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Medical Facilities CorporationUNITED 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, 2017 or ☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-35068ACELRX PHARMACEUTICALS, INC.(Exact name of registrant as specified in its charter) Delaware41-2193603(State or other jurisdiction ofincorporation or organization)(IRS EmployerIdentification No.)351 Galveston DriveRedwood City, CA 94063(650) 216-3500(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)Securities registered pursuant to Section 12(b) of the Act: Title of Each ClassName of Each Exchange on Which RegisteredCommon Stock, $0.001 par valueThe NASDAQ Stock Market LLC Securities registered pursuant to Section 12(g) of the Act:NoneIndicate 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, a smaller reporting company, oran emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growthcompany” in Rule 12b-2 of the Exchange Act.Large accelerated filer ☐Accelerated filer ☑Non-accelerated filer ☐ (Do not check if a smaller reporting company)Smaller reporting company ☐Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with anynew or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐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, 2017 (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$75,622,608. The calculation excludes 10,207,167 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 26, 2018, the number of outstanding shares of the registrant’s common stock was 50,899,154.DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's notice of annual meeting of stockholders and proxy statement to be filed pursuant to Regulation 14A within120 days after Registrant's fiscal year end of December 31, 2017, are incorporated by reference into Part III of this report. 1 ACELRX PHARMACEUTICALS, INC. 2017 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Page PART I Item 1. Business4Item 1A. Risk Factors27Item 1B. Unresolved Staff Comments60Item 2. Properties60Item 3. Legal Proceedings60Item 4. Mine Safety Disclosures60PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities61Item 6. Selected Financial Data63Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations64Item 7A. Quantitative and Qualitative Disclosures About Market Risk78Item 8. Financial Statements and Supplementary Data78Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure78Item 9A. Controls and Procedures78Item 9B. Other Information80PART III Item 10. Directors, Executive Officers and Corporate Governance81Item 11. Executive Compensation81Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters81Item 13. Certain Relationships and Related Transactions, and Director Independence81Item 14. Principal Accounting Fees and Services81PART IV Item 15. Exhibits, Financial Statement Schedules81Item 16. Form 10-K Summary85Signatures86 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 successfully respond to the Complete Response Letter, or CRL, for DSUVIATM (sufentanil sublingual tablet, 30 mcg) andexecute the pathway towards a resubmission of the DSUVIA New Drug Application, or NDA, in the United States; •our ability to obtain, without further delays, and maintain regulatory approval of DSUVIA in the United States and any related restrictions,limitations, and/or warnings in the label of an approved product candidate; •our ability to obtain, without delays, and maintain regulatory approval of the Marketing Authorization Application, or MAA, for DZUVEO inthe European Union or EU, and any related restrictions, limitations, and/or warnings in the label of an approved product candidate; •our ability to successfully execute the pathway towards a resubmission of the ZALVISO NDA and subsequently obtain, without furtherdelays, and maintain regulatory approval of ZALVISO in the United States and any related restrictions, limitations, and/or warnings in thelabel of an approved product candidate; •the outcome of any potential FDA Advisory Committee meeting held for any of our product candidates; •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 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 payer 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; •our liquidity and capital resources; and •our ability to obtain and maintain intellectual property protection for our product candidates. 3 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 use in medically supervisedsettings. Our product candidates, focused on the treatment of acute pain are, DSUVIA™ (known as DZUVEO outside of the United States), andZALVISO®, each of which utilizes sublingual sufentanil, delivered via a non-invasive route of sublingual administration, exclusively for use inmedically supervised settings. We anticipate developing a distribution capability and commercial organization to market and sell DSUVIA, if approved,in the United States by ourselves, and potentially, in certain European Economic Area, or EEA, countries with strategic partners. In geographies where wedecide not to commercialize ourselves, we may seek to out-license commercialization rights. We plan to resubmit the NDA for ZALVISO in the secondhalf of 2018. If we are successful in obtaining approval of ZALVISO, we plan to potentially promote ZALVISO either by ourselves or with strategicpartners. Product Development Programs We have chosen sufentanil as the therapeutic ingredient for our current product candidates. Opioids have been utilized for pain relief for centuries and arethe standard-of-care for the treatment of moderate-to-severe acute pain. Sufentanil, a high-therapeutic index opioid, which has no active metabolites, isavailable as an injectable in several markets around the world and is used by anesthesiologists for induction of sedation or as an epidural; however, theinjectable formulation is not suitable for the treatment of acute pain. Sufentanil has many pharmacological advantages over other opioids. Publishedstudies demonstrate that sufentanil produces significantly less respiratory depressive effects relative to its analgesic effects compared to other opioids,including morphine and fentanyl. These third-party clinical results correlate well with preclinical trials demonstrating sufentanil’s high therapeutic index,or the ratio of the toxic dose to the therapeutic dose of a drug, used as a measure of the relative safety of the drug for a particular treatment. Accordingly,we believe that sufentanil can be developed to provide an effective and well-tolerated treatment for acute pain. The following table illustrates thedifference between the therapeutic index of different opioids. OpioidTherapeuticIndex Meperidine5Methadone12Morphine71Hydromorphone250Fentanyl277Sufentanil26,716 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 ofintravenous, or IV, administration. 4 We have created a proprietary sublingual (under the tongue) formulation of sufentanil intended for the treatment of moderate-to-severe acute pain. Webelieve our non-invasive, proprietary sublingual sufentanil tablet potentially overcomes many of the limitations of current treatment options available formoderate-to-severe acute pain. The sublingual formulation retains the therapeutic value of sufentanil and novel delivery devices provide a non-invasiveroute 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 across the blood-brain barrier to reach the mu-opioid receptors in the brain. The sublingual route of delivery used by DSUVIA andZALVISO provides a predictable onset of analgesia. The sublingual delivery system also eliminates the risk of intravenous, or IV, complications, such ascatheter-related infections. In addition, because patients do not require direct connection to an IV infusion pump, or IV line, DSUVIA and ZALVISO mayallow for ease of patient mobility. Summary of our Product Candidates The following table summarizes key information about our existing product candidates. Product Candidate Description Target Use StatusDSUVIA (known asDZUVEO outside theUnited States) Sufentanil sublingual tablet,30 mcg Moderate-to-severe acute painin a medically supervisedsetting, administered by ahealthcare professional CRL received October 2017. Type A meeting held withFDA on January 26, 2018, expect to resubmit NDA in Q22018. CHMP opinion on MAA filing anticipated in thefirst half of 2018. ZALVISO Sufentanil sublingual tabletsystem, 15 mcg Moderate-to-severe acute painin the hospital setting,administered by the patient asneeded Positive results from Phase 3 trial, IAP312, announced inAugust 2017. Plan to resubmit NDA H2 2018. ZALVISO is approved in the European Union where it ismarketed commercially by Grünenthal. DSUVIA™ (sufentanil sublingual tablet, 30 mcg) None of our product candidates have been approved by the FDA,although ZALVISO has been approved in the EU. To date, we havereceived minimal revenue from the sale of ZALVISO in the EU. DSUVIA is a non-invasive investigational product candidate consisting of 30 mcg sufentanil tablets delivered sublingually by a healthcare professionalusing a disposable, pre-filled, single-dose applicator, or SDA. We are developing DSUVIA for the treatment of moderate-to-severe acute pain to beadministered by a healthcare professional to a patient in medically supervised settings. If approved, examples of potential patient populations andsettings in which DSUVIA could be used include: emergency room patients; patients who are recovering from short-stay or ambulatory surgery and do notrequire more long-term analgesia; post-operative patients who are transitioning from the operating room to the recovery floor; certain types of office-based or hospital-based procedures; patients being treated and transported by paramedics; and for battlefield casualties. In the emergency room and inambulatory care environments, patients often do not have immediate IV access available, or maintaining IV access may provide an impediment to rapiddischarge. Moreover, IV dosing results in high peak plasma levels, thereby limiting the opioid dose and requiring frequent redosing intervals to titrate tosatisfactory analgesia. Oral pills and liquids generally have slow and erratic onset of analgesia. Based on internal market research conducted to date, webelieve that additional treatment options are needed that can safely and effectively treat acute trauma pain, in both civilian and military settings, and thatcan provide an alternative to currently marketed oral pills and liquids, as well as IV-administered opioids, for moderate-to-severe acute pain. 5 The potential benefits of DSUVIA are the result of combining the following three elements: •sufentanil, a high therapeutic index opioid; •our proprietary, non-invasive sublingual dosage form; and •a disposable, pre-filled 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. With the completion of the clinical program for DSUVIA, and the positive data obtained from all the clinical studies, we submitted an NDA under section505(b)(2) with the FDA for DSUVIA for the treatment of adult patients experiencing moderate-to-severe acute pain in a medically supervised setting. TheNDA contained the 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 mean improvements in pain intensity as early as 15-to-30 minutes after the start of dosing. Adverseevents reported in the studies were typical of opioid therapy, with the most common being nausea, headache, vomiting and dizziness. On October 12, 2017, we received a CRL from the FDA regarding the DSUVIA NDA which stated that the FDA determined it could not approve the NDAin its present form and provided recommendations for resubmission. The CRL contained two primary recommendations. First, while the safety databasewas suitable in number of patients, the collection of additional data was requested on at least 50 patients to assess the safety of DSUVIA dosed at themaximum amount described in the proposed label. Second, to ensure proper administration of the tablet with the SDA, the FDA recommended certainchanges to the Directions for Use, or DFU, to address use-related errors, which changes should be validated through a Human Factors, or HF, study. Wehad a Type A post-action meeting with the FDA on January 26, 2018 to discuss the topics covered in the CRL and to clarify the path to move towardsresubmission of the DSUVIA NDA. We expect to resubmit the NDA in the second quarter of 2018 after completing an HF study to validate the revisedDFU. On May 11, 2015, we entered into an award contract (referred to as the DoD Contract) supported by the Clinical and Rehabilitative Medicine ResearchProgram, or CRMRP, of the United States Army Medical Research and Materiel Command, or USAMRMC, within the U.S. Department of Defense, or theDoD, in which the DoD agreed to provide up to $17.0 million to support the development of DSUVIA. Under the terms of the DoD Contract, the DoDreimbursed us for costs incurred for development, manufacturing, regulatory and clinical costs outlined in the DoD Contract, including reimbursement forcertain personnel and overhead expenses. The period of performance under the DoD Contract began on May 11, 2015. The DoD Contract gives the DoDthe option to extend the term and provide additional funding. On March 2, 2016, the DoD Contract was amended to approve enrollment of additionalpatients in the SAP302 study, approve the addition of the SAP303 study, and extend the DoD Contract period of performance by four months fromNovember 10, 2016 to March 9, 2017, to accommodate the increased SAP302 patient enrollment and the SAP303 study. The costs for these changes wereincluded within the current DoD Contract value. On March 9, 2017, the DoD Contract was amended to incorporate additional activities including thedevelopment and testing of packaging changes; and additional stability testing. The amendment also extended the DoD Contract period of performanceby 11 months through February 28, 2018 to accommodate these additional activities. At December 31, 2017, the additional activities as outlined underthe DoD Contract through February 28, 2018 were substantially complete. On February 28, 2018, the DoD contract was amended to incorporateadditional services in the amount of $0.5 million and to extend the contract period by twelve months through February 28, 2019. If DSUVIA is approvedby the FDA, the DoD has the option to purchase 112,000 units of commercial product pursuant to the terms of the DoD Contract. In March 2017, the European Medicines Agency, or EMA, notified us that the Marketing Authorisation Application, or MAA, for DZUVEO (sufentanilsublingual tablet, 30 mcg) for the treatment of patients with moderate-to-severe acute pain in a medically supervised setting has passed validation, andthat the scientific review of the MAA is underway. We anticipate an opinion on the MAA from the Committee for Medicinal Products for Human Use, orCHMP, in the first half of 2018. We held various meetings with Health Authorities in Europe, including from Iceland and Hungary who have beendesignated as rapporteur and co-rapporteur, respectively, prior to the submission of the MAA. Based on feedback from these discussions, we submitted ahybrid application for a label indication for DZUVEO in the EU for acute moderate-to-severe pain in adult patients in medically supervised settings. Atthe time of the MAA submission, we had completed one study in the emergency room for acute pain patients, in addition to two Phase 3 and one Phase 2post-operative pain studies. We may need an additional controlled study in the emergency department with DZUVEO to obtain a label that includestrauma-related pain in addition to post-operative pain. We also anticipate we may need comparator studies in the EU to ensure premium reimbursement incertain countries. 6 ZALVISO® (sufentanil sublingual tablet system) None of our product candidates have beenapproved by the FDA, although ZALVISO hasbeen approved in the EU. To date, we havereceived minimal revenue from the sale ofZALVISO in the EU ZALVISO is intended for the management of moderate-to-severe acute pain in hospitalized adult patients. ZALVISO consists of a pre-filled cartridge of40 sufentanil sublingual tablets, 15 mcg, delivered by the ZALVISO System, a needle-free, handheld, patient-administered, pain management system.While still under development in the U.S., as discussed further below, ZALVISO is approved 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, or PCA. ZALVISO allows patients to self-administer sufentanil sublingual tablets via a pre-programmed, secure system designed in part toeliminate the risk of healthcare provider programming errors. The potential 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. 7 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. 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. 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 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 othermedically supervised settings, or the Field. We retain rights with respect to the Product in countries outside the Territory, including the United States,Asia and Latin America. Under the MSA, we will exclusively manufacture and supply the Product to Grünenthal for the Field in the Territory. Grünenthalshall purchase from us, during the first five years after the effective date of the MSA, 100% and thereafter 80% of Grünenthal’s and its sublicensees’ anddistributors’ requirements of Product for use in the Field for the Territory. We entered into amendments to the License Agreement, effective July 17, 2015and September 20, 2016, or the License Amendments, and together with the License Agreement, the Amended License Agreement, and entered into anamendment to the MSA, or the MSA Amendment, and together with the MSA, the Amended MSA, effective as of July 17, 2015, and together, theAmended Agreements. For additional information on the Amended Agreements, see Note 6 “Collaboration Agreement” in the accompanying notes to theConsolidated Financial Statements. ZALVISO was approved for commercial sale by the European Commission in September 2015 and Grünenthal has begun its commercial launch ofZALVISO in the European Union. On September 18, 2015, we sold a majority of the expected royalty stream and commercial milestones from the sales ofZALVISO in the EU and EEA by Grünenthal to PDL, or the Royalty Monetization. For additional information on the Royalty Monetization with PDL, seeNote 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 2018. We submitted an NDA for ZALVISO in September 2013, or ZALVISO NDA, and on July 25, 2014, the Division of Anesthesia, Analgesia, and AddictionProducts, or the Division, of the FDA issued a CRL for the ZALVISO NDA. The CRL contained requests for additional information on the ZALVISOSystem to ensure proper use of the device. The requests include submission of data demonstrating a reduction in the incidence of device errors, changes toaddress inadvertent dosing, among other items, and submission of additional data to support the shelf life of the product. In March 2015, we receivedcorrespondence from the FDA stating that, in addition to the work we had performed to address the items in the CRL, a clinical study would be required totest the modifications to the ZALVISO device and mitigations put in place to reduce the risk of inadvertent dosing/misplaced tablets. 8 Our IAP312 study was designed to evaluate the effectiveness of changes made to the functionality and usability of the ZALVISO device and to take intoaccount comments from the FDA on the study protocol. In the IAP312 study, 320 hospitalized, post-operative patients used ZALVISO to self-administer15 mcg sublingual sufentanil tablets as often as once every 20 minutes for 24-to-72 hours to manage their moderate-to-severe acute pain. Throughout thestudy, for which top-line results were announced in August 2017, 2.2% of patients experienced a ZALVISO device error, which was statistically less thanthe 5% limit specified in the study objectives. None of these device errors resulted in an over-dosing event. This 2.2% rate was lower (p < 0.001) than the7.9% rate of device errors during patient use previously reported for the earlier version of the ZALVISO device in the Phase 3 IAP311 study. In addition,results of this study supported earlier clinical findings, with favorable tolerability and a significant majority of “good” or “excellent” ratings provided byboth patients and healthcare providers when assessing the method of pain control. We intend to submit these results, together with our earlier Phase 3studies (IAP309, IAP310 and IAP311), all of which met safety and efficacy endpoints, as part of our resubmission of the NDA for ZALVISO in the secondhalf of 2018. Clinical Trials DSUVIA (sufentanil sublingual tablet, 30 mcg) Sufentanil Sublingual Tablet 30 mcg Clinical Program Included More Than 900 PatientsStudyNumberof Patients1Study DesignMean # 30 mcgDoses / StudyPeriodEfficacyEndpointEfficacySAP202100Multi-center,randomized, placebo-controlled, post-operative4.9 / 12hSPID12: DSUVIA vs.placeboSST 30 mcgdemonstrated painrelief over placeboSAP301161Multicenter,randomized, placebo-controlled, post-operative7.0 / 24hSPID12: DSUVIA vs.placeboSST 30 mcgdemonstrated painrelief over placeboSAP30276Multicenter, open-label, EmergencyDepartment1.1 / 2hDrop in pain intensityfrom baselineSST 30 mcg patientshad >35% drop in painat one hour after asingle doseSAP303140Multicenter, open-label, post-operative3.3 / 12hDrop in pain intensityfrom baselineSST 30 mcg patientshad 57% drop in painSelect ZALVISO®Patients2427Varied, post-operativeN/ASPID48: SST 15 mcgvs. placebo PGA48: SST 15 mcgvs. IV PCA morphineSST 15 mcg patientsdemonstratedsuperiority overplacebo and morphine 1.Includes placebo patients, where applicable. 2.323 ZALVISO patients who dosed two 15-mcg tablets within 25 minutes were included in the DSUVIA safety database, balance received placebo. 3.SPID = summed pain intensity difference over a specified number of hours (e.g. 12, 48). PGA48 = patient global assessment of method of pain control over 48hours. 