the right to use, the Intellectual Property necessary ormaterial to Borrower’s business. Except as described on Schedule 5.9, (i) each of the material Copyrights, Trademarks and Patents is valid andenforceable, (ii) no material part of the Intellectual Property has been judged invalid or unenforceable, in whole or in part, and (iii) no claim hasbeen made to Borrower that any material part of the Intellectual Property violates the rights of any third party. Exhibit D is a true, correct andcomplete list of each of Borrower’s Patents, registered Trademarks, registered Copyrights, and material agreements under which Borrower licensesIntellectual Property from third parties (other than shrink-wrap software licenses), together with application or registration numbers, as applicable,owned by Borrower or any Subsidiary, in each case as of the Closing Date. Borrower is not in material breach of, nor has Borrower failed to performany material obligations under, any of the foregoing contracts, licenses or agreements and, to Borrower’s knowledge, no third party to any suchcontract, license or agreement is in material breach thereof or has failed to perform any material obligations thereunder. 19 5.10 Intellectual Property. Except as described on Schedule 5.10, Borrower has, or in the case of any proposed business, will have, allmaterial rights with respect to Intellectual Property necessary or material in the operation or conduct of Borrower’s business as currently conductedand proposed to be conducted by Borrower. Without limiting the generality of the foregoing, and in the case of Licenses, except for restrictionsthat are unenforceable under Division 9 of the UCC, Borrower has the right, to the extent required to operate Borrower’s business, to freely transfer,license or assign Intellectual Property necessary or material in the operation or conduct of Borrower’s business as currently conducted by Borrowerwithout condition, restriction or payment of any kind (other than license payments in the ordinary course of business) to any third party, andBorrower owns or has the right to use, pursuant to valid licenses, all software development tools, library functions, compilers and all other third-party software and other items that are necessary or material to Borrower’s business and used in the design, development, promotion, sale, license,manufacture, import, export, use or distribution of Borrower Products, except customary covenants in inbound license agreements and equipmentleases where Borrower is the licensee or lessee. 5.11 Borrower Products. Except as described on Schedule 5.11, no Intellectual Property owned by Borrower and no Borrower Producthas been or is subject to any actual or, to the knowledge of Borrower, threatened in writing litigation, proceeding (including any proceeding in theUnited States Patent and Trademark Office or any corresponding foreign office or agency) or outstanding decree, order, judgment, settlementagreement or stipulation that restricts in any manner Borrower’s use, transfer or licensing thereof or that may affect the validity, use orenforceability thereof. There is no decree, order, judgment, agreement, stipulation, arbitral award or other provision entered into in connection withany litigation or proceeding that obligates Borrower to grant licenses or ownership interest in any future Intellectual Property related to theoperation or conduct of the business of Borrower or Borrower Products. Borrower has not received any written notice or claim, or, to the knowledgeof Borrower, oral notice or claim, challenging or questioning Borrower’s ownership in any Intellectual Property (or written notice of any claimchallenging or questioning the ownership in any licensed Intellectual Property of the owner thereof) or suggesting that any third party has anyclaim of legal or beneficial ownership with respect thereto nor, to Borrower’s knowledge, is there a reasonable basis for any such claim. NeitherBorrower’s use of its Intellectual Property nor the production and sale of Borrower Products infringes the Intellectual Property or other rights ofothers except where such use or production and sale could not reasonably be expected to cause a Material Adverse Effect. 5.12 Financial Accounts. Exhibit E, as may be updated by the Borrower in a written notice provided to Agent after the Closing Date, is atrue, correct and complete list of (a) all banks and other financial institutions at which Borrower or any Subsidiary maintains Deposit Accounts and(b) all institutions at which Borrower or any Subsidiary maintains an account holding Investment Property, and such exhibit correctly identifies thename, address and telephone number of each bank or other institution, the name in which the account is held, a description of the purpose of theaccount, and the complete account number therefor. 5.13 Employee Loans. Borrower has no outstanding loans to any employee, officer or director of the Borrower nor has Borrowerguaranteed the payment of any loan made to an employee, officer or director of the Borrower by a third party. 20 5.14 Capitalization and Subsidiaries. Borrower’s capitalization as of the Closing Date is set forth on Schedule 5.14 annexed hereto.Borrower does not own any stock, partnership interest or other securities of any Person, except for Permitted Investments. Attached as Schedule5.14, as may be updated by Borrower in a written notice provided after the Closing Date, is a true, correct and complete list of each Subsidiary. SECTION 6. INSURANCE; INDEMNIFICATION 6.1 Coverage. Borrower shall cause to be carried and maintained commercial general liability insurance, on an occurrence form, againstrisks customarily insured against in Borrower’s line of business. Such risks shall include the risks of bodily injury, including death, propertydamage, personal injury, advertising injury, and contractual liability per the terms of the indemnification agreement found in Section 6.3. Borrowermust maintain a minimum of $2,000,000 of commercial general liability insurance for each occurrence. Borrower has and agrees to maintain aminimum of $10,000,000 of directors’ and officers’ insurance for each occurrence and $10,000,000 in the aggregate. So long as there are anySecured Obligations (other than inchoate indemnity obligations) outstanding, Borrower shall also cause to be carried and maintained insuranceupon the Collateral, insuring against all risks of physical loss or damage, in an amount not less than the full replacement cost of the Collateral,provided that such insurance may be subject to standard exceptions and deductibles. Borrower shall also carry and maintain a fidelity insurancepolicy in an amount not less than $25,000. 6.2 Certificates. Borrower shall deliver to Agent certificates of insurance that evidence Borrower’s compliance with its insuranceobligations in Section 6.1 and the obligations contained in this Section 6.2. Borrower’s insurance certificate shall state Lender is an additionalinsured for commercial general liability, loss payee for all risk property damage insurance, subject to the insurer’s approval, and for any futureinsurance that Borrower may acquire from such or another insurer, Borrower shall use commercially reasonable efforts to cause such insurancecertificates to state that the Lender is a loss payee for property insurance and an additional insured for liability insurance for any future insurancethat Borrower may acquire from such insurer. Attached to the certificates of insurance will be additional insured endorsements for liability andlender’s loss payable endorsements for all risk property damage insurance. Borrower shall use commercially reasonable efforts to cause its agentsissuing all certificates of insurance to provide for a minimum of thirty (30) days advance written notice to Agent of cancellation (other thancancellation for non-payment of premiums, for which ten (10) days’ advance written notice shall be sufficient) or any other change adverse toAgent’s interests. Any failure of Agent to scrutinize such insurance certificates for compliance is not a waiver of any of Agent’s rights, all of whichare reserved. 21 6.3 Indemnity. Borrower agrees to indemnify and hold Agent, Lender and their officers, directors, employees, agents, in-house attorneys,representatives and shareholders (each, an “Indemnified Person”) harmless from and against any and all claims, costs, expenses, damages andliabilities (including such claims, costs, expenses, damages and liabilities based on liability in tort, including strict liability in tort), includingreasonable attorneys’ fees and disbursements and other costs of investigation or defense (including those incurred upon any appeal) (collectively,“Liabilities”), that may be instituted or asserted against or incurred by such Indemnified Person as the result of credit having been extended,suspended or terminated under this Agreement and the other Loan Documents or the administration of such credit, or in connection with or arisingout of the transactions contemplated hereunder and thereunder, or any actions or failures to act in connection therewith, or arising out of thedisposition or utilization of the Collateral, excluding in all cases Liabilities to the extent resulting solely from any Indemnified Person’s grossnegligence or willful misconduct. Borrower agrees to pay, and to save Agent and Lender harmless from, any and all liabilities with respect to, orresulting from any delay in paying, any and all excise, sales or other similar taxes (excluding taxes imposed on or measured by the net income ofAgent or Lender) that may be payable or determined to be payable with respect to any of the Collateral or this Agreement. In no event shallBorrower or any Indemnified Person be liable on any theory of liability for any special, indirect, consequential or punitive damages (including anyloss of profits, business or anticipated savings). This Section 6.3 shall survive the repayment of indebtedness under, and otherwise shall survive theexpiration or other termination of, the Loan Agreement. SECTION 7. COVENANTS OF BORROWER Borrower agrees as follows: 7.1 Financial Reports. Borrower shall furnish to Agent the financial statements and reports listed hereinafter (the “FinancialStatements”): (a) as soon as practicable (and in any event within 30 days) after the end of each month, unaudited interim and year-to-date financialstatements as of the end of such month (prepared on a consolidated and consolidating basis, if applicable), including balance sheet and relatedstatements of income and cash flows accompanied by a report detailing any material contingencies (including the commencement of anymaterial litigation by or against Borrower) or any other occurrence that would reasonably be expected to have a Material Adverse Effect, allcertified by Borrower’s Chief Executive Officer or Chief Financial Officer to the effect that they have been prepared in accordance with GAAP,except (i) for the absence of footnotes, (ii) that they are subject to normal year end adjustments, (iii) they do not contain certain non-cash itemsthat are customarily included in quarterly and annual financial statements, and (iv) for the first two months of each quarter only the balance sheetand income statement will be required; (b) as soon as practicable (and in any event within 45 days) after the end of each of the first three fiscal quarters of any fiscal year ofCompany, unaudited interim and year-to-date financial statements as of the end of such fiscal