9 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 to baseline over 12 hours, or SPID-12, (p<0.001).Adverse events related to study drug were typical of opioid therapy and were similar for patients treated with DSUVIA and placebo, the most common ofwhich were nausea (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. 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, or 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. 10 The FDA 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. 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. ZALVISO (sufentanil sublingual tablet system) 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. 11 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). 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-ControlledPhase 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. 12 Multi-center, single-arm, open-label study (IAP312) IAP312 was a Phase 3 study designed to evaluate the overall performance of the ZALVISO System, in response to the CRL received from the FDA forZALVISO. Throughout the study in 320 enrolled patients, 2.2% of patients experienced a ZALVISO device error, which was statistically less than the 5%limit specified in the study objectives. Importantly, none of these device errors resulted in an over-dosing event. This 2.2% rate was lower (p < 0.001) thanthe 7.9% rate of device errors during patient use previously reported for the earlier version of the ZALVISO device in the Phase 3 IAP311 study. In addition, as requested by FDA, the IAP312 study prospectively evaluated the number of inadvertently misplaced tablets which occurred during patientdosing. A small number of inadvertently misplaced tablets (less than 0.1% of total dispensed tablets) was observed in the original Phase 3 studies.However, the presence of inadvertently misplaced tablets had not been routinely assessed as part of the previous protocols. Throughout the IAP312 study,patients self-administered a total of 7,293 sufentanil tablets. Per the updated ZALVISO training instructions electronically displayed on the hand-helddevice, 6 patients called the nurse when they failed to properly self-administer a single tablet to allow for proper retrieval and disposal of the tablet. Also,during inspection by the nurse, which occurred every two hours per protocol, a total of 7 misplaced tablets (<0.1% of total dispensed tablets) werediscovered with 6 additional patients. No patient had a repeat incidence of an inadvertently misplaced tablet following re-training on the device. Thiscombination of patient training and nurse inspection, along with the tracking features of the ZALVISO device, could potentially address the FDA'sconcerns regarding drug accountability. Finally, in this study, 86%, 89% and 100% of patients at the 24, 48 and 72-hour time points, respectively, recorded "good" or "excellent" ratings on thepatient global assessment, or PGA, of the method of pain control, which measures a patient's satisfaction with their quality of analgesia. Healthcareprofessional global assessment, or HPGA, of the method of pain control was similarly strong, with 91%, 95% and 100% of nurses rating ZALVISO as"good" or "excellent" over each respective 24-hour period. ZALVISO was shown to be well tolerated by study participants, with nausea, hypotension andvomiting representing the most commonly reported adverse events. A total of 5 patients experienced serious adverse events, but all were consideredunrelated to study drug by investigators. The Market Opportunity for DSUVIA and ZALVISO Unmet Medical NeedSettings 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: •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. We believe healthcare providers and hospital administrators caring for patients in moderate-to-severe acute pain in the aforementioned medicallysupervised settings could 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 •infection risks due to invasive routes of delivery, such as IV. In our clinical studies, sublingual sufentanil 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; 13 •maintenance of cognitive function; •adverse event types similar to IV opioids, such as nausea, headache, vomiting and dizziness; and •lower percentage of patients with decreased oxygen saturation events compared to IV-PCA morphine. We believe that sublingual sufentanil provides a safety, efficacy and tolerability profile enabling our product candidates to potentially replace IV opioiduse in patients with moderate-to-severe acute pain in the proposed medically-supervised settings. This may be especially true for DSUVIA in theemergency medical settings in the United States, where the number of emergency departments is decreasing, resulting in an increased focus on resourcemanagement to treat a growing number of patients in an efficient manner. United States MarketAccording to commissioned research in 2016, we estimate that there are currently 91.9 million patients who are treated in various medically supervisedsettings for 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. The target patient population for DSUVIA are those patients in thehospital or other medically supervised setting for less than 24 hours. The target patient population for ZALVISO are patients in a hospital setting forgreater than 24 hours. Our current estimate of patients in moderate-to-severe acute pain in medically supervised settings, by setting, is as follows: Emergency services (includes pre-hospital and Emergency Department treatment)51.5 million Outpatient surgery10.7 million Hospital/surgery center/office-based procedures20.1 million Inpatient surgery/inpatient conditions9.6 million The market for ZALVISO, given the target patients in a hospital setting for greater than 24 hours, is the 9.6 million inpatient surgeries and inpatientconditions above. There can be no assurance that our estimates regarding the number of patients treated in the various settings will be accurate. European MarketAccording to recent EU5 (France, Germany, Italy, Spain, and the United Kingdom) national health statistics, 142 million patients are represented acrossthe DZUVEO target segments annually. Each year, there are an estimated 110 million emergency attendances and 32 million surgical proceduresperformed each year. It is anticipated that there are 51 million patients in emergency medicine with moderate-to-severe acute pain and 16 million withmoderate-to-severe acute pain following surgery each year. Our Strategy DSUVIAOur specific strategy with respect to DSUVIA is to: •resubmit the DSUVIA NDA and then 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 to promote DSUVIA; and •supply the DoD and other military organizations as requested and appropriate. DZUVEO Our specific strategy with respect to DZUVEO (in territories outside of the United States) is to: •seek regulatory approval in the EEA; and •seek commercial partnerships for DZUVEO in countries outside of the United States. ZALVISOOur specific strategy with respect to ZALVISO is to: •continue to collaborate with Grünenthal to continue to support the launch of ZALVISO in their licensed territories; 14 •continue to strengthen our commercial relationships for the manufacturing of the components and assembly of the ZALVISO System; and •resubmit the ZALVISO NDA and then seek regulatory approval in the United States and, if successful, potentially promote ZALVISO as afollow-on product to DSUVIA or seek a commercial partnership. 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. Ingeographies where we decide not to commercialize ourselves, we would seek to out-license commercialization rights. In executing our strategy, our goalis to have significant control over the development process and commercial execution for DSUVIA, while retaining meaningful economics. We plan to build commercial capability progressively 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: First, 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, pharmacy andtherapeutics, or P&T, committee members and other related experts to provide us with input on appropriate commercial positioning forDSUVIA for each of these key audiences; •complete planning to build a sales and marketing organization that can define appropriate segmentation and positioning strategies and tacticsfor 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. Second, 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; •create and progressively deploy a high-quality, customer-focused and experienced sales organization dedicated to bringing innovative, highlyvalued healthcare solutions to patients, payers 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. 15 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 “RiskFactors—Risks Related to Our Intellectual Property” appearing elsewhere in this Form 10-K. Our success will depend significantly on our ability to: •obtain and maintain patent and other proprietary protection for our product candidates; •defend our patents; •preserve the confidentiality of our trade secrets; and •operate our business without infringing the patents and proprietary rights of third parties. We have established and continue to build proprietary positions for our product candidates and related technology in the United States and abroad. As of December 31, 2017, we are the owner of record of 22 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 six issued European patents, eachvalid in at least eight countries in Europe. In addition, we own seven 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. 16 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. Over the past year, we have monitored changes in the pharmaceutical industry in response to opioiduse in the United States. Pharmaceutical companies engaged in the distribution and sale of opioids, in particular for the treatment of chronic pain, arerefocusing their efforts in order to support responsible opioid use. For example, Purdue Pharma recently announced that they will no longer be using theirfield sales organization to promote their opioid products; rather, requests for information will be directed to their medical affairs department. While ourproduct candidates are designed for the treatment of moderate to severe acute pain for use in medically supervised settings, rather than for the treatment ofchronic pain or for outpatient use, these industry changes could impact the development and commercial success of DSUVIA or ZALVISO, if approved inthe United States. 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 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. DSUVIA does not require placement of an IV line andtherefore direct competitors in the emergency department are other non-invasive, rapid-acting analgesics. In this environment, DSUVIA may competewith Egalet Corporation’s SPRIX (intranasal ketorolac). Transmucosal fentanyl products, such as ACTIQ or FENTORA (Cephalon, Inc., a subsidiary ofTeva Pharmaceutical Products Ltd.), are approved for opioid-tolerant patients suffering from cancer pain and therefore are not a competitor for DSUVIA.Orally administered tablets or liquids containing oxycodone or hydrocodone often have slower absorption and slower analgesic onset than transmucosalopioids. Examples of oral opioids include, Acura Pharmaceuticals, Inc.’s OXAYDO, (marketed by Egalet Corporation), Collegium Pharmaceuticals, Inc.’sNUCYNTA, and Purdue Pharma, L.P.’s OXYFAST, or generic oral opioids which have moderate-to-severe acute pain labeling. Often used in combination with opioids are generic injectable local anesthetics such as bupivacaine, or branded formulations thereof, including PaciraPharmaceuticals, Inc.’s EXPAREL. In addition, Heron Therapeutics, Inc. is in Phase 3 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. These products mayreduce the amount of opioids required to achieve adequate pain control but usually do not obviate the need for opioids completely. Similarly, there aremany IV formulations of non-steroidal anti-inflammatory drugs (NSAIDS) for treatment of acute pain, such as generic IV ketorolac, Pfizer’s DYLOJECT,Cumberland Pharmaceuticals Inc.’s CALDOLOR and recently Recro Pharma, Inc. submitted an NDA for IV meloxicam for the treatment of moderate-to-severe acute pain. These products are all invasively administered via an IV and, as a result, we do not believe they are direct competitors to the non-invasive DSUVIA. 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. 17 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. (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 as from compounding pharmacies. Inaddition, branded manufacturers (e.g., Hospira, Inc.) sell pre-filled glass syringes of morphine to fit their IV PCA pump systems. These systems, however,are invasive and require programming, which can lead to dosing errors, and therefore, while they are commonly used, we do not believe they are directcompetitors for ZALVISO. Also available on the market is the Avancen Medication on Demand, or MOD, an oral PCA device developed by AvancenMOD Corporation. Oral opioids and other agents can be used in this system. Oral opioids tend to have slower onset than transmucosal opioids, such asZALVISO. The Medicine Company’s IONSYS is a non-invasive transdermal opioid PCA that could potentially compete with ZALVISO; however, aworldwide recall of the product was announced due to a commercial refocusing of the company. Additional potential opioid competitors for ZALVISO include Cara Therapeutics, Inc., who is developing a kappa opioid agonist, CR845, as an IV agentfor the management of post-operative moderate-to-severe pain. Also, Trevena, Inc., has submitted an NDA for IV oliceridine, an intravenous G proteinbiased ligand that targets the mu opioid receptor for the treatment of moderate-to-severe acute pain with a clinical development focus in acute post-operative pain. Both of these product candidates are invasive and, therefore, we do not believe they are direct competition to the non-invasive ZALVISO. 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. On August 22, 2017, we amended theServices Agreement with Patheon effective as of August 4, 2017, or the Amended Services Agreement, to include the manufacture of sufentanil sublingualtablets for use with DSUVIA. Under the terms of the MSA, Patheon will manufacture, supply, and provide certain validation and stability services forDSUVIA intended for marketing and sale in the United States, Canada and Mexico, and their respective territories, the European Union, Switzerland,Liechtenstein, Norway, Iceland and Australia. The term of the Amended Services Agreement has been extended until December 31, 2019, andautomatically renews thereafter for periods of two years, unless terminated by either party upon eighteen months’ prior written notice. In addition, weentered into a related Amended and Restated Capital Expenditure and Equipment Agreement, or the Amended Capital Agreement, related to clinical andcommercial production of our product candidates. Under the terms of the Amended Capital Agreement, we have made, and may make certain futuremodifications 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. 18 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. In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and its’ implementing regulations. The processof obtaining regulatory approvals and complying with applicable laws and regulations requires the expenditure of substantial time and financialresources. Failure to comply at any time during the product development and approval process, or after approval, may subject an applicant toadministrative or judicial sanctions. These sanctions could include the FDA’s refusal to approve pending applications, withdrawal of an approval, aclinical hold, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals ofgovernment contracts, restitution, disgorgement or civil or criminal penalties. The process required by the FDA before a drug product may be marketed inthe United States generally 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, annual program 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. 19 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, and ZALVISO, are regulated under IND applications for clinical development and all device related information is filedunder the Chemistry, Manufacturing and Controls Section, or CMC, of an IND. The results of product development, preclinical trials and clinical trials, along with descriptions of the manufacturing process, analytical tests conductedon our drug products, proposed labeling and other relevant information, will be submitted to the FDA as part of an NDA for a new drug product,requesting approval to market the product in the United States. The submission of an NDA is subject to the payment of a substantial user fee; a waiver ofsuch fee may be obtained under certain limited circumstances. During its review of an NDA, FDA may inspect our manufacturers for GMP and QSRcompliance, and our pivotal clinical trial sites for GCP compliance. In addition, under the Pediatric Research Equity Act, an NDA or supplement to an NDA must contain data to assess the safety and effectiveness of thedrug product for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatricsubpopulation for which the product is safe and effective. The FDA may grant deferrals for submission of data or full or partial waivers. The approval process is lengthy and difficult and the FDA may refuse to approve an NDA if the applicable regulatory criteria are not satisfied or mayrequire additional clinical data or other data and information. Even if such data and information is submitted, the FDA may ultimately decide that theNDA does not satisfy the criteria for approval. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently thanwe interpret the same data. The FDA issues a Complete Response Letter at the conclusion of its review if the NDA is not yet deemed ready for approval. AComplete Response Letter generally outlines the deficiencies in the submission and may require substantial additional testing or information for the FDAto reconsider the application. If, or when, those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the NDA, the FDA willissue an approval letter. The FDA has committed to reviewing such resubmissions in two or six months depending on the type of information included. If one or more of our product candidates receive regulatory approval, the approval may be limited to specific conditions and dosages or the indicationsfor use may otherwise be limited, which could restrict the commercial value of the product. Our product candidates, if approved, will also require RiskEvaluations and Mitigation Strategies, or REMS, which can include a medication guide, patient package insert, a communication plan, elements to assuresafe use and implementation system, and must include a timetable for assessment of the REMS. Further, the FDA may require that certaincontraindications, warnings or precautions be included in the product labeling and may require testing and surveillance programs to monitor the safety ofapproved products that have been commercialized. In addition, the FDA may require post-approval testing which involves clinical trials designed tofurther assess a drug product’s safety and effectiveness after the NDA. Post-Approval Requirements Any drug products for which we receive FDA approvals are subject to continuing regulation by the FDA, including, among other things, record-keepingrequirements, reporting of adverse experiences with the product, providing the FDA with updated clinical safety and efficacy information, productsampling and distribution requirements, complying with certain electronic records and signature requirements and complying with FDA promotion andadvertising requirements. Phase 4 clinical trials are conducted after approval to gain additional experience from the treatment of patients in the intendedtherapeutic indication or when otherwise requested by the FDA in the form of post marketing 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. 20 We rely, and expect to continue to rely, on third parties for the production of clinical and commercial quantities of our products. Future FDA and stateinspections may identify compliance issues at the facilities of our contract manufacturers that may disrupt production or distribution or may requiresubstantial resources to correct. The FDA may withdraw a product approval if compliance with regulatory standards is not maintained or if problems occur after the product reaches themarket. Later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of theproduct from the market. Further, the failure to maintain compliance with regulatory requirements may result in administrative or judicial actions, such asfines, warning letters, holds on clinical trials, product recalls or seizures, product detention or refusal to permit the import or export of products, refusal toapprove pending applications or supplements, restrictions on marketing or manufacturing, injunctions or civil or criminal penalties. Foreign Regulation In addition to regulations in the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial sales anddistribution of our products to the extent we choose to sell any products outside of the United States. In December 2015, the Committee for Medicinal Products for Human Use, or CHMP, at the European Medicines Agency, or EMA, confirmed that anMAA for DZUVEO 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 havesubmitted the DZUVEO MAA and anticipate a CHMP opinion in the first half of 2018. 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. 21 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. Additionally, the intent standard under the federal Anti-Kickback Statute was amended by the Patient Protection and 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.International laws, such as the EU Data Privacy Directive (95/46/EC) and Swiss Federal Act on Data Protection, regulate the processing of personal datawithin the European Union and between countries in the European Union and countries outside of the European Union, including the United States.Failure to provide adequate privacy protections and maintain compliance with safe harbor mechanisms could jeopardize business transactions acrossborders and result in significant penalties. 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. 22 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. 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 and hospitals may refuse to include a particular branded drug in their formularies or otherwiserestrict patient access to a branded drug when a less costly generic equivalent or other alternative is available. Because each third-party payerindividually approves coverage and reimbursement levels, obtaining coverage and adequate reimbursement is a time-consuming, costly and sometimesunpredictable process. We may be required to provide scientific and clinical support for the use of any product to each third-party payer and hospitalseparately with no assurance that approval would be obtained, and we may need to conduct expensive pharmacoeconomic studies in order to demonstratethe cost-effectiveness of our products. This process could delay the market acceptance of any product and could have a negative effect on our futurerevenues and operating results. We cannot be certain that our products and our product candidates will be considered cost-effective. Because coverageand reimbursement determinations are made on a payer-by-payer basis, obtaining acceptable coverage and reimbursement from one payer does notguarantee that we will obtain similar acceptable coverage or reimbursement from another payer. If we are unable to obtain coverage of, and adequatereimbursement and payment levels for, our product candidates from third-party payers, physicians may limit how much or under what circumstances theywill prescribe or administer them. This in turn could affect our ability to successfully commercialize our products and impact our profitability, results ofoperations, financial condition and future success. Third-party payers, government healthcare programs, wholesalers, group purchasing organizations, andhospitals frequently require that pharmaceutical companies negotiate agreements that provide discounts or rebates from list prices. We expect increasingpressure to offer larger discounts or discounts to a greater number of these organizations to maintain acceptable reimbursement levels for and access to ourproducts. Net prices for drugs may be reduced by these mandatory discounts or rebates required by government healthcare programs, private payers,wholesalers, group purchasing organizations, hospitals, and by any future relaxation of laws that presently restrict imports of drugs from policy andpayment limitations in setting their own reimbursement policies. In addition, if our competitors reduce the prices of their products, or otherwisedemonstrate that they are better or more cost effective than our products, this may result in a greater level of reimbursement for their products relative toour products, which would reduce sales of our products and harm our results of operations. There have been, and there will continue to be, legislative and regulatory proposals to change the healthcare system in ways that could impact our abilityto commercialize our products profitably. We anticipate that the federal and state legislatures and the private sector will continue to consider and mayadopt and implement healthcare policies, such as the Affordable Care Act, intended to curb rising healthcare costs. These cost containment measures mayinclude: controls on government-funded reimbursement for drugs; new or increased requirements to pay prescription drug rebates to government healthcare programs; controls on healthcare providers; challenges to or limits on the pricing of drugs, including pricing controls, or limits or prohibitions onreimbursement for specific products through other means; requirements to try less expensive products or generics before a more expensive brandedproduct; and public funding for cost effectiveness research, which may be used by government and private third-party payers to make coverage andpayment decisions. 23 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. Legislative changes to the Affordable Care Act remain possible and appear likely in the 115th U.S. Congress and under the Trump Administration. SinceJanuary 2017, President Trump has signed two Executive Orders and other directives designed to delay the implementation of certain provisions of theAffordable Care Act or otherwise circumvent some of the requirements for health insurance mandated by the Affordable Care Act. Currently, Congress hasconsidered legislation that would repeal, or repeal and replace all or part of the Affordable Care Act. While Congress has not passed comprehensive repeallegislation, two bills affecting the implementation of certain taxes under the Affordable Care Act have been signed into law. The Tax Cuts and Jobs Act of2017 includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Act oncertain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate”.Additionally, on January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed theimplementation of certain fees mandated by the Affordable Care Act, including the so-called “Cadillac” tax on certain high cost employer-sponsoredinsurance plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device excise tax on non-exemptmedical devices. Further, the Bipartisan Budget Act of 2018, or the BBA, among other things, amends the Affordable Care Act, effective January 1, 2019,to increase from 50% to 70% the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D and to close thecoverage gap in most Medicare drug plans, commonly referred to as the “donut hole”. Congress may still consider other legislation to repeal and replaceelements of the Affordable Care Act. We expect that the Affordable Care Act, as currently enacted or as it may be amended or repealed in the future, andother healthcare reform measures that may be adopted in the future, could have a material adverse effect on our industry generally and on our ability tosuccessfully commercialize our product candidates, if approved. We cannot predict the likelihood, nature or extent of government regulation that mayarise from future legislation or administrative action, either in the United States or abroad. If we or our collaborators are slow or unable to adapt tochanges in existing requirements or the adoption of new requirements or policies, or if we or our collaborators are not able to maintain regulatorycompliance, our product candidates may lose any regulatory approval that may have been obtained and we may not achieve or sustain profitability,which would adversely affect our business. 24 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-partypayers provide coverage and establish adequate reimbursement levels for product candidates. In the United States, third-party payers 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 and enacted federal and state legislationdesigned to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs,and reform government program reimbursement methodologies for drugs. At the federal level, the Trump Administration’s budget proposal for fiscal year2019 contains additional drug price control measures that could be enacted during the 2019 budget process or in other future legislation, including, forexample, measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drugprices under Medicaid and to eliminate cost sharing for generic drugs for low-income patients. While any proposed measures will require authorizationthrough additional legislation to become effective, Congress and the Trump Administration have each indicated that it will continue to seek newlegislative and/or administrative measures to control drug costs. At the state level, legislatures are increasingly passing legislation and implementingregulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts,restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importationfrom other countries and bulk purchasing. Further, third-party payers are increasingly challenging the price, examining the medical necessity and reviewing the cost-effectiveness of medical drugproducts and medical services, in addition to questioning their safety and efficacy. Such payers may limit coverage to specific drug products on anapproved list, also known as a formulary, which might not include all of the FDA-approved drugs for a particular indication. We may need to conductexpensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of our product candidates, in addition to thecosts required to obtain the FDA approvals. Nonetheless, our product candidates may not be considered medically necessary or cost-effective. Moreover, the process for determining whether a third-party payer 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 payeor will pay for the drug product. A payer’s decision to providecoverage for a drug product does not imply that an adequate reimbursement rate will be approved. Further, one payer’s determination to provide coveragefor a drug product does not assure that other payers 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; •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; and 25 •a Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research,along with funding for such research. 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 Affordable Care Act 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 2027 unlessCongressional action is taken. The American Tax Payer Relief Act further reduced Medicare payments to several providers, including hospitals. Moreover, the DSCSA imposes additional obligations on manufacturers of pharmaceutical products, among others, related to product tracking andtracing. Among the requirements of this new legislation, manufacturers will be required to provide certain information regarding the drug product toindividuals and entities to which product ownership is transferred, label drug product with a product identifier, and keep certain records regarding thedrug product. AcelRx is engaging CMOs and solution providers in serialization to implement the requirements of the DSCSA on our products. Theacceptability of the approach 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 $19.4 million, $21.4 million and $22.5 million during the yearsended December 31, 2017, 2016 and 2015, respectively. We plan to incur significant expenditures for the foreseeable future to address therecommendations made in the CRL for DSUVIA and prepare for the NDA resubmission, a likely FDA Advisory Committee meeting, and the requiredpediatric studies after approval. In addition, we continue to incur additional research and development expenses as we prepare the resubmission of theNDA for ZALVISO in the second half of 2018, as well as provide support for the Committee for Medicinal Products for Human Use, or CHMP’s, scientificreview of the MAA for DZUVEO. Employees As of December 31, 2017, we employed 41 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. 26 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 DZUVEO outside of the United States), which may not receive regulatory approval in theUnited States or in Europe. We believe the importance of DSUVIA™ (sufentanil sublingual tablet, 30 mcg) is critical to our future success. In December 2016, we submitted the NewDrug Application, or NDA, for DSUVIA for the treatment of patients experiencing moderate-to-severe acute pain in a medically supervised setting to theUnited States Food and Drug Administration, or FDA. The NDA was accepted for filing by the FDA. On October 12, 2017, we received a CRL from theFDA regarding the NDA for DSUVIA which states the FDA determined it cannot approve the NDA in its present form and provides recommendations forresubmission. The CRL contained two primary recommendations. First, the collection of additional data was requested on at least 50 patients to assess thesafety of DSUVIA dosed at the maximum amount described in the proposed label. Second, to ensure proper administration of the tablet with the single-dose applicator, the FDA recommended certain changes to the Directions for Use (DFU) to address use-related errors, which changes should be validatedthrough a Human Factors (HF) study. We held a Type A post-action meeting with the FDA on January 26, 2018 to discuss the topics covered in the CRLand to clarify the path to move towards resubmission of the DSUVIA NDA. We expect to resubmit the DSUVIA NDA in the second quarter of 2018 aftercompleting an HF study to validate the revised DFU. While we plan to resubmit the NDA for DSUVIA, there is no guarantee that the informationpreviously provided, or to be provided, to the FDA will be adequate to address the recommendations made in the DSUVIA CRL or that we will besuccessful in obtaining FDA approval of DSUVIA. Even after we resubmit the DSUVIA NDA, the FDA could require us to complete further clinical,Human Factors or other studies, which could further delay or preclude any approval of the NDA and require us to obtain significant additional funding. Inaddition, given that both DSUVIA and ZALVISO utilize a sublingual tablet formulation of sufentanil, it is possible that an adverse regulatory outcome forone product candidate may affect regulatory outcome for the other product candidate. We have held various meetings with Health Authorities in Europe to discuss the submission of a Marketing Authorization Application, or MAA, forDZUVEO (sufentanil sublingual tablet, 30 mcg). In March 2017, the European Medicines Agency, or EMA, notified us that the MAA for DZUVEO for thetreatment of patients with moderate-to-severe acute pain in a medically supervised setting has passed validation, and that the scientific review of theMAA is underway. We anticipate an opinion on the MAA from the Committee for Medicinal Products for Human Use, or CHMP, in the first half of 2018.We held various meetings with Health Authorities in Europe, including from Iceland and Hungary who have been designated as rapporteur and co-rapporteur, respectively, prior to the submission of the MAA. Based on feedback from these discussions, we submitted a hybrid application for a labelindication for DZUVEO in the EU for acute moderate-to-severe pain in adult patients in medically supervised settings. At the time of the MAAsubmission, we had only completed one study in the emergency room for acute pain patients, in addition to two Phase 3 and one Phase 2 post-operativepain studies. We may need an additional controlled study in the emergency department with DZUVEO to obtain a label that includes trauma-related painin addition to post-operative pain. We also anticipate we may need comparator studies in the EU to ensure premium reimbursement in certain countries. IfDSUVIA is not approved for sale in the United States or DZUVEO is not approved for sale in the EU, or if it is approved with a more limited indication, itcould have a significant impact on our ability to generate cash flows from product sales or to enter into a collaboration agreement. If we are unable toreceive approval to commercialize DSUVIA in the United States, we would be required to find alternative sources of capital to continue operations. IfDSUVIA is not approved for sale in the United States, and we are unsuccessful in finding alternative sources of capital, it will be difficult for us tocontinue under our current operating plan. Our proposed trade name of DSUVIA has been conditionally approved by the FDA, which must approve all drug trade names to avoid medication errorsand misbranding. However, the FDA may withdraw this approval in which case any brand recognition or goodwill that we establish with the nameDSUVIA prior to commercialization may be worthless. 27 Our development efforts for DSUVIA in the United States were delayed as a result of the DSUVIA CRL from the FDA. As a result, our ability tocommercialize and generate revenues from DSUVIA in the United States has been delayed. Any disagreement with the EMA as to the results fromSAP301, SAP302, and SAP303, and therefore any additional requirements imposed by the EMA prior to approval of the MAA, as well as any delay inapproval by the EMA of the DZUVEO MAA, may also negatively impact our stock price and harm our business operations. We may be unable tosuccessfully address the recommendations made in the DSUVIA CRL and resubmit the NDA for DSUVIA. Any additional delays in obtaining, or inabilityto obtain, regulatory approval would further delay or prevent us from commercializing DSUVIA in the United States and DZUVEO in Europe, generatingrevenues and potentially achieving profitability. If any of these events occur, we may be forced to delay or abandon our development efforts for DSUVIAin the United States and DZUVEO 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 receive regulatory approval in the United States. The success of ZALVISO, in part, relies upon our ability to develop and receive regulatory approval of this product candidate in the United States for themanagement of moderate-to-severe acute pain in adult patients in the hospital setting. Our Phase 3 program for ZALVISO initially consisted of threePhase 3 clinical trials. We reported positive top-line data from each of these trials and submitted an NDA for ZALVISO to the FDA in September 2013,which the FDA then accepted for filing in December 2013. On July 25, 2014, the FDA issued a CRL for our NDA for ZALVISO, or the ZALVISO CRL.The ZALVISO CRL contained requests for additional information on the ZALVISO System to ensure proper use of the device. The requests includesubmission of data demonstrating a reduction in the incidence of device errors, changes to address inadvertent dosing, among other items, and submissionof additional data to support the shelf life of the product. Furthermore, in March 2015, we received correspondence from the FDA stating that in additionto the bench testing and two Human Factors studies we had performed in response to the issues identified in the ZALVISO CRL, a clinical trial wasneeded to assess the risk of inadvertent dispensing and overall risk of dispensing failures. Based on the results of the Type C meeting with the FDA, whichtook place in September 2015, we submitted a protocol to the FDA for a clinical study. We completed the protocol review with the FDA and initiated thisstudy, IAP312, in September 2016. IAP312 was a Phase 3 study in post-operative patients designed to evaluate the effectiveness of changes made to the functionality and usability of theZALVISO device and to take into account comments from the FDA on the study protocol. The IAP312 study was designed to rule out a 5% device failurerate. The study design required a minimum of 315 patients. In the IAP312 study, sites proactively looked for tablets that have been dispensed by thepatient but failed to be placed under the tongue, known as dropped tablets. The FDA refers to dropped tablets as inadvertent dispensing. In the prior Phase3 studies, based on approximately 30,000 tablets dispensed, there were 15 dropped tablets discovered from 7 out of 768 patients. With study sitesproactively looking for dropped tablets, we anticipated the observed rate of inadvertent dispensing would be as high or higher in IAP312 than previouslyreported in the combined Phase 3 studies. Correspondence from the FDA suggests that they may include the rate of inadvertent dispensing along with thedevice failures to calculate a total error rate. The IAP312 study evaluated all incidents of misplaced tablets; however, per the protocol, the error ratecalculation does not include the rate of inadvertent dispensing. If the FDA includes the rate of inadvertent dispensing along with the device failures tocalculate a total error rate, the resulting error rate may be unacceptable to the FDA. Further, the correspondence from the FDA suggests that we may needto modify the Risk Evaluation and Mitigation Strategies, or REMS, for ZALVISO to address dropped tablets. In the IAP312 study, 320 hospitalized, post-operative patients used ZALVISO to self-administer 15 mcg sublingual sufentanil tablets as often as once every 20 minutes for 24-to-72 hours to managetheir moderate-to-severe acute pain. Throughout the study, for which top-line results were announced in August 2017, 2.2% of patients experienced aZALVISO device error, which was statistically less than the 5% limit specified in the study objectives. None of these device errors resulted in an over-dosing event. This 2.2% rate was lower (p < 0.001) than the 7.9% rate of device errors during patient use previously reported for the earlier version of theZALVISO device in the Phase 3 IAP311 study. In addition, results of this study supported earlier clinical findings, with favorable tolerability and asignificant majority of “good” or “excellent” ratings provided by both patients and healthcare providers when assessing the method of pain control. Weintend to submit these results as part of our resubmission of the NDA for ZALVISO in the second half of 2018. There is no guarantee that the additional work we performed 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 FDA may include the rate ofinadvertent dispensing along with the device failures to calculate a total error rate and the resulting error rate may be unacceptable to the FDA, or the FDAmay still have concerns regarding the performance of the device, inadvertent dosing (dropped tablets), or other issues. At any future point in time, theFDA could require us to complete further clinical, Human Factors, pharmaceutical, reprocessing or other studies, which could delay or preclude any NDAresubmission or approval of the NDA and could require us to obtain significant additional funding. There is no guarantee such funding would beavailable to us on favorable terms, if at all. In addition, given that both DSUVIA and ZALVISO utilize a sublingual tablet formulation of sufentanil, it ispossible that an adverse regulatory outcome for one product candidate may affect the regulatory outcome for the other product candidate. 