quarter (prepared on a consolidated basis),including balance sheet and related statements of income and cash flows accompanied by a report detailing any material contingencies(including the commencement of any material litigation by or against Borrower) or any other occurrence that would reasonably be expected tohave a Material Adverse Effect, certified by Company’s Chief Executive Officer or Chief Financial Officer to the effect that they have beenprepared in accordance with GAAP, except (i) for the absence of footnotes, and (ii) that they are subject to normal year end adjustments; as wellas the most recent capitalization table for Borrower, including the weighted average exercise price of employee stock options; 22 (c) as soon as practicable (and in any event within 90 days) after the end of each fiscal year, unqualified audited financial statementsas of the end of such year (prepared on a consolidated basis), including balance sheet and related statements of income and cash flows, andsetting forth in comparative form the corresponding figures for the preceding fiscal year, certified by a firm of independent certified publicaccountants selected by Borrower and reasonably acceptable to Lender (it being understood that OUM & Co. and any accountants of recognizednational or regional standing are acceptable to Lender), accompanied by any management report from such accountants; (d) as soon as practicable (and in any event within 30 days) after the end of each month, a Compliance Certificate in the form ofExhibit F; (e) promptly after the sending or filing thereof, as the case may be, copies of any proxy statements, financial statements or reports thatBorrower has made available to holders of its Preferred Stock and copies of any regular, periodic and special reports or registration statementsthat Borrower files with the SEC or any governmental authority that may be substituted therefor, or any national securities exchange; (f) [reserved]; and (g) financial and business projections promptly following their approval by Borrower’s Board of Directors, as well as other financialinformation reasonably requested by Lender. Borrower shall not make any change in its (a) accounting policies or reporting practices, except in accordance with GAAP or with the consent ofLender, or (b) fiscal years or fiscal quarters. The fiscal year of Borrower shall end on December 31. The executed Compliance Certificate may be sent via email to Agent at legal@herculestech.com. All Financial Statementsrequired to be delivered pursuant to clauses (a), (b) and (c) shall be sent via e-mail to financialstatements@herculestech.com with a copy tolegal@herculestech.com provided that, if e-mail is not available or sending such Financial Statements via e-mail is not possible, they shall be sentto Agent at: legal@herculestech.com, attention Chief Credit Officer. Notwithstanding the foregoing, documents required to be delivered pursuant to the terms hereof (to the extent any suchdocuments are included in materials otherwise filed with the SEC) may be delivered electronically and if so delivered, shall be deemed to havebeen delivered on the date on which Borrower emails a link thereto to Agent. 23 7.2 Management Rights. Borrower shall permit any representative that Agent or Lender authorizes, including its attorneys andaccountants, to inspect the Collateral and examine and make copies and abstracts of the books of account and records of Borrower at reasonabletimes and upon reasonable notice during normal business hours. Such inspections or examinations shall be conducted no more often than onceevery six months unless an Event of Default has occurred and is continuing. In addition, any such representative shall have the right to meet withmanagement and officers of Borrower to discuss such books of account and records. In addition, Agent or Lender shall be entitled at reasonabletimes and intervals to consult with and advise the management and officers of Borrower concerning significant business issues affecting Borrower.Such consultations shall not unreasonably interfere with Borrower’s business operations. The parties intend that the rights granted Agent andLender shall constitute “management rights” within the meaning of 29 C.F.R. Section 2510.3-101(d)(3)(ii), but that any advice, recommendationsor participation by Agent or Lender with respect to any business issues shall not be deemed to give Agent or Lender, nor be deemed an exercise byAgent or Lender of, control over Borrower’s management or policies. 7.3 Further Assurances. Borrower shall from time to time execute, deliver and file, alone or with Agent, any financing statements,security agreements, collateral assignments, notices, control agreements, or other documents to perfect or give the highest priority to Agent’s Lienon the Collateral (subject to Permitted Liens that are permitted pursuant to the terms of this Agreement to have superior priority to Agent’s Lienunder this Agreement). Borrower shall from time to time procure any instruments or documents as may be reasonably requested by Agent, and takeall further action that may be necessary or desirable, or that Agent may reasonably request, to perfect and protect the Liens granted hereby andthereby. In addition, and for such purposes only, Borrower hereby authorizes Agent to execute and deliver on behalf of Borrower and to file suchfinancing statements (including an indication that the financing statement covers “all assets” or “all personal property” of Borrower in accordancewith Section 9-504 of the UCC), collateral assignments, notices, control agreements, security agreements and other documents without thesignature of Borrower either in Agent’s name or in the name of Agent as agent and attorney-in-fact for Borrower. Borrower shall protect and defendBorrower’s title to the Collateral and Agent’s Lien thereon against all Persons claiming any interest adverse to Borrower or Agent other thanPermitted Liens. 7.4 [Reserved.] 7.5 Indebtedness. Borrower shall not create, incur, assume, guarantee or be or remain liable with respect to any Indebtedness, or permitany Subsidiary so to do, other than Permitted Indebtedness, or prepay any Indebtedness or take any actions which impose on Borrower anobligation to prepay any Indebtedness, except (a) for the conversion of Indebtedness into equity securities and the payment of cash in lieu offractional shares in connection with such conversion, (b) for purchase money Indebtedness permitted under this Agreement pursuant to its thenapplicable payment schedule, (c) for prepayment by any Subsidiary of (i) intercompany Indebtedness owed by such Subsidiary to any Borrower or(ii) if such Subsidiary is not a Borrower, intercompany Indebtedness owed by such Subsidiary to another Subsidiary that is not a Borrower or (d) asotherwise permitted hereunder or approved in writing by Agent. 24  7.6 Collateral. Borrower shall at all times keep the Collateral, the Intellectual Property and all other property and assets used inBorrower’s business or in which Borrower now or hereafter holds any interest free and clear from any legal process or Liens whatsoever (except forPermitted Liens), and shall give Agent prompt written notice of any legal process affecting the Collateral, the Intellectual Property, such otherproperty and assets, or any Liens thereon. Borrower shall cause its Subsidiaries to protect and defend such Subsidiary’s title to its assets from andagainst all Persons claiming any interest adverse to such Subsidiary, and Borrower shall cause its Subsidiaries at all times to keep such Subsidiary’sproperty and assets free and clear from any legal process or Liens whatsoever (except for Permitted Liens), and shall give Agent prompt writtennotice of any legal process affecting such Subsidiary’s assets. Except with respect to (i) specific property encumbered to secure payment ofparticular Indebtedness incurred to finance the acquisition of such property, (ii) Liens on Excluded Assets described in subsection (xv) of thedefinition of Permitted Liens, and (iii) restrictions by reason of customary provisions restricting assignment, subletting or other transfers containedin leases, licenses and similar agreements entered into in the ordinary course of business (provided that such restrictions are limited to the propertyor assets secured by such Liens, Excluded Assets or the property or assets subject to such leases, licenses or similar agreements, as the case may be),Borrower shall not agree with any Person other than Agent not to encumber its property. 7.7 Investments. Borrower shall not directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any ofits Subsidiaries so to do, other than Permitted Investments. 7.8 Distributions. Borrower shall not, and shall not allow any Subsidiary to, (a) repurchase or redeem any class of stock or other equityinterest other than pursuant to employee, director or consultant stock purchase or repurchase plans or other similar agreements, provided, however,in each case the repurchase or redemption price does not exceed the original consideration paid for such stock or equity interest, or (b) declare orpay any cash dividend or make a cash distribution on any class of stock or other equity interest, except that a Subsidiary may pay dividends ormake distributions to Borrower, or (c) lend money to any employees, officers or directors except as expressly permitted by clause (ix) of thedefinition of Permitted Investments, or guarantee the payment of any such loans granted by a third party in excess of $100,000 in the aggregate or(d) waive, release or forgive any Indebtedness owed by any employees, officers or directors in excess of $100,000 in the aggregate. 7.9 Transfers. Except for Permitted Transfers, neither Borrower nor its Subsidiaries shall voluntarily or involuntarily transfer, sell, lease,license, lend or in any other manner convey any equitable, beneficial or legal interest in any material portion of their assets. 25 7.10 Mergers or Acquisitions. Borrower shall not merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with orinto any other business organization (other than mergers or consolidations of (a) a Subsidiary which is not a Borrower into another Subsidiary orinto a Borrower, (b) a Borrower into another Borrower, (c) any Person into a Borrower in a transaction in which the surviving entity is suchBorrower or (d) any Person (other than a Borrower) into a Subsidiary in a transaction in which the surviving entity is such Subsidiary), or acquire,or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person, except for acquisitionspermitted by Section 7.7. 