28 If the ZALVISO NDA is resubmitted, the FDA may hold an advisory committee meeting to obtain committee input on the safety and efficacy ofZALVISO. Typically, advisory committees will provide responses to specific questions asked by the FDA, including the committee’s view on theapprovability of the drug under review. Advisory committee decisions are not binding, but an adverse decision at the advisory committee may have anegative impact on the regulatory review of ZALVISO. Additionally, we may choose to engage in 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 DSUVIA, or SAP301, SAP302, and SAP303, as well as each of our fourZALVISO Phase 3 clinical trials completed to date, in addition to all of our Phase 2 clinical trials for DSUVIA and ZALVISO. However, even if we believethat the data obtained from clinical trials is positive, the FDA has, and in the future could, determine that the data from our trials was negative orinconclusive or could reach a different conclusion than we did on that same data. Negative or inconclusive results of a clinical trial or difference ofopinion could cause the FDA to require us to repeat the trial or conduct additional clinical trials prior to obtaining approval for commercialization, andthere is no guarantee that additional trials would achieve positive results or that the FDA will agree with our interpretation of the results. For example,although patients treated with DSUVIA demonstrated improvements in pain intensity as early as 15-to-30 minutes after the start of dosing in our each ofour clinical trials included in the NDA for DSUVIA, we received the DSUVIA CRL from the FDA on October 12, 2017 which states the FDA determined itcannot approve the NDA in its present form and provides recommendations for resubmission. We held a Type A post-action meeting with the FDA onJanuary 26, 2018 to discuss the topics covered in the CRL and to clarify the path to move towards resubmission of the DSUVIA NDA, which we expect toresubmit in the second quarter of 2018, following completion of an HF study to validate the revised DFU. As a result of the DSUVIA CRL, the timing ofour commercialization plan for DSUVIA in the United States has been delayed. Similarly, 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 ZALVISO CRL, aclinical trial would be needed to assess the risk of inadvertent dispensing and overall risk of dispensing failures. While we believe ZALVISO met safety,satisfaction and device usability expectations in this trial, known as IAP312, there is no guarantee the FDA will agree with our interpretation of theseresults, or accept our planned NDA resubmission without requiring additional clinical trials of ZALVISO. If the FDA were to require any additionalclinical trials for ZALVISO, our development efforts would be further delayed, which would have a material adverse effect on our business. Any suchdetermination by the FDA would delay the timing of our commercialization plan for ZALVISO, or further development of our other product candidates,and adversely affect our business operations. 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, four Phase 3 clinical trials for ZALVISO, one Phase 2 clinical trial for DSUVIA and several Phase 2 clinical trials for ZALVISO, futureclinical trials may not begin on time, have an effective design, enroll a sufficient number of patients or be completed on schedule, if at all. For example,on October 12, 2017, we received the DSUVIA CRL from the FDA for the NDA for DSUVIA which states the FDA determined it cannot approve the NDAin its present form and provides recommendations for resubmission. We held a Type A post-action meeting with the FDA on January 26, 2018 to discussthe topics covered in the CRL and to clarify the path to move towards resubmission of the DSUVIA NDA, which we expect to resubmit in the secondquarter of 2018, following the completion of a Human Factors study to validate the revised Directions for Use. As a result, the completion of the Phase 3clinical program for DSUVIA has been delayed and our research and development expenses for DSUVIA will increase. Finally, we postponed the start ofIAP312, originally planned for the first quarter of 2016, to September 2016. The postponement was due to a delay in the receipt and testing of finalclinical supplies for this trial. As a result, the development timeline for ZALVISO was further extended. 29 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 resubmitted the DSUVIA NDA. Activities that we undertake to address recommendations made in the DSUVIA CRL may be deemedinsufficient by the FDA. On October 12, 2017, we received a CRL from the FDA regarding the NDA for DSUVIA which states the FDA determined it cannot approve the NDA in itspresent form and provides recommendations for resubmission. The CRL contained two primary recommendations. First, the collection of additional datawas requested on at least 50 patients to assess the safety of DSUVIA dosed at the maximum amount described in the proposed label. Second, to ensureproper administration of the tablet with the single-dose applicator, the FDA recommended certain changes to the DFU to address use-related errors, whichchanges should be validated through an HF study. We had a Type A post-action meeting with the FDA on January 26, 2018 to discuss the topics coveredin the CRL and to clarify the path to move towards resubmission of the DSUVIA NDA, which we expect to resubmit in the second quarter of 2018,following the completion of the HF study to validate the revised DFU. There is no guarantee that we will be able to successfully address the recommendations made by the FDA in the DSUVIA CRL or resubmit the DSUVIANDA. Inability to obtain FDA regulatory approval would prevent us from commercializing DSUVIA in the United States, generating revenues andpotentially achieving profitability. If any of these events occur, we may be forced to delay or abandon our development and commercialization efforts forDSUVIA in the United States, which would have a material adverse effect on our business and could potentially cause us to cease operations. Even if we believe that we have successfully addressed the recommendations made in the DSUVIA CRL, and we are able to resubmit the NDA, the FDAmay deem the results insufficient. The FDA may provide review commentary at any time during the resubmission and review process which couldadversely affect or even prevent the approval of DSUVIA, which would adversely affect our business. We may not be able to identify appropriateremediations to issues that the FDA may raise, and we may not have sufficient time or financial resources to conduct future activities to remediate issuesraised by the FDA. We have not yet resubmitted the ZALVISO NDA. Activities that we have undertaken to address issues raised in the ZALVISO CRL may be deemedinsufficient by the FDA. We completed bench testing and additional Human Factors studies that we believed addressed certain items contained in the ZALVISO CRL. However,before the results from these studies were submitted as a part of the proposed NDA resubmission, the FDA, in March 2015, notified us of the need for aclinical trial prior to the resubmission of the ZALVISO NDA. In early September 2015, we had a Type C meeting with the FDA to discuss the FDA’srequest for an additional clinical trial and our planned response to the ZALVISO CRL. In response to discussions with the FDA, we agreed to complete anadditional open-label study with ZALVISO in post-operative patients, known as IAP312. We completed the protocol review for IAP312 and announcedpositive results from this study in August 2017, which we intend to use to support our NDA resubmission. We plan to resubmit our NDA for ZALVISO inthe second half of 2018. 30 Although we believe the IAP312 study met safety, satisfaction and device usability expectations, there is no guarantee the IAP312 trial results willaddress the issues raised by the FDA. Any delay in obtaining, or inability to obtain, regulatory approval would prevent us from commercializingZALVISO in the United States, generating revenues and achieving profitability. If any of these events occur, we may be forced to delay or abandon ourdevelopment and commercialization efforts for ZALVISO in the United States, which would have a material adverse effect on our business and couldpotentially cause us to cease operations. If we are able to resubmit an NDA for ZALVISO with this new clinical data, there is no guarantee that such data will be deemed sufficient by the FDA.While we designed the protocols for bench testing and the Human Factors studies to address the issues raised in the ZALVISO CRL, and designed theprotocol for the additional ZALVISO clinical trial to further address these issues, there is no guarantee the FDA will deem such protocols and resultssufficient to address those issues when they are formally reviewed as a part of an NDA resubmission. Lastly, while we believe the results from our bench testing, Human Factors studies and the IAP312 clinical trial are positive, the FDA may hold a differentopinion and deem the results insufficient. The FDA may provide review commentary at any time during the resubmission and review process which couldadversely affect or even prevent the approval of ZALVISO, which would adversely affect our business. We may not be able to identify appropriateremediations to issues that the FDA may raise, and we may not have sufficient time or financial resources to conduct future activities to remediate issuesraised 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 3 multicenter, open-label study ofZALVISO (IAP312), 2% of patients dropped out prematurely due to an AE. Five patients experienced SAEs in the IAP312 study (four in the sufentanilsublingual tablet group and one in the placebo group) considered possibly or probably related to the study 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 or ZALVISO, cause serious or unexpected side effects after receiving marketing approval, a number ofpotentially significant negative consequences could result, including: •regulatory authorities may withdraw their approval of the product or impose restrictions on its distribution in the form of 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, 31 •our reputation may suffer. Any of these events could prevent us from achieving or maintaining market acceptance of the affected product candidate and could substantially increasethe costs of commercializing our product candidates. Additional time may be required to obtain 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 both DSUVIA and ZALVISO due to regulatory uncertainties in the product development and approval process, inparticular as it relates to a drug/device combination product approval under an NDA. For example, the DSUVIA CRL received from the FDA in October12, 2017 contains requests for additional information and testing of DSUVIA to assess the safety of DSUVIA dosed at the maximum amount described inthe proposed label in at least 50 patients. AcelRx had a Type A post-action meeting with the FDA on January 26, 2018 to discuss the topics covered inthe CRL and to clarify the path to move towards resubmission of the DSUVIA NDA, which we expect to resubmit in the second quarter of 2018, followingthe completion of an HF study to validate the revised DFU. 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 or ZALVISO, until the appropriate regulatory authorities, such as the FDA orthe EMA, have reviewed and approved the product candidate. The regulatory agencies may not complete their review processes in a timely manner, or wemay be unable to obtain regulatory approval for our product candidates. As part of our development program, we met with the FDA in December 2015 toreview plans for an NDA for DSUVIA. Based on feedback from the FDA, we expanded the clinical program for DSUVIA by 176 additional patients toinclude individuals from specific populations and settings, in order to increase the DSUVIA safety database. As a result, the completion of the Phase 3clinical program for DSUVIA was extended and our clinical trial expenses increased. On October 12, 2017, we received a CRL from the FDA regarding the NDA for DSUVIA which states the FDA determined it cannot approve the NDA in itspresent form and provides recommendations for resubmission. The CRL contained two primary recommendations. AcelRx had a Type A post-actionmeeting with the FDA on January 26, 2018 to discuss the topics covered in the CRL and to clarify the path to move towards resubmission of the DSUVIANDA, which we expect to resubmit in the second quarter of 2018, following the completion of an HF study to validate the revised DFU. However, theDSUVIA CRL resulted in delays in our ability to obtain commercial approval of DSUVIA and increased our associated costs. We have held various meetings with Health Authorities in Europe, including from Iceland and Hungary who have been designated as rapporteur and co-rapporteur, respectively, prior to the submission of the MAA. Based on feedback from these discussions, we submitted a hybrid application for a labelindication for DZUVEO in the EU for acute moderate-to-severe pain in adult patients in medically supervised settings. At the time of the MAAsubmission, we had completed one study in the emergency room for acute pain patients, in addition to two Phase 3 and one Phase 2 post-operative painstudies. We may need an additional controlled study in the emergency department with DZUVEO to obtain a label that includes trauma-related pain inaddition to post-operative pain. We also anticipate we may need comparator studies in the EU to ensure premium reimbursement in certain countries.These additional comparator studies may delay commercialization and any associated future revenues from DZUVEO in these 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 the ZALVISO CRL 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 ZALVISO CRL, a clinical trial is needed to assess the risk of inadvertent dispensingand overall risk of dispensing failures. Based on our Type C meeting with the FDA in early September 2015 to discuss the FDA’s request for an additionalclinical trial and our planned response to the ZALVISO CRL, we submitted a protocol to the FDA for a clinical study in post-operative patients designedto evaluate the effectiveness of changes made to the functionality and usability of the ZALVISO device and to take into account comments from the FDAon the study protocol. We completed the protocol review and announced positive results from this study in August 2017, which we intend to use tosupport our NDA resubmission. We anticipate resubmitting the NDA for ZALVISO in the second half of 2018. 32 Although the FDA provided feedback on the DSUVIA clinical program and reviewed the protocol for IAP312, and we have incorporated feedback fromHealth Authorities in Europe concerning the submission of the MAA for DZUVEO, the FDA has, and the EMA may in the future, require us to completeadditional clinical work prior to approving the NDA for DSUVIA, resubmitting the NDA for ZALVISO, or prior to the Committee for Medicinal Productsfor Human Use, or CHMP of the EMA adopting a positive opinion on the MAA for DZUVEO. Additional delays may result if any of our productcandidates is taken before an FDA advisory committee which may recommend restrictions on approval or recommend non-approval. In addition, we mayexperience delays or rejections based upon additional government regulation from future legislation or administrative action, or changes in regulatoryagency policy during the period of product development, clinical trials and the review process. For example, in February 2016, the FDA announced acomprehensive action plan to take concrete steps towards reducing the impact of opioid abuse on American families and communities. As part of thisplan, the FDA announced that it intended to review product and labelling decisions and re-examine the risk-benefit paradigm for opioids. In May 2017, the current FDA Commissioner established an Opioid Policy Steering Committee to address and advise regulators on opioid use. TheCommittee was charged with three initial questions: (i) should the FDA require mandatory education for HCPs who prescribe opioids; (ii) should the FDAtake steps to ensure the number of prescribed opioid doses is more closely tailored to the medical indication; and (iii) is the FDA properly considering therisk of abuse and misuse of opioids during its drug review process. Neither DSUVIA nor ZALVISO have been designed with an abuse-deterrentformulation and neither product candidate is tamper-resistant. As a result, neither DSUVIA nor ZALVISO have undergone testing for tamper-resistance orabuse deterrence. 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. 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. 33 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, submitted the MAA for DZUVEO for a label indication foracute moderate-to-severe pain in a medically supervised setting. We may need an additional controlled study in the emergency department setting withDZUVEO to obtain a label that includes both post-operative pain and trauma-related pain. In addition, we intend to resubmit our NDA seeking approvalof ZALVISO for the management of moderate-to-severe acute pain in adult patients in the hospital setting; however, our clinical trial data was generatedexclusively from the post-operative segment of this population, and the FDA may restrict any approval to post-operative patients only, which wouldreduce 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. More generally, the FDA’s comprehensive action plan to take concrete steps towards reducing the impact of opioid abuse on Americanfamilies and communities may result in delays and challenges in obtaining NDA approval. Any significant delay in the acceptance, review or approval ofan NDA that we have submitted would have a material adverse effect on our business and financial condition and would require us to obtain significantadditional 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. 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 certain states we cannot apply for a license until a drugis approved by the FDA. The state licensing process may take several months which would delay commercialization in those states. In addition,manufacturers of drug products and their facilities are subject to payment of user fees and continual review and periodic inspections by the FDA and otherregulatory authorities for compliance with cGMPs and adherence to commitments made in the NDA. If we, or a regulatory agency, discover previouslyunknown problems with a product, such as AEs of unanticipated severity or frequency, or problems with the facilities where the product is manufactured,a regulatory agency may impose restrictions relative to that product or the manufacturing facilities, including requiring recall or withdrawal of theproduct from the market or suspension of 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; 34 •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 compliance with regulatory requirements in those markets. Ifwe fail to comply with regulatory requirements in international markets or to obtain and maintain required approvals, or if regulatory approvals ininternational markets are delayed, our target market will be reduced and our ability to realize the full market potential of our products will be harmed. 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, any of which may be subject toincreased scrutiny or restriction in connection with the FDA’s comprehensive opioids action plan. While we have received pre-clearance from the FDAregarding certain aspects of the proposed required REMS for ZALVISO, we cannot predict the final REMS to be required as part of any FDA approval ofZALVISO. Depending on the extent of the REMS requirements, any U.S. launch may be delayed, the costs to commercialize ZALVISO may increasesubstantially and the potential commercial market could be restricted. DSUVIA, if approved, will also require a REMS program that may significantlyincrease our costs to commercialize this product candidate. Furthermore, risks of sufentanil that are not adequately addressed through proposed REMSprograms for our future product candidates may also prevent or delay their approval for commercialization. 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, restrict or regulate post-approvalactivities for DSUVIA, DZUVEO and ZALVISO, and affect our ability to profitably sell any products for which we obtain marketing approval. Forexample, in February 2016, the FDA announced a comprehensive action plan to take concrete steps towards reducing the impact of opioid abuse onAmerican families and communities. As part of this plan, the FDA announced that it intended to review product and labelling decisions and re-examinethe risk-benefit paradigm for opioids. 35 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 Affordable Care Act (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 Affordable Care Act 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; and •a Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research,along with funding for such research. The Affordable Care Act has the potential to substantially change health care financing and delivery by both governmental and private insurers, and mayalso increase our regulatory burdens and operating costs. Legislative changes to the Affordable Care Act remain possible and appear likely in the 115th U.S. Congress and under the Trump Administration. SinceJanuary 2017, President Trump has signed two Executive Orders and other directives designed to delay the implementation of certain provisions of theAffordable Care Act or otherwise circumvent some of the requirements for health insurance mandated by the Affordable Care Act. Concurrently, Congresshas considered legislation that would repeal or repeal and replace all or part of the Affordable Care Act. While Congress has not passed comprehensiverepeal legislation, two bills affecting the implementation of certain taxes under the Affordable Care Act have been signed into law. The Tax Cuts and JobsAct of 2017 includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Acton certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate”.Additionally, on January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed theimplementation of certain fees mandated by the Affordable Care Act, including the so-called “Cadillac” tax on certain high cost employer- sponsoredinsurance plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device excise tax on non-exemptmedical devices. Further, the Bipartisan Budget Act of 2018, or the BBA, among other things, amends the Affordable Care Act, effective January 1, 2019,to increase from 50% to 70% the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D and to close thecoverage gap in most Medicare drug plans, commonly referred to as the “donut hole”. Congress may still consider other legislation to repeal and replaceelements of the Affordable Care Act. We expect that the Affordable Care Act, as currently enacted or as it may be amended or repealed in the future, andother healthcare reform measures that may be adopted in the future, could have a material adverse effect on our industry generally and on our ability tosuccessfully commercialize our product candidates, if approved. We cannot predict the likelihood, nature or extent of government regulation that mayarise from future legislation or administrative action, either in the United States or abroad. If we or our collaborators are slow or unable to adapt tochanges in existing requirements or the adoption of new requirements or policies, or if we or our collaborators are not able to maintain regulatorycompliance, our product candidates may lose any regulatory approval that may have been obtained and we may not achieve or sustain profitability,which would adversely affect our business. In addition, other legislative changes have been proposed and adopted in the United States since the Affordable Care Act 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 2027 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 additional 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 informationregarding the drug product to individuals and entities to which product ownership is transferred, label drug product with a product identifier, and keepcertain records regarding the drug product. 36 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 payers 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. 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 2018 and may continue to incurlosses for the foreseeable future. We have incurred significant net losses in each year since our inception in July 2005, and as of December 31, 2017, we had an accumulated deficit of$297.9 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 work to address the recommendations made in the DSUVIA CRLand confirm plans to move towards resubmission of the DSUVIA NDA, continue our pre-commercialization activities for DSUVIA and ZALVISO, conductresearch and development activities for our product candidates, including addressing issues raised by the FDA related to regulatory review of ZALVISO,and support the manufacturing and supply of ZALVISO in Europe for Grünenthal. While Grünenthal has begun commercial sales of ZALVISO in the EU,if DSUVIA), 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 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 agreement with Grünenthal forcommercialization of ZALVISO in Europe and Australia, Grünenthal may not recognize a level of commercial sales of ZALVISO for which we wouldreceive sales milestone payments. Even if Grünenthal is successful in commercialization of ZALVISO, as a result of our sale to PDL of certain expectedroyalties from the sales of ZALVISO by Grünenthal and a majority of our first four commercial sales milestones, we will receive only 25% of the salesroyalties and 20% of the first four commercial milestones under the Amended License Agreement. In addition, we do not anticipate generating revenuesfrom our other product candidates for the foreseeable future, if ever. Our ability to generate future revenues from product sales depends heavily on oursuccess in: •obtaining and maintaining regulatory approval for DSUVIA and/or ZALVISO in the United States 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 DSUVIA and ZALVISO, as well as obtaining regulatory approval for, and launching andcommercializing DSUVIA and ZALVISO, which will require additional funding or corporate partnership resources. 37 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. Even if one or more of our product candidates is approved for commercial sale, we anticipate incurring significant costs associated with commercializingany approved product candidate. Even if we are able to generate revenues from the sale of any future approved products, we may not become profitableand may need to obtain additional funding to continue operations. We are substantially dependent on our commercial partner, Grünenthal, to successfully commercialize ZALVISO in Europe. Under our amended agreements with Grünenthal, we have granted Grünenthal rights to commercialize ZALVISO in 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 othermedically supervised settings, and in September 2015, the EC approved Grünenthal’s MAA for ZALVISO for the management of acute moderate-to-severe post-operative pain in adult patients, and Grünenthal has begun its commercial launch of ZALVISO in the European Union. 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, which was delivered in December 2016,have undergone extensive bench testing and we believe we have successfully addressed the issues as presented. Additional devices were deliveredbeginning in early 2017. Controllers with the U.S. version of the revised software were also used in the IAP312 clinical study that was initiated inSeptember 2016. There can be no assurance that the issues identified in the initial pilot and launch phases by Grünenthal will not have a material adverseimpact on the current and future sales of ZALVISO in Europe. Further, if new issues occur, there may be a material adverse impact on the future sales ofZALVISO in Europe which may have a negative impact on future revenues received and recognized by us. There is no guarantee that Grünenthal will achieve commercial success in its ZALVISO launch in the European Union or anywhere in the Territory. InSeptember 2015, we consummated a monetization transaction with PDL BioPharma, Inc., or PDL, pursuant to which we sold to PDL for $65.0 million75% of the European royalties from sales of ZALVISO and 80% of the first four commercial milestones under the License Agreement, subject to a cappedamount, referred to as the Royalty Monetization. Accordingly, even if Grünenthal is successful in the commercialization of ZALVISO in the Territory, wewill receive only 25% of the royalties and 20% of the first four commercial milestones under the License Agreement, and 100% of the royalties after thecapped amount is reached. Any failures in commercialization of ZALVISO outside the United States could have a material adverse impact on our business, including an adverseimpact on the development of DSUVIA or ZALVISO in the United States, if related to issues underlying the sufentanil sublingual tablet technology,safety or efficacy. Additionally, we agreed to certain representations and covenants relating to the Amended Agreements under our agreements with PDL,and, if we breach those representations or covenants, we may become subject to indemnification claims by PDL and liable to PDL for its indemnifiablelosses relating to such breaches. The amount of such losses could be material and could have a material adverse impact on our business. We may be unable to achieve the manufacturing cost reductions required in order to accommodate the declining transfer prices under the AmendedAgreements without a corresponding decrease in our gross margin. Under the Amended Agreements with Grünenthal, we will sell ZALVISO at a predetermined transfer price that approximates the direct cost of manufactureat our contract manufacturers. We will not recover internal indirect costs as part of the transfer price. In addition, the Amended Agreements includedeclining maximum transfer prices over the term of the contract with Grünenthal. These transfer prices were agreed to assuming economies of scale thatwould occur with increasing production volumes (from the potential approval of ZALVISO in the U.S. and an increase in demand in Europe) andcorresponding decreases in manufacturing costs. We do not have long-term supply agreements with our contract manufacturers and prices are subject toperiodic changes. To date, we have not received U.S. approval of ZALVISO and the Grünenthal launch is in the early stages. If we do not receive timelyapproval of ZALVISO in the U.S., are unable to successfully launch ZALVISO in the U.S., or the volume of Grünenthal sales does not increasesignificantly, we are not likely to achieve the manufacturing cost reductions required in order to accommodate these declining transfer prices whichwould affect our ability to achieve net gross profit on ZALVISO product sales. 38 We have a limited operating history that may make it difficult to predict our future performance or evaluate our business and prospects. Since inception, our operations have been primarily focused on developing our technology and undertaking pharmaceutical development and clinicaltrials for our product candidates, understanding the market potential for our product candidates and preparing for the potential commercialization ofDSUVIA and ZALVISO in the United States. We have not yet obtained regulatory approval of any of our product candidates in the United States, andhave never ourselves directly commercialized a product. Consequently, any predictions that are made about our future success, or viability, or evaluationof 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 in support of our product candidates, including addressing the recommendations made in theDSUVIA CRL and resubmission of the DSUVIA NDA, the remaining development activities associated with ZALVISO, including preparation of theplanned NDA resubmission, as well as support for FDA regulatory review of both the DSUVIA and ZALVISO NDA resubmissions, if/when they areresubmitted. Further development activities can be time consuming and costly. While we believe we have sufficient capital resources to continue plannedoperations through at least the end of the first quarter of 2019, we will need additional capital to pursue commercialization of any of our productcandidates, including DSUVIA and ZALVISO, if approved. 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. Wesubmitted a protocol to the FDA for a clinical study in post-operative patients designed to evaluate the effectiveness of changes made to the functionalityand usability of the ZALVISO device and to take into account comments from the FDA on the study protocol. We announced positive results from thisstudy, IAP312, in August 2017, which we intend to use to support our NDA resubmission. We plan to resubmit our NDA for ZALVISO in the second halfof 2018. The IAP312 clinical trial, and the corresponding extension of the ZALVISO development program, unexpectedly increased our capitalrequirements. Clinical trials, regulatory reviews, and a potential launch of a commercial product are expensive activities. In addition, commercialization costs forDSUVIA and ZALVISO in the United States may be significantly higher than estimated. We may experience technical difficulties in ourcommercialization efforts or otherwise, which could substantially increase the costs of commercialization. Revenues may be lower than expected andaccordingly costs to produce such revenues may exceed those revenues. We will need to seek additional capital to continue operations. Such capitaldemands could be substantial. In the future, we may seek to sell additional equity or debt securities, including under the Sales Agreement with Cantor,monetize or securitize certain assets including future royalty streams and milestones, obtain a credit facility, or enter into product development, license ordistribution agreements with third parties, or divest one or more of our product candidates. Such arrangements may not be available on favorable terms, ifat 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. 39 To fund our operations, we may sell additional equity securities, which may result in dilution to our stockholders, or debt securities, which may imposerestrictions on our business. 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. Forexample, during the year ended December 31, 2017, we issued and sold 5.4 million shares of common stock pursuant to the Sales Agreement with Cantor,for which we received net proceeds of approximately $15.7 million. The incurrence of indebtedness would result in increased fixed payment obligationsand could also result in certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sellor license intellectual property rights and other operating restrictions, such as minimum cash balances, that could adversely impact our ability to conductour business. If we are unable to expand our operations or otherwise capitalize on our business opportunities, our business, financial condition and resultsof operations could be materially adversely affected and we may not be able to meet our debt service obligations. We might be unable to service our existing debt due to a lack of cash flow and might be subject to default. As of December 31, 2017, we have approximately $19.1 million of debt, which includes the accrual portion of the End of Term Fee, under our AmendedLoan Agreement with Hercules. The Amended Loan Agreement has a scheduled maturity date of March 2020 and is secured by a first priority securityinterest in substantially all of our assets, with the exception of our intellectual property and those assets sold under the Royalty Monetization, where thesecurity 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, Hercules could elect to declare all amounts outstanding, together with accrued and unpaid interest and penalty, to be immediately dueand payable. Additional capital may not be available on terms acceptable to us, or at all. In addition, the Royal Monetization has the effect of decreasingfuture cash flows otherwise potentially available to us under the Amended Agreements to repay this debt. Even if we were able to repay the full amount incash, any such repayment could leave us with little or no working capital for our business. If we are unable to repay those amounts, Hercules will have afirst claim on our assets pledged under the Amended Loan Agreement. If Hercules should attempt to foreclose on the collateral, it is unlikely that therewould be any assets remaining after repayment in full of such secured indebtedness. Any default under the Amended Loan Agreement and resultingforeclosure would have a material adverse effect on our financial condition and our ability to continue our operations. The costs incurred under the DoD Contract are subject to audit by the Department of Defense and any identified deficiencies could jeopardize past orfuture funding. 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 hasreimbursed us for costs incurred for development, manufacturing, regulatory and clinical costs outlined in the DoD Contract, including reimbursement forcertain personnel and overhead expenses. The period of performance under the DoD Contract began on May 11, 2015. The DoD Contract gives the DoDthe option to extend the term of the DoD Contract and provide additional funding for the research. On March 2, 2016, the DoD Contract was amended toapprove enrollment of additional patients in the SAP302 study, approve the addition of the SAP303 study, and extend the DoD Contract period ofperformance by four months from November 10, 2016 to March 9, 2017, to accommodate the increased SAP302 patient enrollment and the SAP303study. On March 9, 2017, the DoD Contract was amended to incorporate additional activities including the development and testing of packagingchanges; and additional stability testing. The amendment also extended the DoD Contract period of performance by 11 months through February 28,2018 to accommodate these additional activities. At December 31, 2017, the additional activities as outlined under the DoD Contract through February28, 2018 were substantially complete. On February 28, 2018, the DoD contract was amended to incorporate additional services in the amount of $0.5million and to extend the contract period by twelve months through February 28, 2019. Funding under the DoD Contract will be subject to audit by theDoD 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 theDoD Contract. 40 Risks Related to Our Reliance on Third Parties We rely on third party manufacturers to produce our preclinical and clinical drug supplies and intend to rely on third parties to produce commercialsupplies of any approved product candidates. Reliance on third party manufacturers entails many risks including: •the inability to meet our product specifications and quality requirements consistently; •a delay or inability to procure or expand sufficient manufacturing capacity; •manufacturing and product quality issues related to scale-up of manufacturing; •costs and validation of new equipment and facilities required for scale-up; •a failure to 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. If any suchbreach were to be material and remain uncured, it could result in Grünenthal terminating the Amended Agreements, which in turn could result in us beingresponsible for indemnification of losses suffered by PDL under the Royalty Monetization. If any of these events were to occur, our business would bematerially adversely affected. 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. We have used two established suppliers of sufentanil citrate for our tablets. However, currently we only have one supplier qualified for our manufacture ofZALVISO. For each product candidate, only one of the two suppliers will be qualified as a vendor with the FDA and EMA. If supply from the approvedvendor is interrupted, there could be a significant disruption in commercial supply. For example, our API provider is changing its process formanufacturing our drug. There is no guarantee that this change will not impact our commercial supply of API. This change in process will require aregulatory submission to the FDA and European Health Authority which must be approved before the new process API can be used commercially in eachcorresponding territory. Any alternative vendor would need to be qualified through an NDA supplement and/or an MAA variation which could result infurther delay. The FDA or other regulatory agencies outside of the United States may also require additional trials if a new sufentanil supplier is reliedupon 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. 41 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 number of commercial lots at Patheon to support Grünenthal’s launch in Europe, our experienceis limited, which has and may in the future impact our ability to deliver commercial supplies to Grünenthal on a timely basis. 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. On August 22, 2017, we entered into anamendment to the Services Agreement with Patheon under which Patheon has agreed to manufacture, supply, and provide certain validation and stabilityservices with respect to DSUVIA for potential sales in United States, Canada and Mexico, and 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. If Patheoncannot provide us with an adequate supply of sufentanil sublingual tablets, we may be required to pursue alternative sources of manufacturing capacity.Switching or adding commercial manufacturing capability can involve substantial cost and require extensive management time and focus, as well asadditional regulatory filings which may result in significant delays. In addition, there is a natural transition period when a new manufacturing facilitycommences work. As a result, delays may occur, which can materially impact our ability to meet our desired commercial timelines, thereby increasing ourcosts 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 DSUVIA or DZUVEO and ZALVISO outside the EU. Thesechallenges may have a material 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 the resubmittedZALVISO NDA. We submitted a protocol to the FDA for a clinical study in post-operative patients designed to evaluate the effectiveness of changesmade to the functionality and usability of the ZALVISO device and to take into account comments from the FDA on the study protocol in response to theZALVISO CRL. We completed the protocol review with the FDA for the study, known as IAP312, and announced positive results from this study inAugust 2017, which we intend to use to support the planned NDA resubmission. We plan to resubmit our NDA for ZALVISO in the second half of 2018.However, if any additional changes to the device are substantial, the FDA may require us to perform further clinical trials or studies in order to approvethe device for commercial use. 42 We have manufactured and shipped commercial supplies of ZALVISO for delivery to Grünenthal; however, our experience is limited. We will continue torely on contract manufacturers, component fabricators and third-party service providers to produce the necessary ZALVISO devices for the commercialmarketplace. We currently outsource manufacturing and packaging of the controller, dispenser and cartridge components of the ZALVISO device to thirdparties and intend to continue to do so. Some of these purchases and components were made and will continue to be made utilizing short-term purchaseagreements and we may not be able to enter into long-term agreements for commercial supply of DSUVIA or ZALVISO devices with third-partymanufacturers, or may be unable to do so on acceptable terms. In addition, we have encountered and may continue to encounter production issues withour current or future contract manufacturers and other third party service providers, including the reliability of the production equipment, quality of thecomponents produced, their inability to meet demand or other unanticipated delays including scale-up and automating processes, which could adverselyimpact our ability to supply our customers with DSUVIA, if approved in the U.S., ZALVISO in the EU, DZUVEO, if approved outside the U.S., andZALVISO, if approved in the U.S. and any other foreign territories. 