7.11 Taxes. Borrower and its Subsidiaries shall pay when due all taxes (other than de minimis amounts not exceeding Twenty FiveThousand Dollars ($25,000) in the aggregate), fees or other charges of any nature whatsoever (together with any related interest or penalties) nowor hereafter imposed or assessed against Borrower, Agent or Lender (to the extent assessed in connection with the making of the Loan hereunderbut excluding taxes on Lender’s net income) or the Collateral or upon Borrower’s ownership, possession, use, operation or disposition thereof orupon Borrower’s rents, receipts or earnings arising therefrom. Borrower shall file on or before the due date therefor all personal property tax returnsin respect of the Collateral. Notwithstanding the foregoing, Borrower may contest, in good faith and by appropriate proceedings, taxes for whichBorrower maintains adequate reserves therefor in accordance with GAAP. 7.12 Corporate Changes. Neither Borrower nor any Subsidiary shall change its corporate name, legal form or jurisdiction of formationwithout twenty (20) days’ prior written notice to Agent. Neither Borrower nor any Subsidiary shall suffer a Change in Control. Neither Borrowernor any Subsidiary shall relocate its chief executive office or its principal place of business unless: (i) it has provided prior written notice to Agent;and (ii) such relocation shall be within the continental United States of America. Neither Borrower nor any Domestic Subsidiary shall relocate anyitem of Collateral (other than (w) sales of Inventory in the ordinary course of business, (x) relocations of mobile Equipment, (y) relocations of otherEquipment having an aggregate value of up to $150,000 in any fiscal year, and (z) relocations of Collateral from a location described on Exhibit Cto another location described on Exhibit C) unless (i) it has provided prompt written notice to Agent, (ii) such relocation is within the continentalUnited States or to such other jurisdiction as designated in writing by Borrower from time to time, and, (iii) if such relocation is to a third partybailee, it has delivered a bailee agreement in form and substance reasonably acceptable to Agent. 7.13 Deposit Accounts. Neither Borrower nor any Domestic Subsidiary shall maintain any Deposit Accounts, or accounts holdingInvestment Property, except with respect to which Agent has an Account Control Agreement. 7.14 Borrower shall notify Agent of each Subsidiary formed subsequent to the Closing Date and, within 30 days of formation, shallcause any such Domestic Subsidiary to execute and deliver to Agent a Joinder Agreement. 26 7.15 Notification of Event of Default. Borrower shall notify Agent promptly upon becoming aware of the occurrence of any Event ofDefault, such notice to be sent via facsimile or email to Agent. 7.16 Agent and Lender have received a license from the U.S. Small Business Administration (“SBA”) to extend loans as a small businessinvestment company (“SBIC”) pursuant to the Small Business Investment Act of 1958, as amended, and the associated regulations (collectively,the “SBIC Act”). Portions of the loan to Borrower will be made under the SBA license and the SBIC Act. Addendum 1 to this Agreement outlinesvarious responsibilities of Agent, Lender and Borrower associated with an SBA loan, and such Addendum 1 is hereby incorporated in thisAgreement. SECTION 8. [RESERVED] SECTION 9. EVENTS OF DEFAULT The occurrence of any one or more of the following events shall be an Event of Default: 9.1 Payments. Borrower fails to pay any amount due under this Agreement, the Notes or any of the other Loan Documents on the duedate; provided, however, that an Event of Default shall not occur on account of a failure to pay due solely to an administrative or operational errorof Lender or Borrower's bank if Borrower had the funds to make the payment when due and makes the payment within three (3) business daysfollowing Borrower's knowledge of such failure to pay; or 9.2 Covenants. Borrower breaches or defaults in the performance of any covenant or Secured Obligation under this Agreement, theNotes, or any of the other Loan Documents, and (a) with respect to a default under any covenant under this Agreement (other than under Sections 6,7.5, 7.6, 7.7, 7.8, 7.9, 7.10, 7.15 and 7.16), such default continues for more than ten (10) days after the earlier of the date on which (i) Agent orLender has given notice of such default to Borrower and (ii) Borrower has actual knowledge of such default or (b) with respect to a default underany of Sections 6, 7.5, 7.6, 7.7, 7.8, 7.9, 7.10, 7.15 or 7.16, the occurrence of such default; or 9.3 Material Adverse Effect. A circumstance has occurred that would reasonably be expected to have a Material Adverse Effect; or 9.4 Other Loan Documents. The occurrence of any default under any Loan Document or any other agreement between Borrower andLender and such default continues for more than ten (10) days after the earlier of the date on which (a) Lender has given notice of such default toBorrower, or (b) Borrower has actual knowledge of such default; or 9.5 Representations. Any representation or warranty made by Borrower in any Loan Document or in the Warrant shall have been false ormisleading in any material respect; or 27 9.6 Insolvency. Borrower (A) (i) shall make an assignment for the benefit of creditors; or (ii) shall be unable to pay its debts as theybecome due, or be unable to pay or perform under the Loan Documents, or shall become insolvent; or (iii) shall file a voluntary petition inbankruptcy; or (iv) shall file any petition, answer, or document seeking for itself any reorganization, arrangement, composition, readjustment,liquidation, dissolution or similar relief under any present or future statute, law or regulation pertinent to such circumstances; or (v) shall seek orconsent to or acquiesce in the appointment of any trustee, receiver, or liquidator of Borrower or of all or any substantial part (i.e., 33-1/3% or more)of the assets or property of Borrower; or (vi) shall cease operations of its business as its business has normally been conducted, or terminatesubstantially all of its employees; or (vii) Borrower or its directors or majority shareholders shall take any action initiating any of the foregoingactions described in clauses (i) through (vi); or (B) either (i) forty-five (45) days shall have expired after the commencement of an involuntaryaction against Borrower seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under anypresent or future statute, law or regulation, without such action being dismissed or all orders or proceedings thereunder affecting the operations orthe business of Borrower being stayed; or (ii) a stay of any such order or proceedings shall thereafter be set aside and the action setting it aside shallnot be timely appealed; or (iii) Borrower shall file any answer admitting or not contesting the material allegations of a petition filed againstBorrower in any such proceedings; or (iv) the court in which such proceedings are pending shall enter a decree or order granting the relief sought inany such proceedings; or (v) forty-five (45) days shall have expired after the appointment, without the consent or acquiescence of Borrower, of anytrustee, receiver or liquidator of Borrower or of all or any substantial part of the properties of Borrower without such appointment being vacated; or 9.7 Attachments; Judgments. Any portion of Borrower’s assets is attached or seized, or a levy is filed against any such assets, or ajudgment or judgments is/are entered for the payment of money, individually or in the aggregate, of at least $500,000, and such judgment remainsunstayed for a period of ten (10) days, or Borrower is enjoined or in any way prevented by court order from conducting any part of its business; or 9.8 Other Obligations. The occurrence of any default (after giving effect to any grace or cure period, if any) under any agreement orobligation of Borrower involving any Indebtedness which results in a right by a third party or parties, whether or not exercised, to accelerate thematurity of such Indebtedness in excess of $250,000, or the occurrence of any default by Borrower under any agreement of Borrower involving anyIndebtedness that could reasonably be expected to have a Material Adverse Effect; or 9.9 Stop Trade. At any time after Lender has received shares of Common Stock pursuant to the terms set forth in Section 2.3(e), an SECstop trade order or NASDAQ market trading suspension of the Common Stock shall be in effect for five (5) consecutive days or five (5) days duringa period of ten (10) consecutive days, excluding in all cases a suspension of all trading on a public market, provided that Borrower shall not havebeen able to cure such trading suspension within thirty (30) days of the notice thereof or list the Common Stock on another public market withinsixty (60) days of such notice. 28 SECTION 10. REMEDIES 10.1 General. Upon and during the continuance of any one or more Events of Default, (i) Agent may, and at the direction of theRequired Lenders shall, accelerate and demand payment of all or any part of the Secured Obligations together with a Prepayment Charge anddeclare them to be immediately due and payable (provided, that upon the occurrence of an Event of Default of the type described in Section 9.6,the Notes and all of the Secured Obligations shall automatically be accelerated and made due and payable, in each case without any further noticeor act), (ii) Agent may, at its option, sign and file in Borrower’s name any and all collateral assignments, notices, control agreements, securityagreements and other documents it deems necessary or appropriate to perfect or protect the repayment of the Secured Obligations, and infurtherance thereof, Borrower hereby grants Agent an irrevocable power of attorney coupled with an interest, and (iii) Agent may notify any ofBorrower’s account debtors to make payment directly to Agent, compromise the amount of any such account on Borrower’s behalf and endorseAgent’s name without recourse on any such payment for deposit directly to Agent’s account. Agent may, and at the direction of the RequiredLenders shall, exercise all rights and remedies with respect to the Collateral under the Loan Documents or otherwise available to it under the UCCand other applicable law, including the right to release, hold, sell, lease, liquidate, collect, realize upon, or otherwise dispose of all or any part ofthe Collateral and the right to occupy, utilize, process and commingle the Collateral. All Agent’s rights and remedies shall be cumulative and notexclusive. 10.2 Collection; Foreclosure. Upon the occurrence and during the continuance of any Event of Default, Agent may, and at the directionof the Required Lenders shall, at any time or from time to time, apply, collect, liquidate, sell in one or more sales, lease or otherwise dispose of, anyor all of the Collateral, in its then condition or following any commercially reasonable preparation or processing, in such order as Agent may elect.Any such sale may be made either at public or private sale at its place of business or elsewhere. Borrower agrees that any such public or private salemay occur upon ten (10) calendar days’ prior written notice to Borrower. Agent may require Borrower to assemble the Collateral and make itavailable to Agent at a place designated by Agent that is reasonably convenient to Agent and Borrower. The proceeds of any sale, disposition orother realization upon all or any part of the Collateral shall be applied by Agent in the following order of priorities: First, to Agent and Lender in an amount sufficient to pay in full Agent’s and Lender’s reasonable costs and professionals’ andadvisors’ fees and expenses as described in Section 11.11; Second, to Lender in an amount equal to the then unpaid amount of the Secured Obligations (including principal, interest, andthe Default Rate interest), in such order and priority as Agent may choose in its sole discretion; and Finally, after the full and final payment in Cash of all of the Secured Obligations (other than inchoate obligations), to anycreditor holding a junior Lien on the Collateral, or to Borrower or its representatives or as a court of competent jurisdiction may direct. 