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 and another contract packaging facility. Thecapacity and cost to package the DSUVIA units under this manual process is not sufficient to support successful future sales of DSUVIA. We haveinitiated the process to purchase an automated filling and packaging line to support increased capacity packaging for DSUVIA. We expect to completethe acquisition and installation of this line in the second half of 2018. There is no assurance that we will be able to successfully purchase, install orvalidate the automated filling and packaging line for DSUVIA. If we are successful in the purchase, installation and validation of this equipment andprocess, 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 Phase 3 clinicalprogram 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 or DZUVEO, ZALVISO, and any 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 forensuring that each of our trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards and our reliance on theCROs 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 anyother 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. 43 Risks Related to Commercialization of Our Product Candidates The commercial success of DSUVIA or DZUVEO, 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 DZUVEO outside the U.S., if approved, as well as ZALVISO in the EU, will depend on anumber of factors, including: •demonstration of clinical safety and efficacy compared to other products; •the relative convenience, ease of administration and acceptance by physicians, patients and health care payers; •the use of DSUVIA for the management of moderate-to-severe acute pain by a healthcare professional for patient types that were notspecifically 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, DZUVEO, or ZALVISO; •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 and reimbursement. If our approved products do not achieve an adequate level of acceptance by physicians, nurses, patients and P&T Committees, we may not generatesufficient 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 DZUVEO 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 DZUVEO, 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. 44 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 has resulted, and any future approvals of our product candidates outside of the United States will result, in a variety ofrisks associated with international operations that 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 DZUVEO is approved for commercialization outside the United States, we intend to enter into agreementswith third parties to market DZUVEO 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; 45 •unexpected changes in tariffs, trade barriers and regulatory requirements; •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. DSUVIA does not require placement of an IV line andtherefore direct competitors in the emergency department are other non-invasive, rapid-acting analgesics. In this environment, DSUVIA may competewith Egalet Corporation’s SPRIX (intranasal ketorolac). Transmucosal fentanyl products, such as ACTIQ or FENTORA (Cephalon, Inc., a subsidiary ofTeva Pharmaceutical Products Ltd.), are approved for opioid-tolerant patients suffering from cancer pain and therefore are not a competitor for DSUVIA.Orally administered tablets or liquids containing oxycodone or hydrocodone often have slower absorption and slower analgesic onset than transmucosalopioids. Examples of oral opioids include Acura Pharmaceuticals, Inc.’s OXAYDO (marketed by Egalet Corporation), Collegium Pharmaceuticals, Inc.’sNUCYNTA, and Purdue Pharma, L.P.’s OXYFAST, or generic oral opioids which have moderate-to-severe acute pain labeling. Often used in combination with opioids are generic injectable local anesthetics, such as bupivacaine, or branded formulations thereof, including PaciraPharmaceuticals, Inc.’s EXPAREL. In addition, Heron Therapeutics, Inc. is in Phase 3 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. These products mayreduce the amount of opioids required to achieve adequate pain control but usually do not obviate the need for opioids completely. Similarly, there aremany IV formulations of non-steroidal anti-inflammatory drugs (NSAIDS) for treatment of acute pain, such as generic IV ketorolac, Pfizer’s DYLOJECT,Cumberland Pharmaceuticals Inc.’s CALDOLOR and recently Recro Pharma, Inc. submitted an NDA for IV meloxicam for the treatment of moderate-to-severe acute pain. These products are all invasively administered via an IV and, as a result, we do not believe they are direct competitors to the non-invasive DSUVIA. We believe that ZALVISO would compete with a number of opioid-based treatment options that are currently available, as well as some products that arein development. The hospital market for opioids for moderate-to-severe acute pain is large and competitive. The primary competition for ZALVISO is theIV PCA pump, which is widely used in the moderate-to-severe acute pain in the hospital setting. Leading manufacturers of IV PCA pumps includeHospira, Inc. (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 andfentanyl, all of which are available as generics both from generic product manufacturers as well as from compounding pharmacies. In addition, brandedmanufacturers (e.g., Hospira, Inc.) sell pre-filled glass syringes of morphine to fit their IV PCA pump systems. These systems, however, are invasive andrequire programming, which can lead to dosing errors, and therefore, while they are commonly used, we do not believe they are direct competitors forZALVISO. Also available on the market is the Avancen Medication on Demand, or MOD, an oral PCA device developed by Avancen MOD Corporation. Oralopioids and other agents can be used in this system. Oral opioids tend to have slower onset than transmucosal opioids, such as ZALVISO. The MedicineCompany’s IONSYS is a non-invasive transdermal opioid PCA that could potentially compete with ZALVISO; however, a worldwide recall of the productwas announced due to a commercial refocusing of the company. Additional potential opioid competitors for ZALVISO include Cara Therapeutics, Inc.,who is developing a kappa opioid agonist, CR845, as an IV agent for the management of post-operative moderate-to-severe pain. Also, Trevena, Inc., hassubmitted an NDA for IV oliceridine, an intravenous G-protein biased ligand that targets the mu-opioid receptor for the treatment of moderate-to-severeacute pain, with a clinical development focus in acute post-operative pain. Both of these product candidates are invasive and, therefore, we do not believethey are direct competition to the non-invasive ZALVISO. 46 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 DZUVEO 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 DZUVEO 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 payer programs at thefederal and state levels, authorities, including Medicare and Medicaid, private health insurers, managed care plans and other third-party payers. No uniform policy requirement for coverage and reimbursement for drug products exists among third-party payers in the United States or the EU.Therefore, coverage and reimbursement can differ significantly from payer to payer. 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 payer 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 payers could significantly harm our operating results, our ability to raise capital needed tocommercialize any future approved drugs and our overall financial condition. 47 A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and other third-party payers 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 DZUVEO 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, DZUVEO 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 payers, 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 DZUVEO, 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 DZUVEO, 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, ZALVISO and/or our other drug candidates, even if/when those drug candidatesobtain marketing approval. In the United States, there has been increasing legislative and enforcement interest with respect to specialty drug pricing practices. Specifically, therehave been several recent U.S. Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring moretransparency to drug pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursementmethodologies for drugs. At the federal level, the Trump Administration’s budget proposal for fiscal year 2019 contains additional drug price controlmeasures that could be enacted during the 2019 budget process or in other future legislation, including, for example, measures to permit Medicare Part Dplans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices under Medicaid and to eliminate costsharing for generic drugs for low-income patients. While any proposed measures will require authorization through additional legislation to becomeeffective, Congress and the Trump Administration have each indicated that it will continue to seek new legislative and/or administrative measures tocontrol drug costs. At the state level, legislatures are increasingly passing legislation and implementing regulations designed to control pharmaceuticaland biological product pricing, including price or patient reimbursement constraints, discounts, discounts, restrictions on certain product access andmarketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.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 payers 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 DZUVEO, would be negatively affected. 48 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. 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. 49 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 payers, 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 payers 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 payer (e.g., public or private) and knowingly or willfully falsifying, concealing, or covering upby any trick or device a material fact or making any materially false statement in connection with the delivery of, or payment for, healthcarebenefits, items or services relating to healthcare matters; •HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementingregulations, impose certain obligations, including mandatory contractual terms, on covered healthcare providers, health plans andclearinghouses, as well as their respective business associates that perform services for them that involve the use, or disclosure of,individually identifiable health information, with respect to safeguarding the privacy, security and transmission of individually identifiablehealth information; •international laws, such as the EU Data Privacy Directive (95,46/EC) and Swiss Federal Act on Data Protection, regulate the processing ofpersonal data within the European Union and between countries in the European Union and countries outside of the European Union,including the United States: •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 Affordable Care Act ), and its implementing regulations, requires certain manufacturers of drugs,devices, biologicals and medical supplies to report to the U.S. Department of Health and Human Services information related to payments andother transfers of value provided to physicians and teaching hospitals, as well as ownership and investment interests held by physicians andtheir 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, 50 •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, additional oversight and reporting obligations if we becomesubject to a corporate integrity agreement or other 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 financial results. Any action against us forviolation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses or divert our management’s attentionfrom 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 incompliance with applicable European laws and directives, we would be unable to continue to affix the CE Mark to our ZALVISO device, which wouldprevent Grünenthal from selling these devices within the EU and EEA. 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.Our contract manufacturers, suppliers, clinical trial sites and local and national transportation vendors are all subject to business interruptions due toweather, natural disasters, or man-made incidents. We are also vulnerable to other types of natural disasters and other events that could disrupt ouroperations. We do not carry insurance for earthquakes or other natural disasters and we may not carry sufficient business interruption insurance tocompensate us for losses that may occur. Any losses or damages we incur could have a material adverse effect on our business operations. 51 Our future success depends on our ability to retain key executives and to attract, retain and motivate qualified personnel. We are highly dependent on principal members of our executive team, the loss of whose services may adversely impact the achievement of our objectives.While we have entered into offer letters with each of our executive officers, any of them could leave our employment at any time, as all of our employeesare “at will” employees. Recruiting and retaining other qualified employees for our business, including scientific and technical personnel, will also becritical to our success. There is currently a shortage of skilled executives in our industry, which is likely to continue. As a result, competition for skilledpersonnel is intense and the turnover rate can be high. We may not be able to attract and retain personnel on acceptable terms given the competitionamong numerous pharmaceutical companies for individuals with similar skill sets. In addition, failure to succeed in clinical trials, or delays in theregulatory approval process, may make it more challenging to recruit and retain qualified personnel. The inability to recruit or loss of the services of anyexecutive or key employee might impede the progress of our research, development and commercialization objectives. 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, 2017, we had 41 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, medical, financial and otherresources and to hire more consultants and contractors. Future growth will impose significant additional responsibilities on our management, includingthe need to identify, recruit, maintain, motivate and integrate additional employees, consultants and contractors. Also, our management may need todivert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growthactivities. We may not be able to effectively manage the expansion of our operations, which may result in weaknesses in our infrastructure, give rise tooperational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Our expected growthcould require significant capital expenditures and may divert financial resources from other projects, such as the development of additional productcandidates. If our management is unable to effectively manage our growth, our expenses may increase more than expected, our ability to generate and/orgrow revenues could be reduced, and we may not be able to implement our business strategy. Our future financial performance and our ability tocommercialize DSUVIA, 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 approval of ZALVISO in the EU, we expanded our insurance coverage to include the saleof ZALVISO to our commercial partner, Grünenthal. There can be no assurance that such coverage will be adequate to protect us against any future lossesdue to liability. On occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated adverse effects. Asuccessful product liability claim or series of claims brought against us could cause our stock price to decline and, if judgments exceed our insurancecoverage, could adversely affect our results of operations and business. 52 Our employees, independent contractors, principal investigators, consultants, commercial partners and vendors may engage in misconduct or otherimproper activities, including non-compliance with regulatory standards and requirements and insider trading. We are exposed to the risk that our employees, independent contractors, investigators, consultants, commercial partners and vendors may engage infraudulent conduct or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct that violates (1) thelaws of the FDA and similar foreign regulatory bodies, including those laws requiring the reporting of true, complete and accurate information to suchregulatory bodies; (2) healthcare fraud and abuse laws of the United States and similar foreign fraudulent misconduct laws; and (3) laws requiring thereporting of financial information or data accurately. Specifically, the promotion, sales and marketing of healthcare items and services, as well as certainbusiness arrangements in the healthcare industry are subject to extensive laws designed to prevent misconduct, including fraud, kickbacks, self-dealingand other abusive practices. These laws may restrict or prohibit a wide range of pricing, discounting, marketing, structuring and commission(s), certaincustomer incentive programs and other business arrangements generally. Activities subject to these laws also involve the improper use of informationobtained in the course of patient recruitment for clinical trials. It is not always possible to identify and deter employee and other third-party misconduct.The precautions we take to detect and prevent inappropriate conduct may not be effective in controlling unknown or unmanaged risks or losses or inprotecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws. If any such actions areinstituted against us, and we are not successful in defending ourselves, those actions could have a significant impact on our business, including theimposition of civil, criminal and administrative penalties, damages, monetary fines, disgorgement, individual imprisonment, additional oversight andreporting obligations if we become subject to a corporate integrity agreement or similar agreements to resolve allegations of non-compliance with theselaws, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm,diminished profits and future earnings, and curtailment of our operations, any of which could adversely affect our ability to operate our business and ourresults 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, 2017, we are the owner of record of 66 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. 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. 53 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. 54 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. 55 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 and, in April2017, the FDA conditionally accepted the DSUVIA mark as part of the NDA review process. Although we are not currently aware of any oppositions to orcancellations of our registered trademarks or pending applications, it is possible that one or more of the applications could be subject to opposition orcancellation after the marks are registered. The registrations will be subject to use and maintenance requirements. It is also possible that we have not yetregistered all of our trademarks in all of our potential markets, and that there are names or symbols other than “ACELRX” that may be protectable marksfor which we have not sought registration, and failure to secure those registrations could adversely affect our business. Opposition or cancellationproceedings may be filed against our trademarks and our trademarks may not survive such proceedings. Risks Related to Ownership of Our Common Stock The market price of our common stock may be highly volatile. Since our initial public offering, or IPO, in February 2011, the trading price of our common stock has experienced significant volatility and is likely to bevolatile in the future. For example, most recently our stock price dropped by 60% on October 12, 2017, the day we announced the receipt of the DSUVIACRL from the FDA. Our stock price could be subject to wide fluctuations in response to a variety of factors, including the following: •any delay in resubmitting the NDA for ZALVISO, or addressing the recommendations made in the DSUVIA CRL and resubmitting the NDAfor DSUVIA, and any additional adverse developments or perceived adverse developments with respect to the FDA’s review of the ZALVISOor DSUVIA NDAs upon resubmission; •adverse results or delays in future clinical trials; •inability to obtain additional funding, including funding necessary for the planned potential commercialization and manufacturing ofZALVISO and DSUVIA 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 the investment 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; •additions or departures of key scientific or management personnel; •significant lawsuits, including patent or stockholder litigation; 56 •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, 2017 and 2016 was approximately 950,000 and 330,000 shares per day, respectively.While trading volume spiked in the second half of 2017 due to the DSUVIA PDUFA decision, a more active market for our stock has only recentlydeveloped and may not be sustained. Our stockholders may be unable to sell their common stock at or near their asking prices, which may result insubstantial losses to our investors. The market for our common stock may be characterized by significant price volatility when compared to seasoned issuers, and we expect that our shareprice will be more volatile than a seasoned issuer for the indefinite future. As noted above, our common stock may be sporadically and/or thinly traded.As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence theprice of those shares in either direction. The price for our shares could, for example, decline significantly in the event that a large number of our commonstock are sold on the market without commensurate demand, as compared to a seasoned issuer that could better absorb those sales without adverse impacton its share price. Our principal stockholders and management own a significant percentage of our stock and are able to exert significant control over matters subject tostockholder approval. Our executive officers and directors, together with the stockholders with whom our executive officers and directors are affiliated or associated,beneficially own a significant percentage of our voting stock. Therefore, these stockholders have the ability to influence us through this ownershipposition. These stockholders are able to determine all matters requiring stockholder approval. For example, these stockholders, acting together, are able tocontrol elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction.This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may believe are in your best interest as one ofour stockholders. We incur significant increased costs as a result of operating as a public company, and our management is required to devote substantial time to newcompliance initiatives. As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002, as amended, or theSarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, as well as the information and reportingrequirements of the Exchange Act and other federal securities laws, and rules subsequently implemented by the SEC and NASDAQ, have imposed variousrequirements on public companies. The costs of compliance with the Sarbanes-Oxley Act and of preparing and filing annual and quarterly reports, proxystatements and other information with the SEC, the Dodd-Frank Act, and regulations promulgated under these statutes, are significant. Our managementand other personnel need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations increase our legaland financial compliance costs and make some activities more time-consuming and costly. For example, these rules and regulations make it more difficultand more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain our currentlevels of such coverage. As a public company, we are subject to the requirements of Section 404 of the Sarbanes-Oxley Act. If we are unable to comply with Section 404 in atimely manner, it may affect the reliability of our internal control over financial reporting. Assessing our staffing and training procedures to improve ourinternal control over financial reporting is an ongoing process. We have been and will continue to be involved in a substantial effort to implement appropriate processes, document the system of internal control overkey processes, assess their design, remediate any deficiencies identified and test their operation. If we fail to comply with the requirements of Section 404,it may affect the reliability of our internal control over financial reporting and negatively impact the quality of disclosure to our stockholders. If we, orour independent registered public accounting firm, identify and report a material weakness, it could adversely affect our stock price. 57 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 additional equity securities, including pursuant to the Sales Agreement with Cantor, our stockholders may experience substantial dilution. Wemay sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time totime. If we sell common stock, convertible securities or other equity securities in more than one transaction, investors may be materially diluted bysubsequent sales. These sales may also result in material dilution to our existing stockholders, and new investors could gain rights superior to our existingstockholders. 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 future complete response letters, negative clinicalresults, a negative vote or decision by the FDA advisory committee, or other negative feedback from the FDA, EMA, or other regulatory agencies. In thepast, securities-related class action litigation has often been brought against a company following a decline in the market price of its securities. This riskis especially relevant for us because biotechnology and biopharmaceutical companies often experience significant stock price volatility in connectionwith their investigational drug candidate development programs and the FDA's review of their NDAs. 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. 58 The recently passed comprehensive tax reform bill could adversely affect our business and financial condition. On December 22, 2017, President Trump signed into law new legislation that significantly revises the Internal Revenue Code of 1986, as amended. Thenewly enacted federal income tax law, among other things, contains significant changes to corporate taxation, including reduction of the corporate taxrate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except forcertain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating losscarrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings(subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time,and modifying or repealing many business deductions and credits (including reducing the business tax credit for certain clinical testing expensesincurred in the testing of certain drugs for rare diseases or conditions generally referred to as “orphan drugs”). Notwithstanding the reduction in thecorporate income tax rate, the overall impact of the new federal tax law is uncertain, and our business and financial condition could be adversely affected.In addition, it is uncertain if and to what extent various states will conform to the newly enacted federal tax law. The impact of this tax reform on holdersof our common stock is also uncertain and could be adverse. Investors should consult with their legal and tax advisors with respect to this legislation andthe potential tax consequences of investing in or holding our common stock. 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. 59 These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult forstockholders to replace members of our Board of Directors, which is responsible for appointing the members of our management. In addition, we aresubject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad rangeof business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interestedstockholder, unless such transactions are approved by our Board of Directors. This provision could have the effect of delaying or preventing a change ofcontrol, whether or not it is desired by or beneficial to our stockholders. Further, other provisions of Delaware law may also discourage, delay or preventsomeone from acquiring us or merging with us. Item 1B. Unresolved Staff Comments None. Item 2. Properties We lease approximately 25,893 square feet of office and laboratory space in Redwood City, California under an agreement that expires in January 2024,with an option to extend for an additional period of six years. 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. 60 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Our common stock has been trading on the NASDAQ Global Market under the symbol “ACRX” since our IPO on February 11, 2011. Prior to this date,there was no public market for our common stock. The following table sets forth the high and low intraday sales prices of our common stock for theperiods indicated as reported by the NASDAQGlobal Market: Price High Low Year ended 2017 Fourth Quarter $5.75 $1.55 Third Quarter $4.70 $2.025 Second Quarter $3.20 $1.95 First Quarter $3.60 $2.45 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 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 futurestockholder returns. The above Stock Price Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities andExchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or SecuritiesExchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing. 61 Holders of Record As of February 5, 2018, 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. 62 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, 2017 2016 2015 2014 2013 (in thousands, except share and per share data) Consolidated Statements of Operations Data: Revenue: Collaboration agreement $7,143 $6,440 $14,857 $5,217 $27,370 Contract and other 852 10,917 4,406 — 2,132 Total revenue 7,995 17,357 19,263 5,217 29,502 Costs and Operating Expenses: Cost of goods sold $10,659 $12,315 $1,770 $— $— Research and development 19,409 21,402 22,488 24,520 26,292 General and administrative 16,609 15,597 14,203 18,346 9,877 Restructuring costs — — 756 — — Total costs and operating expenses 46,677 49,314 39,217 42,866 36,169 Loss from operations (38,682) (31,957) (19,954) (37,649) (6,667)Interest expense (3,316) (2,770) (2,977) (2,639) (1,518)Interest income and other income (expense), net 510 918 1,720 6,935 (15,241)Non-cash interest expense on liability related to sale of futureroyalties (10,721) (9,382) (2,428) — — Net loss before income taxes $(52,209) $(43,191) $(23,639) $(33,353) $(23,426)Benefit (provision) for income taxes 701 34 (760) — — Net loss $(51,508) $(43,157) $(24,399) $(33,353) $(23,426)Net loss per share of common stock, basic $(1.10) $(0.95) $(0.55) $(0.77) $(0.59)Shares used in computing net loss per share of common stock,basic 46,883,535 45,313,118 44,300,099 43,427,111 39,746,678 Net loss per share of common stock, diluted – see Note 14 $(1.10) $(0.95) $(0.60) $(0.91) $(0.59)Shares used in computing net loss per share of common stock,diluted 46,883,535 45,313,118 44,468,440 44,322,297 39,746,678 As of December 31, 2017 2016 2015 2014 2013 (in thousands) Balance Sheet Data: Cash, cash equivalents and short-term investments $60,469 $80,310 $113,464 $75,350 $103,663 Working capital 49,753 78,862 106,167 62,567 97,692 Total assets 75,552 99,993 127,785 86,416 110,031 Long-term debt 19,096 21,549 20,922 24,874 14,364 Liability related to sale of future royalties 83,588 72,987 63,612 — — PIPE warrant liability — 288 913 5,577 13,111 Accumulated deficit (297,870) (246,362) (203,205) (178,806) (145,453)Total stockholders’ (deficit) equity (36,509) (5,337) 33,113 46,656 73,159 63 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with our audited financial statements and the related notes that appear elsewherein this Annual Report on Form 10-K. This discussion contains forward-looking statements within the meaning of Section 21E of the Securities ExchangeAct of 1934, as amended. Such forward-looking statements involve risks, uncertainties and other factors that may cause our actual results, levels ofactivity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Ouractual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of severalfactors, including those set forth under “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K. Please refer to the section entitled“Forward-Looking Statements” in this Annual Report on Form 10-K. Overview We are a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for use in medically supervisedsettings. Our product candidates, focused on the treatment of acute pain are, DSUVIA™ (known as DZUVEO outside of the United States), andZALVISO®, each utilize sublingual sufentanil, delivered via a non-invasive route of sublingual administration, exclusively for use in medicallysupervised settings. We anticipate developing a distribution capability and commercial organization to market and sell DSUVIA, if approved, in theUnited States by ourselves, and potentially, in certain European Economic Area, or EEA, countries with strategic partners. In geographies where wedecide not to commercialize ourselves, we may seek to out-license commercialization rights. We plan to resubmit our NDA for ZALVISO in the secondhalf of 2018. If we are successful in obtaining approval of ZALVISO in the United States, we plan to potentially promote ZALVISO either by ourselves orwith strategic partners. Product Development Programs Our product development portfolio features two innovative therapies for the treatment of acute pain. Please refer to “Part I. Item 1. Business—ProductDevelopment Programs” for a detailed discussion of our product candidates. Collaborative Arrangements Our collaborative arrangements allow us to commercialize ZALVISO in the EU, Switzerland, Liechtenstein, Iceland, Norway and Australia. Please refer to“Part I. Item 1. Business— Collaborative Arrangements” for a detailed discussion of our collaborative arrangements. 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 sales of ZALVISO in the EU, especially in light of continueddelays in obtaining regulatory approvals from the FDA. As a result, we expect to continue to incur operating losses and negative cash flows. AlthoughZALVISO has been approved for sale in the EU, we sold the majority of the royalty rights and certain commercial sales milestones we are entitled toreceive under the Grünenthal Agreements to PDL in September 2015. As we continue to pursue development of our product candidates, includingregulatory review and potential commercial development, subject to FDA approval, we expect the business aspects of our company to become morecomplex. We plan to add personnel and incur additional costs related to the maturation of our business and the potential commercialization of DSUVIAand ZALVISO in the United States. In addition, we believe that continued investment in research and development is critical to attaining our strategicobjectives. In order to develop our product candidates as commercially viable therapeutics, we expect to expend significant resources for expertise inmanufacturing, regulatory affairs, clinical research and other aspects of pharmaceutical development. To date, we have funded our operations primarily through the issuance of equity securities, borrowings, payments from our 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 DoD Contract, the DoD has reimbursed us for certain costs incurred for development, manufacturing, regulatory and clinical costs outlined in theDoD Contract, including reimbursement for certain personnel and overhead expenses. 64 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 $51.5 million, $43.2 million and $24.4 million during the years ended December 31, 2017, 2016 and 2015, respectively. As ofDecember 31, 2017, we had an accumulated deficit of $297.9 million. As of December 31, 2017, we had cash, cash equivalents and short-terminvestments totaling $60.5 million compared to $80.3 million as of December 31, 2016. 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. 65 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. 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. We adopted the new revenue recognition standard effective January 1, 2018 under the modified retrospective transition method. An evaluation of ourcontract with the U.S. Department of Defense and the Amended Agreements with our collaboration partner Grünenthal was completed, and we determinedthat the impact of adoption of the new standard to our financial statements is not material. In addition, there is no change to the units of accountingpreviously identified under legacy GAAP which are now considered performance obligations under the new guidance. 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. 66 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. 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 during the years ended December 31, 2016 and 2015, wereprimarily determined using the simplified method in accordance with guidance provided by the SEC. Such method was utilized as we did not believe ourhistorical option exercise experience, which was limited, provided a reasonable basis upon which to estimate expected term. During this period, volatilitywas derived from historical volatilities of several public companies within our industry that were deemed to be comparable to our business because wehad insufficient history on the volatility of our common stock relative to the expected life assumptions used by us. During the year ended December 31,2017, we determined that our historical data provided a reasonable basis for estimating future behavior in regards to expected term and volatility, and as aresult, began using our own historical option exercise experience and the volatility of our own common stock as the basis for these assumptions. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected life assumption. Further, during the yearsended December 31, 2016 and 2015, we estimated forfeitures at the time of grant and revised those estimates in subsequent periods if actual forfeituresdiffered from those estimates. Effective January 1, 2017, we adopted ASU 2016-09 and elected to recognize forfeitures when they occur using a modifiedretrospective approach, which did not have a material impact on our Consolidated Financial Statements. 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. 67 Years Ended December 31, 2017, 2016 and 2015 Revenue In September 2015, the European Commission, or EC, granted marketing approval for ZALVISO in the European Union to our commercial partner,Grünenthal, and Grünenthal has begun its commercial launch of ZALVISO in the European Union. We anticipate that royalty revenues and non-cashroyalty revenues from the commercial sale of ZALVISO in 2018 will continue to be minimal. Revenue during the year ended December 31, 2017, was $8.0 million, including $7.1 million recognized under our Amended License Agreement withGrünenthal. In addition, we recognized $0.9 million in revenue for services performed under the DoD Contract. 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 for services performed 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 for services performed under the DoD Contract. Collaboration Agreement Revenue Below is a summary of revenue recognized under the Amended Agreements during the years ended December 31, 2017, 2016 and 2015 (in thousands): Years Ended December 31, 2017 2016 2015 License $— $— $13,167 Product sales 6,673 5,742 — Joint steering committee, research and development services 269 688 1,690 Non-cash royalty revenue related to Royalty Monetization (SeeNote 8) 151 7 — Royalty revenue 50 3 — Total $7,143 $6,440 $14,857 As a result of the launch of ZALVISO in Europe by our licensee, Grünenthal, we recognized $6.7 million and $5.7 million in product sales in the yearsended December 31, 2017 and 2016, respectively, consisting of ZALVISO devices, drug product and accessories. 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. We estimate and recognize royalty revenue andnon-cash royalty revenue on a quarterly basis. Adjustments to estimated revenue are recognized in the subsequent quarter based on actual revenue earnedper the royalty reports received from Grünenthal. As of December 31, 2017, we had current and non-current portions of the deferred revenue balance under the Amended Agreements of $0.4 million and$3.5 million, respectively. The estimated margin we expect to receive on transfer prices under the Amended Agreements was deemed to be a significantand incremental discount on manufacturing services, as compared to market rates for contract manufacturing margin. The value assigned to this portion ofthe total allocated consideration was $4.4 million. We anticipate that the long-term deferred revenue balance will decline on a straight-line basis through2029, as we recognize collaboration revenue under the Amended Agreements. Contract and Other Revenue During the years ended December 31, 2017, 2016 and 2015, we recognized revenue of $0.9 million, $10.9 million and $4.4 million, respectively, forservices performed under the DoD Contract for DSUVIA. Under the terms of the DoD Contract, the DoD reimbursed 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 supportof the submission of the DSUVIA NDA to the FDA. 68 Cost of goods sold Total cost of goods sold was $10.7 million, $12.3 million and $1.8 million for the years ended December 31, 2017, 2016 and 2015, respectively. Costs ofgoods sold decreased in the year ended December 31, 2017, as compared to the prior year, due to reduced overhead costs associated with delivering theZALVISO product to Grünenthal. In October 2015, we initiated production of ZALVISO for Grünenthal. Under the Amended Agreements, we will sellZALVISO at a predetermined transfer price that approximates the direct cost of manufacture at our contract manufacturers. We will not recover internalindirect costs as part of the transfer price. In addition, the Amended Agreements include declining maximum transfer prices over the term of the contractwith Grünenthal. These transfer prices were agreed to assuming economies of scale that would occur with increasing production volumes (from thepotential approval of ZALVISO in the U.S. and an increase in demand in Europe) and corresponding decreases in manufacturing costs. We do not havelong-term supply agreements with our contract manufacturers and prices are subject to periodic changes. To date, we have not received U.S. approval ofZALVISO and the Grünenthal launch is in the early stages. 