29 Agent shall be deemed to have acted reasonably in the custody, preservation and disposition of any of the Collateral if it complies with the obligations ofa secured party under the UCC. 10.3 No Waiver. Agent shall be under no obligation to marshal any of the Collateral for the benefit of Borrower or any other Person, andBorrower expressly waives all rights, if any, to require Agent to marshal any Collateral. 10.4 Cumulative Remedies. The rights, powers and remedies of Agent hereunder shall be in addition to all rights, powers and remediesgiven by statute or rule of law and are cumulative. The exercise of any one or more of the rights, powers and remedies provided herein shall not beconstrued as a waiver of or election of remedies with respect to any other rights, powers and remedies of Agent. SECTION 11. MISCELLANEOUS 11.1 Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and validunder applicable law, but if any provision of this Agreement shall be prohibited by or invalid under such law, such provision shall be ineffectiveonly to the extent and duration of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisionsof this Agreement. 11.2 Notice. Except as otherwise provided herein, any notice, demand, request, consent, approval, declaration, service of process orother communication (including the delivery of Financial Statements) that is required, contemplated, or permitted under the Loan Documents orwith respect to the subject matter hereof shall be in writing, and shall be deemed to have been validly served, given, delivered, and received uponthe earlier of: (i) the day of transmission by electronic mail or hand delivery or delivery by an overnight express service or overnight mail deliveryservice; or (ii) the third calendar day after deposit in the United States of America mails, with proper first class postage prepaid, in each caseaddressed to the party to be notified as follows: If to Agent: HERCULES TECHNOLOGY II, L.P. as agentLegal DepartmentAttention: Chief Legal Officer and Himani Bhalla400 Hamilton Avenue, Suite 310Palo Alto, CA 94301email: legal@herculestech.comTelephone: 650-289-3060 30 If to Lender: HERCULES CAPITAL FUNDING TRUST 2014-1Legal DepartmentAttention: Chief Legal Officer and Himani Bhalla400 Hamilton Avenue, Suite 310Palo Alto, CA 94301email: legal@herculestech.comTelephone: 650-289-3060 and HERCULES TECHNOLOGY II, L.P.Legal DepartmentAttention: Chief Legal Officer and Himani Bhalla400 Hamilton Avenue, Suite 310Palo Alto, CA 94301email: legal@herculestech.comTelephone: 650-289-3060 If to Borrower: ACELRX PHARMACEUTICALS, INC.Attention: Chief Financial Officer351 Galveston DriveRedwood City, CA 94063email: [●]Telephone: [●] or to such other address as each party may designate for itself by like notice. 11.3 Entire Agreement; Amendments. This Agreement and the other Loan Documents constitute the entire agreement and understanding of the parties hereto in respect of the subject matterhereof and thereof, and supersede and replace in their entirety any prior proposals, term sheets, non-disclosure or confidentiality agreements, letters,negotiations or other documents or agreements, whether written or oral, with respect to the subject matter hereof or thereof. 31 Neither this Agreement, any other Loan Document, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance withthe provisions of this Section 11.3. The Required Lenders and Borrower party to the relevant Loan Document may, or, with the written consent of theRequired Lenders, the Agent and the Borrower party to the relevant Loan Document may, from time to time, (i) enter into written amendments,supplements or modifications hereto and to the other Loan Documents for the purpose of adding any provisions to this Agreement or the other LoanDocuments or changing in any manner the rights of the Lenders or of the Borrower hereunder or thereunder or (ii) waive, on such terms and conditions asthe Required Lenders or the Agent, as the case may be, may specify in such instrument, any of the requirements of this Agreement or the other LoanDocuments or any default or Event of Default and its consequences; provided, however, that no such waiver and no such amendment, supplement ormodification shall (A) forgive the principal amount or extend the final scheduled date of maturity of any Loan, extend the scheduled date of anyamortization payment in respect of any Term Loan, reduce the stated rate of any interest or fee payable hereunder) or extend the scheduled date of anypayment thereof, in each case without the written consent of each Lender directly affected thereby; (B) eliminate or reduce the voting rights of any Lenderunder this Section 11.3 without the written consent of such Lender; (C) reduce any percentage specified in the definition of Required Lenders, consent tothe assignment or transfer by the Borrower of any of its rights and obligations under this Agreement and the other Loan Documents, release all orsubstantially all of the Collateral or release a Borrower from its obligations under the Loan Documents, in each case without the written consent of allLenders; or (D) amend, modify or waive any provision of Section 11.17 without the written consent of the Agent. Any such waiver and any suchamendment, supplement or modification shall apply equally to each Lender and shall be binding upon Borrower, the Lender, the Agent and all futureholders of the Loans. 11.4 No Strict Construction. The parties hereto have participated jointly in the negotiation and drafting of this Agreement. In the eventan ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto and nopresumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement. 11.5 No Waiver. The powers conferred upon Agent and Lender by this Agreement are solely to protect its rights hereunder and under theother Loan Documents and its interest in the Collateral and shall not impose any duty upon Agent or Lender to exercise any such powers. Noomission or delay by Agent or Lender at any time to enforce any right or remedy reserved to it, or to require performance of any of the terms,covenants or provisions hereof by Borrower at any time designated, shall be a waiver of any such right or remedy to which Agent or Lender isentitled, nor shall it in any way affect the right of Agent or Lender to enforce such provisions thereafter. 11.6 Survival. All agreements, representations and warranties contained in this Agreement and the other Loan Documents or in anydocument delivered pursuant hereto or thereto shall be for the benefit of Agent and Lender and shall survive the execution and delivery of thisAgreement. Section 6.3 shall survive the termination of this Agreement. 11.7 Successors and Assigns. The provisions of this Agreement and the other Loan Documents shall inure to the benefit of and bebinding on Borrower and its permitted assigns (if any). Borrower shall not assign its obligations under this Agreement or any of the other LoanDocuments without Agent’s express prior written consent, and any such attempted assignment shall be void and of no effect. Agent and Lendermay assign, transfer, or endorse its rights hereunder and under the other Loan Documents without prior notice to Borrower, and all of such rightsshall inure to the benefit of Agent’s and Lender’s successors and assigns; provided that, as long as no Event of Default has occurred and iscontinuing, neither Agent nor any Lender may assign, transfer or endorse its rights hereunder or under the Loan Documents to any party that is adirect competitor of Borrower (as reasonably determined by Agent), it being acknowledged that, in all cases, any transfer to an Affiliate of anyLender or Agent shall be allowed. 32 11.8 Governing Law. This Agreement and the other Loan Documents have been negotiated and delivered to Agent and Lender in theState of California, and shall have been accepted by Agent and Lender in the State of California. Payment to Agent and Lender by Borrower of theSecured Obligations is due in the State of California. This Agreement and, except to the extent another jurisdiction is specified therein, the otherLoan Documents shall be governed by, and construed and enforced in accordance with, the laws of the State of California, excluding conflict oflaws principles that would cause the application of laws of any other jurisdiction. 11.9 Consent to Jurisdiction and Venue. All judicial proceedings (to the extent that the reference requirement of Section 11.10 is notapplicable) arising in or under or related to this Agreement or any of the other Loan Documents may be brought in any state or federal court locatedin the State of California. By execution and delivery of this Agreement, each party hereto generally and unconditionally: (a) consents tononexclusive personal jurisdiction in Santa Clara County, State of California; (b) waives any objection as to jurisdiction or venue in Santa ClaraCounty, State of California; (c) agrees not to assert any defense based on lack of jurisdiction or venue in the aforesaid courts; and (d) irrevocablyagrees to be bound by any judgment rendered thereby in connection with this Agreement or the other Loan Documents. Service of process on anyparty hereto in any action arising out of or relating to this Agreement shall be effective if given in accordance with the requirements for notice setforth in Section 11.2, and shall be deemed effective and received as set forth in Section 11.2. Nothing herein shall affect the right to serve processin any other manner permitted by law or shall limit the right of either party to bring proceedings in the courts of any other jurisdiction. 11.10 Mutual Waiver of Jury Trial / Judicial Reference. Because disputes arising in connection with complex financial transactions are most quickly and economically resolved by an experienced and expertPerson and the parties wish applicable state and federal laws to apply (rather than arbitration rules), the parties desire that their disputes be resolved by ajudge applying such applicable laws. EACH OF BORROWER, AGENT AND LENDER SPECIFICALLY WAIVES ANY RIGHT IT MAY HAVE TOTRIAL BY JURY OF ANY CAUSE OF ACTION, CLAIM, CROSS-CLAIM, COUNTERCLAIM, THIRD PARTY CLAIM OR ANY OTHER CLAIM(COLLECTIVELY, “CLAIMS”) ASSERTED BY BORROWER AGAINST AGENT, LENDER OR THEIR RESPECTIVE ASSIGNEE OR BY AGENT,LENDER OR THEIR RESPECTIVE ASSIGNEE AGAINST BORROWER. This waiver extends to all such Claims, including Claims that involve Personsother than Agent, Borrower and Lender; Claims that arise out of or are in any way connected to the relationship among Borrower, Agent and Lender; andany Claims for damages, breach of contract, tort, specific performance, or any equitable or legal relief of any kind, arising out of this Agreement, any otherLoan Document. 33 If the waiver of jury trial set forth in Section 11.10(a) is ineffective or unenforceable, the parties agree that all Claims shall be resolved by reference to aprivate judge sitting without a jury, pursuant to Code of Civil Procedure Section 638, before a mutually acceptable referee or, if the parties cannot agree, areferee selected by the Presiding Judge of the Santa Clara County, California. Such proceeding shall be conducted in Santa Clara County, California, withCalifornia rules of evidence and discovery applicable to such proceeding. In the event Claims are to be resolved by judicial reference, either party may seek from a court identified in Section 11.9, any prejudgment order, writ orother relief and have such prejudgment order, writ or other relief enforced to the fullest extent permitted by law notwithstanding that all Claims areotherwise subject to resolution by judicial reference. 11.11 Professional Fees. Borrower promises to pay Agent’s and Lender’s fees and expenses necessary to finalize the loandocumentation, including but not limited to reasonable attorneys fees, UCC searches, filing costs, and other miscellaneous expenses. In addition,Borrower promises to pay any and all reasonable attorneys’ and other professionals’ fees and expenses incurred by Agent and Lender after theClosing Date in connection with or related to: (a) the Loan; (b) the administration, collection, or enforcement of the Loan; (c) the amendment ormodification of the Loan Documents; (d) any waiver, consent, release, or termination under the Loan Documents; (e) the protection, preservation,audit, field exam, sale, lease, liquidation, or disposition of Collateral or the exercise of remedies with respect to the Collateral; (f) any legal,litigation, administrative, arbitration, or out of court proceeding in connection with or related to Borrower or the Collateral, and any appeal orreview thereof; and (g) any bankruptcy, restructuring, reorganization, assignment for the benefit of creditors, workout, foreclosure, or other actionrelated to Borrower, the Collateral, the Loan Documents, including representing Agent or Lender in any adversary proceeding or contested mattercommenced or continued by or on behalf of Borrower’s estate, and any appeal or review thereof. 11.12 Confidentiality. Agent and Lender acknowledge that certain items of Collateral and information provided to Agent and Lenderby Borrower are confidential and proprietary information of Borrower, if and to the extent such information either (x) is marked as confidential byBorrower at the time of disclosure, or (y) should reasonably be understood to be confidential (the “Confidential Information”). Accordingly, Agentand Lender agree that any Confidential Information it may obtain in the course of acquiring, administering, or perfecting Agent’s security interestin the Collateral shall not be disclosed to any other Person or entity in any manner whatsoever, in whole or in part, without the prior writtenconsent of Borrower, except that Agent and Lender may disclose any such information: (a) to its own directors, officers, employees, accountants,counsel and other professional advisors and to its Affiliates if Agent or Lender in their sole discretion determines that any such party should haveaccess to such information in connection with such party’s responsibilities in connection with the Loan or this Agreement and, provided that suchrecipient of such Confidential Information either (i) agrees to be bound by the confidentiality provisions of this paragraph or (ii) is otherwisesubject to confidentiality restrictions that reasonably protect against the disclosure of Confidential Information; (b) if such information is generallyavailable to the public through no fault of Agent or Lender; (c) if required or appropriate in any report, statement or testimony submitted to anygovernmental authority having or claiming to have jurisdiction over Agent or Lender; (d) if required or appropriate in response to any summons orsubpoena or in connection with any litigation, to the extent permitted or deemed advisable by Agent’s or Lender’s counsel; (e) to comply with anylegal requirement or law applicable to Agent or Lender; (f) to the extent reasonably necessary in connection with the exercise of any right orremedy under any Loan Document, including Agent’s sale, lease, or other disposition of Collateral after default; (g) to any participant or assigneeof Agent or Lender or any prospective participant or assignee; provided, that such participant or assignee or prospective participant or assigneeagrees in writing to be bound by this Section prior to disclosure; or (h) otherwise with the prior consent of Borrower; provided, that any disclosuremade in violation of this Agreement shall not affect the obligations of Borrower or any of its Affiliates or any guarantor under this Agreement orthe other Loan Documents. 34 11.13 Assignment of Rights. Borrower acknowledges and understands that Agent or Lender may sell and assign all or part of its interesthereunder and under the Note(s) (if any) and Loan Documents to any person or entity (an “Assignee”), provided, however, that any transfer byLender of the Note(s) (if any) shall be subject to compliance with applicable federal and state securities laws. After such assignment the term“Agent” or “Lender” as used in the Loan Documents shall mean and include such Assignee, and such Assignee shall be vested with all rights,powers and remedies of Agent and Lender hereunder with respect to the interest so assigned; but with respect to any such interest not so transferred,Agent and Lender shall retain all rights, powers and remedies hereby given. No such assignment by Agent or Lender shall relieve Borrower of anyof its obligations hereunder. Lender agrees that in the event of any transfer by it of the Note(s)(if any), it will endorse thereon a notation as to theportion of the principal of the Note(s), which shall have been paid at the time of such transfer and as to the date to which interest shall have beenlast paid thereon. 11.14 Revival of Secured Obligations. This Agreement and the Loan Documents shall remain in full force and effect and continue to beeffective if any petition is filed by or against Borrower for liquidation or reorganization, if Borrower becomes insolvent or makes an assignment forthe benefit of creditors, if a receiver or trustee is appointed for all or any significant part of Borrower’s assets, or if any payment or transfer ofCollateral is recovered from Agent or Lender. The Loan Documents and the Secured Obligations and Collateral security shall continue to beeffective, or shall be revived or reinstated, as the case may be, if at any time payment and performance of the Secured Obligations or any transfer ofCollateral to Agent, or any part thereof is rescinded, avoided or avoidable, reduced in amount, or must otherwise be restored or returned by, or isrecovered from, Agent, Lender or by any obligee of the Secured Obligations, whether as a “voidable preference,” “fraudulent conveyance,” orotherwise, all as though such payment, performance, or transfer of Collateral had not been made. In the event that any payment, or any part thereof,is rescinded, reduced, avoided, avoidable, restored, returned, or recovered, the Loan Documents and the Secured Obligations shall be deemed,without any further action or documentation, to have been revived and reinstated except to the extent of the full, final, and indefeasible payment toAgent or Lender in Cash. 35 11.15 Counterparts. This Agreement and any amendments, waivers, consents or supplements hereto may be executed in any number ofcounterparts, and by different parties hereto in separate counterparts, each of which when so delivered shall be deemed an original, but all of whichcounterparts shall constitute but one and the same instrument. 11.16 No Third Party Beneficiaries. No provisions of the Loan Documents are intended, nor will be interpreted, to provide or create anythird-party beneficiary rights or any other rights of any kind in any Person other than Agent, Lender and Borrower unless specifically providedotherwise herein, and, except as otherwise so provided, all provisions of the Loan Documents will be personal and solely among Agent, the Lenderand the Borrower. 11.17 Publicity. None of the parties hereto nor any of its respective member businesses and Affiliates shall, without the other parties’prior written consent (which shall not be unreasonably withheld or delayed), publicize or use (a) the other party's name (including a briefdescription of the relationship among the parties hereto), logo or hyperlink to such other parties’ web site, separately or together, in written andoral presentations, advertising, promotional and marketing materials, client lists, public relations materials or on its web site (together, the“Publicity Materials”); (b) the names of officers of such other parties in the Publicity Materials; and (c) such other parties’ name, trademarks,servicemarks in any news or press release concerning such party; provided however, notwithstanding anything to the contrary herein, no suchconsent shall be required (i) to the extent necessary to comply with the requests of any regulators, legal requirements or laws applicable to suchparty, pursuant to any listing agreement with any national securities exchange (so long as such party provides prior notice to the other party heretoto the extent reasonably practicable) and (ii) to comply with Section 11.12. 11.18 Agency. (a) Appointment. Lender hereby irrevocably appoints Hercules Technology II, L.P. to act on its behalf as the Agent hereunder andunder the other Loan Documents and authorizes the Agent to take such actions on its behalf and to exercise such powers as are delegated to theAgent by the terms hereof or thereof, together with such actions and powers as are reasonably incidental thereto. (b) Indemnification. Lender agrees to indemnify the Agent in its capacity as such (to the extent not reimbursed by Borrower andwithout limiting the obligation of Borrower to do so), according to its respective Term Commitment percentages (based upon the totaloutstanding Term Loan Commitments) in effect on the date on which indemnification is sought under this Section 11.18, from and against anyand all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever thatmay at any time be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of, this Agreement, any of theother Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby orany action taken or omitted by the Agent under or in connection with any of the foregoing. The agreements in this Section shall survive thepayment of the Loans and all other amounts payable hereunder. 36 (c) Agent in Its Individual Capacity. The Person serving as the Agent hereunder shall have the same rights and powers in its capacityas a Lender as any other Lender and may exercise the same as though it were not the Agent and the term “Lender” shall, unless otherwiseexpressly indicated or unless the context otherwise requires, include each such Person serving as Agent hereunder in its individual capacity. (d) Exculpatory Provisions. The Agent shall have no duties or obligations except those expressly set forth herein and in the otherLoan Documents. Without limiting the generality of the foregoing, the Agent shall not: (i)be subject to any fiduciary or other implied duties, regardless of whether any default or any Event of Default has occurredand is continuing; (ii)have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powersexpressly contemplated hereby or by the other Loan Documents that the Agent is required to exercise as directed in writingby the Lender, provided that the Agent shall not be required to take any action that, in its opinion or the opinion of itscounsel, may expose the Agent to liability or that is contrary to any Loan Document or applicable law; and (iii)except as expressly set forth herein and in the other Loan Documents, have any duty to disclose, and the Agent shall not beliable for the failure to disclose, any information relating to the Borrower or any of its Affiliates that is communicated to orobtained by any Person serving as the Agent or any of its Affiliates in any capacity. (e) The Agent shall not be liable for any action taken or not taken by it (i) with the consent or at the request of the Lender or as theAgent shall believe in good faith shall be necessary, under the circumstances or (ii) in the absence of its own gross negligence or willfulmisconduct. (f) The Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representationmade in or in connection with this Agreement or any other Loan Document, (ii) the contents of any certificate, report or other documentdelivered hereunder or thereunder or in connection herewith or therewith, (iii) the performance or observance of any of the covenants,agreements or other terms or conditions set forth herein or therein or the occurrence of any default or Event of Default, (iv) the validity,enforceability, effectiveness or genuineness of this Agreement, any other Loan Document or any other agreement, instrument or document or (v)the satisfaction of any condition set forth in Section 4 or elsewhere herein, other than to confirm receipt of items expressly required to bedelivered to the Agent. 37 (g) Reliance by Agent. Agent may rely, and shall be fully protected in acting, or refraining to act, upon, any resolution, statement,certificate, instrument, opinion, report, notice, request, consent, order, bond or other paper or document that it has no reason to believe to beother than genuine and to have been signed or presented by the proper party or parties or, in the case of cables, telecopies and telexes, to havebeen sent by the proper party or parties. In the absence of its gross negligence or willful misconduct, Agent may conclusively rely, as to the truthof the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to Agent and conforming tothe requirements of the Loan Agreement or any of the other Loan Documents. Agent may consult with counsel, and any opinion or legal adviceof such counsel shall be full and complete authorization and protection in respect of any action taken, not taken or suffered by Agent hereunderor under any Loan Documents in accordance therewith. Agent shall have the right at any time to seek instructions concerning the administrationof the Collateral from any court of competent jurisdiction. Agent shall not be under any obligation to exercise any of the rights or powersgranted to Agent by this Agreement, the Loan Agreement and the other Loan Documents at the request or direction of Lenders unless Agent shallhave been provided by Lender with adequate security and indemnity against the costs, expenses and liabilities that may be incurred by it incompliance with such request or direction. (SIGNATURES TO FOLLOW) 38 IN WITNESS WHEREOF, Borrower, Agent and Lender have duly executed and delivered this Amended and Restated Loan and SecurityAgreement as of the day and year first above written. BORROWER: ACELRX PHARMACEUTICALS, INC. Signature: /s/ Timothy E. Morris Print Name: Timothy E. Morris Title: Chief Financial Officer, Head of Business Development Accepted in Palo Alto, California: AGENT: HERCULES TECHNOLOGY II, L.P.,a Delaware limited partnership By: Hercules Technology SBICManagement, LLC, its General Partner By: Hercules Capital, Inc., its Manager By: /s/ Jennifer Choe Jennifer Choe, Assistant General Counsel LENDER: HERCULES CAPITAL FUNDING TRUST2014-1 /s/ Jennifer Choe Jennifer Choe, Assistant General CounselHERCULES TECHNOLOGY II, L.P.,a Delaware limited partnership By: Hercules Technology SBICManagement, LLC, its General Partner By: Hercules Capital, Inc., its Manager By: /s/ Jennifer Choe Jennifer Choe, Assistant General Counsel  Table of Addenda, Exhibits and Schedules Addendum 1:SBA Provisions Exhibit A:Advance RequestAttachment to Advance Request Exhibit B:Term Note Exhibit C:Name, Locations, and Other Information for Borrower Exhibit D:Borrower’s Patents, Trademarks, Copyrights and Licenses Exhibit E:Borrower’s Deposit Accounts and Investment Accounts Exhibit F:Compliance Certificate Exhibit G:Joinder Agreement Exhibit H:ACH Debit Authorization Agreement Schedule 1Subsidiaries Schedule 1.1Commitments Schedule 1AExisting Permitted Indebtedness Schedule 1BExisting Permitted Investments Schedule 1CExisting Permitted Liens Schedule 5.3Consents, Etc. Schedule 5.5Actions Before Governmental Authorities Schedule 5.8Tax Matters Schedule 5.9Intellectual Property Claims Schedule 5.10Intellectual Property Schedule 5.11Borrower Products Schedule 5.14Capitalization  ADDENDUM 1 to AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (h) Borrower’s Business. For purposes of this Addendum 1, Borrower shall be deemed to include its “affiliates” as defined in Title 13Code of Federal Regulations Section 121.103. Borrower represents and warrants to Agent and Lender as of the Closing Date and covenants toAgent and Lender for a period of one year after the Closing Date with respect to subsections 2, 3, 4, 5, 6 and 7 below, as follows: 1.Size Status. As of the Closing Date, Borrower’s NAIC is 325412, and Borrower has fewer than 750 employee in theaggregate; 2.No Relender. Borrower’s primary business activity does not involve, directly or indirectly, providing funds to others,purchasing debt obligations, factoring, or long-term leasing of equipment with no provision for maintenance or repair; 3.No Passive Business. Borrower is engaged in a regular and continuous business operation (excluding the mere receipt ofpayments such as dividends, rents, lease payments, or royalties). Borrower’s employees are carrying on the majority ofday to day operations. Borrower will not pass through substantially all of the proceeds of the Loan to another entity; 4.No Real Estate Business. Borrower is not classified under Major Group 65 (Real Estate) or Industry No. 1531 (OperativeBuilders) of the SIC Manual. The proceeds of the Loan will not be used to acquire or refinance real property unlessBorrower (x) is acquiring an existing property and will use at least 51 percent of the usable square footage for itsbusiness purposes; (y) is building or renovating a building and will use at least 67 percent of the usable square footagefor its business purposes; or (z) occupies the subject property and uses at least 67 percent of the usable square footage forits business purposes. 5.No Project Finance. Borrower’s assets are not intended to be reduced or consumed, generally without replacement, asthe life of its business progresses, and the nature of Borrower’s business does not require that a stream of cash paymentsbe made to the business's financing sources, on a basis associated with the continuing sale of assets (e.g., real estatedevelopment projects and oil and gas wells). The primary purpose of the Loan is not to fund production of a single itemor defined limited number of items, generally over a defined production period, where such production will constitutethe majority of the activities of Borrower (e.g., motion pictures and electric generating plants).  6.No Farm Land Purchases. Borrower will not use the proceeds of the Loan to acquire farm land which is or is intended tobe used for agricultural or forestry purposes, such as the production of food, fiber, or wood, or is so taxed or zoned. 7.No Foreign Investment. The proceeds of the Loan will not be used substantially for a foreign operation. At the time ofthe Loan, Borrower will not have more than 49 percent of its employees or tangible assets located outside the UnitedStates of America. The representation in this subsection (7) is made only as of the date hereof and shall not continue forone year as contemplated in the first sentence of this Section 1. (i) Small Business Administration Documentation. Agent and Lender acknowledge that Borrower completed, executed and deliveredto Agent SBA Forms 480, 652 and 1031 (Parts A and B) together with a business plan showing Borrower’s financial projections (includingbalance sheets and income and cash flows statements) for the period described therein and a written statement (whether included in the purchaseagreement or pursuant to a separate statement) from Agent regarding its intended use of proceeds from the sale of securities to Lender (the “Useof Proceeds Statement”). Borrower represents and warrants to Agent and Lender that the information regarding Borrower and its affiliates setforth in the SBA Form 480, Form 652 and Form 1031 and the Use of Proceeds Statement delivered as of the Closing Date is accurate andcomplete. (j) Inspection. The following covenants contained in this Section (c) are intended to supplement and not to restrict the relatedprovisions of the Loan Documents. Subject to the preceding sentence, Borrower will permit, for so long as Lender holds any debt or equitysecurities of Borrower, Agent, Lender or their representative, at Agent’s or Lender’ expense, and examiners of the SBA to visit and inspect theproperties and assets of Borrower, to examine its books of account and records, and to discuss Borrower’s affairs, finances and accounts withBorrower’s officers, senior management and accountants, all at such reasonable times as may be requested by Agent or Lender or the SBA. (k) Annual Assessment. Promptly after the end of each calendar year (but in any event prior to February 28 of each year) and at suchother times as may be reasonably requested by Agent or Lender, Borrower will deliver to Agent a written assessment of the economic impact ofLender’s investment in Borrower, specifying the full-time equivalent jobs created or retained in connection with the investment, the impact ofthe investment on the businesses of Borrower in terms of expanded revenue and taxes, other economic benefits resulting from the investment(such as technology development or commercialization, minority business development, or expansion of exports) and such other information asmay be required regarding Borrower in connection with the filing of Lender’s SBA Form 468. Lender will assist Borrower with preparing suchassessment. In addition to any other rights granted hereunder, Borrower will grant Agent and Lender and the SBA access to Borrower’s booksand records for the purpose of verifying the use of such proceeds. Borrower also will furnish or cause to be furnished to Agent and Lender suchother information regarding the business, affairs and condition of Borrower as Agent or Lender may from time to time reasonably request.  (l) Use of Proceeds. Borrower will use the proceeds from the Loan only for purposes set forth in Section 7.16. Borrower will deliverto Agent from time to time promptly following Agent’s request, a written report, certified as correct by Borrower's Chief Financial Officer,verifying the purposes and amounts for which proceeds from the Loan have been disbursed. Borrower will supply to Agent such additionalinformation and documents as Agent reasonably requests with respect to its use of proceeds and will permit Agent and Lender and the SBA tohave access to any and all Borrower records and information and personnel as Agent deems necessary to verify how such proceeds have been orare being used, and to assure that the proceeds have been used for the purposes specified in Section 7.16. (m) Activities and Proceeds. Neither Borrower nor any of its affiliates (if any) will engage in any activities or use directly orindirectly the proceeds from the Loan for any purpose for which a small business investment company is prohibited from providing funds by theSBIC Act, including 13 C.F.R. §107.720. Without obtaining the prior written approval of Agent, Borrower will not change within 1 year of thedate hereof, Borrower’s current business activity to a business activity which a licensee under the SBIC Act is prohibited from providing fundsby the SBIC Act. (n) Redemption Provisions. Notwithstanding any provision to the contrary contained in the Certificate of Incorporation of Borrower,as amended from time to time (the “Charter”), if, pursuant to the redemption provisions contained in the Charter, Lender is entitled to aredemption of its Warrant, such redemption (in the case of Lender) will be at a price equal to the redemption price set forth in the Charter (the“Existing Redemption Price”). If, however, Lender delivers written notice to Borrower that the then current regulations promulgated under theSBIC Act prohibit payment of the Existing Redemption Price in the case of an SBIC (or, if applied, the Existing Redemption Price would causeits common stock to lose its classification as an “equity security” and Lender has determined that such classification is unadvisable), the amountLender will be entitled to receive shall be the greater of (i) fair market value of the securities being redeemed taking into account the rights andpreferences of such securities plus any costs and expenses of the Lender incurred in making or maintaining the Warrant, and (ii) the ExistingRedemption Price where the amount of accrued but unpaid dividends payable to the Lender is limited to Borrower's earnings plus any costs andexpenses of the Lender incurred in making or maintaining the Warrant; provided, however, the amount calculated in subsections (i) or (ii) aboveshall not exceed the Existing Redemption Price.  (o) Compliance and Resolution. Borrower agrees that a failure to comply with Borrower’s obligations under this Addendum, or anyother set of facts or circumstances where it has been asserted by any governmental regulatory agency (or Agent or Lender believes that there is asubstantial risk of such assertion) that Agent, Lender and their affiliates are not entitled to hold, or exercise any significant right with respect to,any securities issued to Lender by Borrower, will constitute a breach of the obligations of Borrower under the financing agreements amongBorrower, Agent and Lender. In the event of (i) a failure to comply with Borrower’s obligations under this Addendum; or (ii) an assertion by anygovernmental regulatory agency (or Agent or Lender believes that there is a substantial risk of such assertion) of a failure to comply withBorrower’s obligations under this Addendum, then (i) Agent, Lender and Borrower will meet and resolve any such issue in good faith to thesatisfaction of Borrower, Agent, Lender, and any governmental regulatory agency, and (ii) upon request of Lender or Agent, Borrower willcooperate and assist with any assignment of the financing agreements among Hercules Technology II, L.P. and Hercules Capital, Inc.  EXHIBIT A ADVANCE REQUEST To: Agent: Date: __________, 20__ Hercules Technology II, L.P. (the “Agent”) 400 Hamilton Avenue, Suite 310 Palo Alto, CA 94301 email: legal@herculestech.com Attn: AcelRx Pharmaceuticals, Inc. (“Borrower”) hereby requests from Hercules Technology II, L.P. and Hercules Capital Funding Trust 2014-1 (collectively,“Lender”) an Advance in the amount of _____________________ Dollars ($________________) on ______________, _____ (the “Advance Date”)pursuant to the Amended and Restated Loan and Security Agreement among Borrower, Agent and Lender (the “Agreement”). Capitalized words and otherterms used but not otherwise defined herein are used with the same meanings as defined in the Agreement. Please: (a) Issue a check payable to Borrower ________ or (b) Wire Funds to Borrower’s account ________ [IF FILED PUBLICLY, ACCOUNT INFO REDACTED FOR SECURITYPURPOSES] Bank: _____________________________ Address: _____________________________ _____________________________ ABA Number: _____________________________ Account Number: _____________________________ Account Name: _____________________________ Contact Person: _____________________________ Phone Number To Verify Wire Info: _____________________________ Email address: _____________________________ Borrower represents that the conditions precedent to the Advance set forth in the Agreement are satisfied and shall be satisfied upon the makingof such Advance, including but not limited to: (i) that no event that has had or could reasonably be expected to have a Material Adverse Effect hasoccurred and is continuing; (ii) that the representations and warranties set forth in the Agreement and in the Warrants are and shall be true and correct inall material respects on and as of the Advance Date with the same effect as though made on and as of such date, except to the extent such representationsand warranties expressly relate to an earlier date; (iii) that Borrower is in compliance with all the terms and provisions set forth in each Loan Document onits part to be observed or performed; and (iv) that as of the Advance Date, no fact or condition exists that would (or would, with the passage of time, thegiving of notice, or both) constitute an Event of Default under the Loan Documents. Borrower understands and acknowledges that Agent has the right toreview the financial information supporting this representation and, based upon such review in its sole discretion, Lender may decline to fund therequested Advance.  Borrower hereby represents that Borrower’s corporate status and locations have not changed since the date of the Agreement or, if theAttachment to this Advance Request is completed, are as set forth in the Attachment to this Advance Request. Borrower agrees to notify Agent promptly before the funding of the Loan if any of the matters which have been represented above shall not betrue and correct on the Borrowing Date and if Agent has received no such notice before the Advance Date then the statements set forth above shall bedeemed to have been made and shall be deemed to be true and correct as of the Advance Date. Executed as of [ ], 20[ ]. BORROWER: AcelRx Pharmaceuticals,Inc. SIGNATURE:________________________TITLE:_____________________________PRINT NAME:______________________  ATTACHMENT TO ADVANCE REQUEST Dated: _______________________ Borrower hereby represents and warrants to Lender that Borrower’s current name and organizational status is as follows: Name:AcelRx Pharmaceuticals, Inc. Type of organization:Corporation State of organization:Delaware Organization file number:3998627 Borrower hereby represents and warrants to Agent that the street addresses, cities, states and postal codes of its current locations are as follows:  EXHIBIT B THIS SECURED TERM PROMISSORY NOTE HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THESECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF1933, AS AMENDED, AND, ACCORDINGLY, MAY NOT BE TRANSFERRED UNLESS (I) THIS NOTE HAS BEEN REGISTERED FOR SALEPURSUANT TO THE SECURITIES ACT OF 1933, AS AMENDED, (II) THIS NOTE MAY BE SOLD PURSUANT TO RULE 144, OR (III) THEBORROWER HAS RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IT THAT SUCH TRANSFER MAY LAWFULLY BEMADE WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SECURED TERM PROMISSORY NOTE $[ ],000,000Advance Date: ___ __, 20[ ] Maturity Date: _____ ___, 20[ ] FOR VALUE RECEIVED, AcelRx Pharmaceuticals, Inc., a Delaware corporation (the “Borrower”), hereby promises to pay to the order of_____________ or the holder of this Note (the “Lender”) at 400 Hamilton Avenue, Suite 310, Palo Alto, CA 94301 or such other place of payment as theholder of this Secured Term Promissory Note (this “Promissory Note”) may specify from time to time in writing, in lawful money of the United States ofAmerica, the principal amount of [ ] Million Dollars ($[ ],000,000) or such other principal amount as Lender has advanced to Borrower, together withinterest at a rate as set forth in Section 2.2(c) of the Loan Agreement based upon a year consisting of 360 days, with interest computed daily based on theactual number of days in each month. This Promissory Note is the one of the Notes referred to in, and is executed and delivered in connection with, that certain Amended and RestatedLoan and Security Agreement dated March 2, 2017, by and among Borrower, Hercules Technology II, L.P. (the “Agent”) and the several banks and otherfinancial institutions or entities from time to time party thereto as lender (as the same may from time to time be amended, modified or supplemented inaccordance with its terms, the “Loan Agreement”), and is entitled to the benefit and security of the Loan Agreement and the other Loan Documents (asdefined in the Loan Agreement), to which reference is made for a statement of all of the terms and conditions thereof. All payments shall be made inaccordance with the Loan Agreement. All terms defined in the Loan Agreement shall have the same definitions when used herein, unless otherwisedefined herein. An Event of Default under the Loan Agreement shall constitute a default under this Promissory Note. Borrower waives presentment and demand for payment, notice of dishonor, protest and notice of protest under the UCC or any applicable law.Borrower agrees to make all payments under this Promissory Note without setoff, recoupment or deduction and regardless of any counterclaim or defense.This Promissory Note has been negotiated and delivered to Lender and is payable in the State of California. This Promissory Note shall be governed byand construed and enforced in accordance with, the laws of the State of California, excluding any conflicts of law rules or principles that would cause theapplication of the laws of any other jurisdiction. BORROWERACELRX PHARMACEUTICALS, INC. By: _______________________________ Title: ______________________________  EXHIBIT C NAME, LOCATIONS, AND OTHER INFORMATION FOR BORROWER 1. Borrower represents and warrants to Agent that Borrower’s current name and organizational status as of the Closing Date is as follows: Name:AcelRx Pharmaceuticals, Inc. Type of organization:Corporation State of organization:Delaware Organization file number:3998627 2. Borrower represents and warrants to Agent that for five (5) years prior to the Closing Date, Borrower did not do business under any other nameor organization or form except the following: Name: Used during dates of: Type of Organization: State of organization: Organization file Number: 3. Borrower’s fiscal year ends on December 31. 4. Borrower’s federal employer tax identification number is: 41-2193603 5. Borrower represents and warrants to Lender that its chief executive office is located at 351 Galveston Drive, Redwood City, CA 94063.  EXHIBIT D BORROWER’S PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES See attached chart of patents. ACELRX, THE ACELRX LOGO, ARX, NANOTAB, ACCELERATE.INNOVATE.ALLEVIATE., ZALVISO AND ASSOCIATED LOGO ARETRADEMARKS OF ACELRX PHARMACEUTICALS, INC.  EXHIBIT E BORROWER’S DEPOSIT ACCOUNTS AND INVESTMENT ACCOUNTS DEPOSIT ACCOUNTS Depository Institution (name and address)Account TypeAccount NumberAccount HolderWells Fargo BankDemand[●]AcelRx Pharmaceuticals, Inc. INVESTMENT ACCOUNTS Securities Intermediary (name and address)Account TypeAccount NumberAccount HolderMorgan Stanley & Co.Securities[●]AcelRx Pharmaceuticals, Inc.  EXHIBIT F COMPLIANCE CERTIFICATE Hercules Technology II, L.P. (as “Agent”)400 Hamilton Avenue, Suite 310Palo Alto, CA 94301 Reference is made to that certain Amended and Restated Loan and Security Agreement dated March 2, 2017 and the Loan Documents (asdefined therein) entered into in connection with such Amended and Restated Loan and Security Agreement all as may be amended from time to time(hereinafter referred to collectively as the “Loan Agreement”) by and among Hercules Technology II, L.P. (the “Agent”), the several banks and otherfinancial institutions or entities from time to time party thereto (collectively, the “Lender”) and AcelRx Pharmaceutical, Inc. (the “Company”) asBorrower. All capitalized terms not defined herein shall have the same meaning as defined in the Loan Agreement. The undersigned is an Officer of the Company, knowledgeable of all Company financial matters, and is authorized to provide certification ofinformation regarding the Company; hereby certifies, in such capacity, that in accordance with the terms and conditions of the Loan Agreement, except asset forth below, the Company is in compliance for the period ending ___________ of all covenants, conditions and terms and hereby reaffirms that allrepresentations and warranties contained therein are true and correct on and as of the date of this Compliance Certificate with the same effect as thoughmade on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date, after giving effect in all cases toany standard(s) of materiality contained in the Loan Agreement as to such representations and warranties. Attached are the required documents supportingthe above certification. The undersigned further certifies that the financial statements delivered pursuant to Section 7.1(a) and 7.1(b), if applicable, areprepared in accordance with GAAP (except for the absence of footnotes with respect to unaudited financial statement and subject to normal year endadjustments) and are consistent from one period to the next except as explained below. Exception(s): __________________________________________________________________ REPORTING REQUIREMENTREQUIREDCHECK IFATTACHED Interim Financial StatementsMonthly within 30 days ☐ Interim Financial StatementsWithin 45 days after each of the first 3 fiscalquarters of each fiscal year ☐ Audited Financial StatementsFYE within 90 days ☐  The undersigned hereby also confirms the below disclosed accounts represent all depository accounts and securities accounts presently open in the nameof each Borrower or Borrower Subsidiary/Affiliate, as applicable. DepositoryAC # FinancialInstitution Account Type(Depository /Securities) Last MonthEndingAccountBalance Purpose ofAccount BORROWERName/Address: 1 2 3 4 BORROWERSUSIDIARY /AFFILIATECOMPANYName/Address 1 2 3 4 Very Truly Yours, ACELRX PHARMACEUTICALS, INC. By: Name: Its:  EXHIBIT G FORM OF JOINDER AGREEMENT This Joinder Agreement (the “Joinder Agreement”) is made and dated as of [ ], 20[ ], and is entered into by and between__________________, a___________ (“Subsidiary”), and HERCULES TECHNOLOGY II, L.P., a Delaware limited partnership (as “Agent”). RECITALS A. Subsidiary’s Affiliate, AcelRx Pharmaceuticals, Inc., a Delaware corporation (“Company”) [has entered/desires to enter] into that certainAmended and Restated Loan and Security Agreement dated March 2, 2017, with the several banks and other financial institutions or entities from time totime party thereto as lender (collectively, the “Lender”) and the Agent, as such agreement may be amended (the “Loan Agreement”), together with theother agreements executed and delivered in connection therewith; B. Subsidiary acknowledges and agrees that it will benefit both directly and indirectly from Company’s execution of the Loan Agreement andthe other agreements executed and delivered in connection therewith; AGREEMENT NOW THEREFORE, Subsidiary and Agent agree as follows: 1.The recitals set forth above are incorporated into and made part of this Joinder Agreement. Capitalized terms not defined herein shall have themeaning provided in the Loan Agreement. 2.By signing this Joinder Agreement, Subsidiary shall be bound by the terms and conditions of the Loan Agreement the same as if it were the Borrower(as defined in the Loan Agreement) under the Loan Agreement, mutatis mutandis, provided however, that (a) with respect to (i) Section 5.1 of theLoan Agreement, Subsidiary represents that it is an entity duly organized, legally existing and in good standing under the laws of [ ], (b) neitherAgent nor Lender shall have any duties, responsibilities or obligations to Subsidiary arising under or related to the Loan Agreement or the other LoanDocuments, (c) that if Subsidiary is covered by Company’s insurance, Subsidiary shall not be required to maintain separate insurance or comply withthe provisions of Sections 6.1 and 6.2 of the Loan Agreement, and (d) that as long as Company satisfies the requirements of Section 7.1 of the LoanAgreement, Subsidiary shall not have to provide Agent separate Financial Statements. To the extent that Agent or Lender has any duties,responsibilities or obligations arising under or related to the Loan Agreement or the other Loan Documents, those duties, responsibilities orobligations shall flow only to Company and not to Subsidiary or any other Person or entity. By way of example (and not an exclusive list): (i)Agent’s providing notice to Company in accordance with the Loan Agreement or as otherwise agreed among Company, Agent and Lender shall bedeemed provided to Subsidiary; (ii) a Lender’s providing an Advance to Company shall be deemed an Advance to Subsidiary; and (iii) Subsidiaryshall have no right to request an Advance or make any other demand on Lender.  3.Subsidiary agrees not to certificate its equity securities without Agent’s prior written consent, which consent may be conditioned on the delivery ofsuch equity securities to Agent in order to perfect Agent’s security interest in such equity securities. 4.Subsidiary acknowledges that it benefits, both directly and indirectly, from the Loan Agreement, and hereby waives, for itself and on behalf on anyand all successors in interest (including without limitation any assignee for the benefit of creditors, receiver, bankruptcy trustee or itself as debtor-in-possession under any bankruptcy proceeding) to the fullest extent provided by law, any and all claims, rights or defenses to the enforcement of thisJoinder Agreement on the basis that (a) it failed to receive adequate consideration for the execution and delivery of this Joinder Agreement or (b) itsobligations under this Joinder Agreement are avoidable as a fraudulent conveyance. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]  [SIGNATURE PAGE TO JOINDER AGREEMENT] SUBSIDIARY: _________________________________. By: Name: Title: Address: Telephone: ___________email: ____________ AGENT: HERCULES TECHNOLOGY II, L.P. By: Hercules Technology SBIC Management, LLC, its General Partner By: Hercules Capital, Inc., its Manager By:____________________________________Name:__________________________________Title: ___________________________________ Address:400 Hamilton Ave., Suite 310Palo Alto, CA 94301email: legal@herculestech.comTelephone: 650-289-3060  EXHIBIT H ACH DEBIT AUTHORIZATION AGREEMENT Hercules Technology II, L.PHercules Capital Funding Trust 2014-1400 Hamilton Avenue, Suite 310Palo Alto, CA 94301 Re: Amended and Restated Loan and Security Agreement dated March 2, 2017 (the “Agreement”) by and among AcelRx Pharmaceuticals, Inc.(“Borrower”) and Hercules Technology II, L.P., as agent (“Company”) and the lenders party thereto (collectively, the “Lender”) In connection with the above referenced Agreement, the Borrower hereby authorizes the Company to initiate debit entries for (i) the periodic paymentsdue under the Agreement and (ii) out-of-pocket legal fees and costs incurred by Agent or Lender pursuant to Section 11.11 of the Agreement to theBorrower’s account indicated below. The Borrower authorizes the depository institution named below to debit to such account. [IF FILED PUBLICLY, ACCOUNT INFO REDACTED FOR SECURITY PURPOSES] This authority will remain in full force and effect so long as any amounts are due under the Agreement. ACELRX PHARMACEUTICALS, INC. By: _________________________________________ Date: ________________________________________ DEPOSITORY NAMEBRANCHCITYSTATE AND ZIP CODETRANSIT/ABA NUMBERACCOUNT NUMBER SCHEDULE 1.1 COMMITMENTS LENDERTRANCHE 1 TERMCOMMITMENTTRANCHE 1 TERMCOMMITMENTPERCENTAGE Hercules Technology II, L.P. $6,822,108.3933.33%Hercules Capital Funding Trust2014-1 $13,644,216.7666.67%TOTAL TRANCHE 1COMMITMENTS $20,466,325.15100% LENDERTRANCHE 2 TERMCOMMITMENTTRANCHE 2 TERMCOMMITMENTPERCENTAGE TOTAL TRANCHE 2COMMITMENTS $10,000,000.00100% Exhibit 21.2 SUBSIDIARIES OF THE REGISTRANT ARPI LLC, duly formed under the laws of the State of Delaware, a wholly owned subsidiary of AcelRx Pharmaceuticals, Inc. Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the following Registration Statements: (j)Registration Statements on Form S-8 (Nos. 333-209998, 333-202709, 333-194634, 333-187206 and 333-180334) pertaining to the 2011 EquityIncentive Plan, (ii)Registration Statements on Form S-8 (Nos. 333-209998 and 333-180334) pertaining to the 2011 Equity Incentive Plan and 2011 Employee StockPurchase Plan, (iii)Registration Statement on Form S-8 (No. 333-172409) pertaining to the 2006 Stock Plan, 2011 Equity Incentive Plan and 2011 Employee StockPurchase Plan, (iv)Registration Statement on Form S-3 and Amendment No. 1 to Registration Statement on Form S-3 (No. 333-196089), (v)Registration Statement on Form S-3MEF (Nos. 333-190003), and (vi)Registration Statements on Form S-3 (Nos. 333-183237 and 333-182245) of our reports dated March 2, 2017, with respect to the consolidated financial statements and the effectiveness of internal control over financial reporting ofAcelRx Pharmaceuticals, Inc. included in this Annual Report on Form 10-K of AcelRx Pharmaceuticals, Inc. for the year ended December 31, 2016. /s/ OUM & CO. LLP San Francisco, CaliforniaMarch 2, 2017 Exhibit 23.2 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statements: (1) Registration Statements on Form S-8 Nos. 333-209998, 333-202709, 333-194634, 333-187206 and 333-180334 pertaining to the 2011 EquityIncentive Plan of AcelRx Pharmaceuticals, Inc., (2) Registration Statements on Form S-8 Nos. 333-209998 and 333-180334 pertaining to the 2011 Equity Incentive Plan and 2011 Employee StockPurchase Plan of AcelRx Pharmaceuticals, Inc., (3) Registration Statement on Form S-8 No. 333-172409 pertaining to the 2006 Stock Plan, 2011 Equity Incentive Plan and 2011 Employee StockPurchase Plan of AcelRx Pharmaceuticals, Inc., and (4) Registration Statements Form S-3 No. 333-196089, 333-190003, 333-183237, 333-182245 of AcelRx Pharmaceuticals, Inc. and in the relatedprospectuses; of our report dated March 12, 2015, except for Note 1 and 7, as to which the date is March 7, 2016, with respect to the consolidated financial statementsof AcelRx Pharmaceuticals, Inc., included in this Annual Report on Form 10-K of AcelRx Pharmaceuticals, Inc. for the year ended December 31, 2016. /s/ Ernst & Young LLP Redwood City, CaliforniaMarch 2, 2017 Exhibit 31.1 CERTIFICATIONS I, Howard B. Rosen, 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 2, 2017 /s/ Howard B. Rosen Howard B. Rosen Chief Executive Officer (Principal Executive 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 2, 2017 /s/ Timothy E. Morris Timothy E. Morris Chief Financial Officer (Principal Financial Officer) 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), Howard B. Rosen, interim 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, 2016, 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 2nd day of March, 2017. /s/ Howard B. Rosen /s/ Timothy E. MorrisHoward B. RosenChief 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.” 

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