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. Cost of goods sold for ZALVISO delivered to Grünenthal includes the inventory costs of the active pharmaceutical ingredient, or API, third-party contractmanufacturing costs, estimated warranty costs, packaging and distribution costs, shipping, handling and storage costs and impairment charges. Thesedirect costs included in costs of goods sold totaled $6.5 million, $6.4 million and $0.3 million in the years ended December 31, 2017, 2016 and 2015,respectively. We periodically evaluate the carrying value of inventory on hand for potential excess amounts over demand using the same lower of cost ormarket approach as that used to value the inventory. During the year ended December 31, 2017, we recorded an inventory impairment charge of $0.4million, primarily for ZALVISO raw materials inventory on hand, plus related purchase commitments. The indirect costs to manufacture include internalpersonnel and related costs for purchasing, supply chain, quality assurance, depreciation and related expenses. Indirect costs included in costs of goodssold totaled $4.2 million, $5.9 million and $1.5 million in the years ended December 31, 2017, 2016 and 2015, respectively. For the foreseeable future,we anticipate negative gross margins on ZALVISO product 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, 2016 research and development expenses related to DSUVIA, known as DZUVEO 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 expect to incur future research and development expenditures to addressthe recommendations made in the CRL for DSUVIA and prepare for its resubmission. In addition, we continue to incur additional research anddevelopment expenses as we prepare the resubmission of the NDA for ZALVISO in the second half of 2018, as well as provide support for the Committeefor Medicinal Products for Human Use, or CHMP’s, scientific review of the MAA for DZUVEO. 69 We track external development expenses on a program-by-program basis. Our development resources are shared among all of our programs.Compensation and benefits, facilities, depreciation, stock-based compensation, and development support services are not allocated specifically toprojects and are considered research and development overhead. Below is a summary of our research and development expenses during the years endedDecember 31, 2017, 2016 and 2015 (in thousands, except percentages): Years Ended December 31, $ Change2017 vs. 2016 $ Change2016 vs. 2015 % Change2017 vs. 2016 % Change2016 vs. 2015 2017 2016 2015 DSUVIA 4,031 $8,764 $5,848 $(4,733) $2,916 (54)% 50%ZALVISO 6,188 4,076 4,950 2,112 (874) 52% (18)%Overhead 9,190 8,562 11,690 628 (3,128) 7% (27)%Total research and developmentexpenses $19,409 $21,402 $22,488 $(1,993) $(1,086) (9)% (5)% 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 addressing the recommendations made in the CRL for DSUVIA and preparing for theresubmission of the DSUVIA NDA in the second quarter of 2018, as well as advancing DZUVEO in the EU and preparing for the resubmission of theZALVISO NDA in the second half of 2018 in the United States, our future research and development expenses will depend on the clinical success as wellas ongoing assessments of the commercial potential of our product candidates. In addition, we cannot predict which product candidates may be subject tofuture collaborations, when these arrangements will be secured, if at all, and to what degree these arrangements would affect our development plans andcapital requirements. Research and development expenses during the year ended December 31, 2017, as compared to the year ended December 31, 2016, decreased by $2.0million predominantly due to a decrease of $4.7 million in DSUVIA-related spending, offset by an increase of $2.1 million in ZALVISO-related spendingand a $0.6 million increase in other research and development expenses. DSUVIA-related spending decreases were primarily due to the completion of theSAP303 and SAP302 studies in 2016. The increase in ZALVISO-related spending in the year ended December 31, 2017, as compared to the year endedDecember 31, 2016, was mainly due to the IAP312 clinical study. 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. General and Administrative Expenses General and administrative expenses consisted primarily of salaries, benefits and stock-based compensation for personnel engaged in administration,finance, pre-commercialization and business development activities. Other significant expenses included legal expenses related to litigation and patentprotection of our intellectual property, allocated facility costs and professional fees for general legal, audit and consulting services. We expect generaland administrative expenses in 2018 to increase as compared to 2017 expenses, as we have been focusing our efforts on preparing for the potentialcommercialization of DSUVIA in the United States, and the continued development of DZUVEO in the EU and ZALVISO in the United States. Total general and administrative expenses for the years ended December 31, 2017, 2016 and 2015, were as follows (in thousands, except percentages): Years Ended December 31, $ Change2017 vs. 2016 $ Change2016 vs. 2015 % Change2017 vs. 2016 % Change2016 vs. 2015 2017 2016 2015 General and administrativeexpenses $16,609 $15,597 $14,203 $1,012 $1,394 6% 10% General and administrative expenses increased by $1.0 million during the year ended December 31, 2017, as compared to the year ended December 31,2016, primarily due to a $2.0 million increase in expenses in support of DSUVIA-related pre-commercialization activities, offset by a $1.0 milliondecrease in other general and administrative expenses. 70 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. 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 DZUVEOoutside 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. 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, 2017, 2016 and 2015, was as follows (in thousands, except percentages): Years Ended December 31, $ Change2017 vs. 2016 $ Change2016 vs. 2015 % Change2017 vs. 2016 % Change2016 vs. 2015 2017 2016 2015 Interest expense $(3,316) $(2,770) $(2,977) $(546) $207 20% (7)%Interest income and other income(expense), net 510 918 1,720 (408) (802) (44)% (47)%Non-cash interest expense onliability related to sale of futureroyalties (10,721) (9,382) (2,428) (1,339) (6,954) 14% 286%Total other (expense) income $(13,527) $(11,234) $(3,685) $(2,293) $(7,549) 20% 205% Interest expense consisted primarily of interest accrued or paid on our debt obligation agreements and amortization of debt discounts. Interest expense forthe years ended December 31, 2017 pertains to interest on the Amended and Restated Loan and Security Agreement, or the Amended Loan Agreementwith Hercules Capital Funding Trust 2014-1 and Hercules Technology II, L.P., together, Hercules. Interest expense for the years ended December 31, 2016and 2015 pertains to interest on the 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., together, the Lenders. 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. The scheduled maturity date is nowMarch 2020. Refer to Note 7 “Long-Term Debt” for additional information. As a result of the higher interest rate in the year ended December 31, 2017 ascompared to the year ended December 31, 2016, the amount of interest expense incurred increased. The amount of interest expense decreased in the yearended December 31, 2016 as compared to the year ended December 31, 2015, due to the lower average principal balance in the year ended December 31,2016. As of December 31, 2017, the accrued balance due to Hercules was $19.1 million. The change in interest income and other income (expense), net, during the years ended December 31, 2017, 2016 and 2015, was primarily attributable tothe change in the fair value of our PIPE warrants, 512,456 of which expired unexercised on November 30, 2017. Refer to Note 9 “Warrants” for additionalinformation. Interest income and other income (expense), net, during the year ended December 31, 2015 also included $0.5 million in impairment chargesrelated to leasehold improvements in our corporate offices. Non-cash interest expense on liability related to sale of future royalties is attributable to the royalty sale transaction, or Royalty Monetization, that wecompleted in September 2015. As described above, the Royalty Monetization has been recorded as debt under the applicable accounting guidance. Weimpute interest on the liability and record interest expense based on the amount and timing of royalty and milestone payments expected to be received byPDL over the life of the arrangement. There are a number of factors that could materially affect the estimated interest rate and we will assess this estimateon a periodic basis. As a result, future interest rates could differ significantly and any such change in interest rate will be adjusted prospectively. Weanticipate that we will incur approximately $12 million in non-cash interest expense related to the Royalty Monetization in the year ended December 31,2018. 71 Benefit (Provision) for Income Taxes Total benefit (provision) for income taxes for the years ended December 31, 2017, 2016 and 2015 was as follows (in thousands, except percentages): Years Ended December 31, $ Change2017 vs. 2016 $ Change2016 vs. 2015 % Change2017 vs. 2016 % Change2016 vs. 2015 2017 2016 2015 Benefit (provision) for incometaxes $701 $34 $(760) $667 $794 1,962% (104)% In 2017, we booked a long-term tax receivable of $0.7 million as a benefit for income taxes related to the reversal of the Alternative Minimum Tax creditswhich are now refundable credits under the provisions of the Tax Cuts and Jobs Act of 2017. In 2016, we received income tax refunds resulting in abenefit for income taxes of $34,000. 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 of $0.8 million 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 2018 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, and 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. As of December 31, 2017, we had cash, cash equivalents and investments totaling $60.5 million compared to $80.3 million as of December 31, 2016. Thedecrease was primarily due to cash required to fund our continuing operations, as we continue our research and development and pre-commercializationactivities and support Grünenthal’s sales of ZALVISO in the EU. We anticipate that our existing capital resources will permit us to meet our capital andoperational requirements through at least the end of the first quarter of 2019. While we believe we have sufficient capital to meet our operationalrequirements through at least the end of the first quarter of 2019, our expectations may change depending on a number of factors. Our existing capitalresources likely will not be sufficient to fund our operations until such time as we may be able to generate sufficient revenues to sustain our operations.Additional capital may not be available on terms acceptable to us, or at all. If adequate funds are not available, or if the terms underlying potentialfunding sources are unfavorable, our business and our ability to develop our product candidates would be harmed. On June 21, 2016, we entered into a Controlled Equity OfferingSM 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 our common stock, or the Common Stock, having anaggregate offering price of up to $40.0 million. During the year ended December 31, 2017, we issued and sold an aggregate of 5.4 million shares ofcommon stock pursuant to the Sales Agreement, for which we received net proceeds of approximately $15.7 million, after deducting commissions, feesand expenses of $0.5 million. 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, 2017 was $83.6 million. 72 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 March 2, 2017, we amended and restated the Original Loan Agreement with Hercules, which is referred to as the Amended Loan Agreement. Pursuantto the Amended Loan Agreement, we borrowed the first tranche of approximately $20.5 million upon closing of the transaction on March 2, 2017, whichis represented by secured term promissory notes, or the Notes. Our obligations under the Amended Loan Agreement are secured by a security interest insubstantially all of our assets, other than our intellectual property. Loans under the Amended Loan Agreement now mature in March 2020. Refer to Note 7“Long-Term Debt” for additional information. As of December 31, 2017, the accrued balance due under the Amended Loan Agreement was $19.1 million, which includes the accrued portion of the Endof Term Fee. 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, 2017 2016 2015 (in thousands) Net cash used in operating activities $(29,765) $(29,395) $(19,953)Net cash provided by (used in) investing activities (9,970) 1,809 8,203 Net cash (used in) provided by financing activities 12,327 (26) 59,634 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 contingent put option liability. Cash used in operating activities of $29.8 million during the year ended December 31, 2017, reflected a net loss of $51.5 million, partially offset byaggregate non-cash charges of $18.0 million, and a net change of $3.7 million in our net operating assets and liabilities. Non-cash charges included $10.7million in non-cash interest expense on the liability related to the royalty monetization, $4.3 million for stock-based compensation, $1.7 million indepreciation expense, $1.3 million in non-cash interest expense related to the Amended Loan Agreement, and $0.4 million in inventory impairment dueto excess ZALVISO inventory. The net change in our operating assets and liabilities included a decrease in accounts receivable of $4.3 million offset byan increase in tax receivable of $0.7 million, related to the benefit for income taxes recorded in the year ended December 31, 2017. 73 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 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, 2017, cash used in investing activities of $10.0 million was primarily due to purchases of investments of $7.6million and purchases of property and equipment of $2.4 million. 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. Cash Flows from Financing Activities Cash flows from financing activities primarily reflect proceeds from the sale of our securities, including under our 2016 ATM Agreement, and paymentsmade on debt financings. During the year ended December 31, 2017, cash provided by financing activities of $12.3 million was primarily due to $15.7million in net proceeds from the sale of our common stock under the 2016 ATM Agreement, offset by $3.5 million in payments of long-term debt underthe Amended Loan Agreement. 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. Operating Capital and Capital Expenditure Requirements Our rate of cash usage may increase in the future, in particular to support our product development activities, including activities undertaken to addressthe recommendations made in the DSUVIA CRL and support the resubmission of the DSUVIA NDA to the FDA, the continued development of DZUVEOin the EU, ZALVISO in the United States and the potential commercialization of our product candidates, if approved, outside of the Grünenthal Territory.We anticipate that our existing capital resources will permit us to meet our capital and operational requirements through at least the end of the firstquarter of 2019. Our current operating plan includes anticipated activities required to address the recommendations in the DSUVIA CRL to support theresubmission of the DSUVIA NDA to the FDA in the second quarter of 2018, support for the CHMP review of the MAA for DZUVEO in the EU,resubmission of the NDA for ZALVISO in the second half of 2018, and expenditures related to our preparation for the potential commercialization ofDSUVIA in the United States. These assumptions may change as a result of many factors. We will continue to evaluate the work necessary to gainapproval of DSUVIA and ZALVISO in the United States and intend to update our cash forecasts accordingly. Our forecast of the period of time throughwhich our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actualresults could vary materially. Additional capital may not be available on terms acceptable to us, or at all. If adequate funds are not available, or if theterms underlying potential funding sources are unfavorable, our business and our ability to develop our product candidates would be harmed. 74 Our future capital requirements may vary materially from our expectations based on numerous factors, including, but not limited to, the following: •the outcome, timing and cost of regulatory resubmissions and any approvals for DSUVIA (known as DZUVEO outside the United States) andZALVISO; •the initiation, progress, timing and completion of clinical trials for our product candidates, including DZUVEO in the EU; •expenditures related to our preparation for the potential commercialization of DSUVIA and ZALVISO; •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; •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. 75 Contractual Obligations The following table summarizes our long-term contractual obligations at December 31, 2017: Payments Due by Period Contractual obligations Total 2018 2019–2021 2022–2023 Thereafter (in thousands) Operating leases(1) $7,609 $959 $3,804 $2,730 $116 Purchase obligations(2) 200 — 200 — — Principal payments on long-term debt(3) 19,984 7,727 12,257 — — Interest payments on long-term debt 2,420 1,623 797 — — Repayment of liability related to the sale of futureroyalties 194,873 604 34,619 40,172 119,478 Total contractual obligations $225,086 $10,913 $51,677 $42,902 $119,594 (1) Operating lease includes base rent for facilities we occupy in Redwood City, California.(2) 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.(3) The Amended and Restated Loan and Security Agreement dated as of March 2, 2017 includes a $1.3 million end of term payment due onmaturity of the loan, in March 2020, which is included in the table above. See Note 7 “Long-Term Debt” for additional information. 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 our headquarters, effective April 2012. Rent expense from the facility leaseis 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 First Amendment, to the Existing Lease. Pursuant to the First Amendment, the term of the ExistingLease was extended for a period of twenty (20) months and twenty-two (22) days and expiring January 31, 2018, or the Expiration Date, unless soonerterminated pursuant to the terms of the Existing Lease. In addition, the First Amendment included a new lease on an additional approximate 12,106square feet 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 42months commencing 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). In June 2017, we entered into an amendment, or the Second Amendment, to the Existing Lease, and as amended by the First and Second Amendments, theLease, with Metropolitan Life Insurance Company, or the Landlord, for the Current Premises and the Expansion Space, approximately 25,893 square feetlocated at 301 – 351 Galveston Drive, Redwood City, California. Pursuant to the Second Amendment, the term of the Lease has been extended for aperiod of seventy-two (72) months, or the Extended Term, beginning February 1, 2018 and expiring January 31, 2024, or the Expiration Date, unlesssooner terminated pursuant to the terms of the Lease. Pursuant to the Second Amendment, we will pay on a monthly basis annual rent of approximately $1.2 million, with annual increases each 12-monthperiod beginning February 1st, and the first two months to be abated provided that we are not in default thereunder. In addition, we will pay the Landlordspecified percentages of certain operating expenses related to the leased facility incurred by the Landlord. 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. On August 22, 2017, we amended the Services Agreement withPatheon effective as of August 4, 2017, or the Amended Services Agreement, to include the manufacture of sufentanil sublingual tablets for use withDSUVIA. 76 Under the terms of the Amended Services Agreement, we have agreed to purchase, subject to Patheon’s continued material compliance with the terms ofthe Amended Services Agreement, at least eighty percent (80%) of our sufentanil sublingual tablet requirements for ZALVISO in the United States,Canada and Mexico from Patheon. Also under the terms of the Amended Services Agreement, Patheon will manufacture, supply, and provide certainvalidation and stability services for DSUVIA intended for marketing and sale in the United States, Canada and Mexico, and their respective territories, theEuropean Union, Switzerland, Liechtenstein, Norway, Iceland and Australia. The term of the Amended Services Agreement has been extended untilDecember 31, 2019, and will automatically renew thereafter for periods of two years, unless terminated by either party upon eighteen months’ priorwritten notice. 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 2015, 2016 or 2017 based on the amount of revenuesearned by Patheon from AcelRx in 2014, 2015, and 2016, respectively. In addition, no payment will be due to Patheon in 2018, as we met the annualrevenue threshold in 2017. The potential purchase obligation commitment in 2019 is reflected in the contractual obligations 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 included 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 March 2020. Refer to Note 7 “Long-Term Debt” for additional information. 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. 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. 77 Off-Balance Sheet Arrangements Through December 31, 2017, 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, 2017, consisted primarily of money market funds and U.S. government agencysecurities. We do not have any auction rate securities on our Consolidated Balance Sheets, 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. The primaryobjective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments withoutsignificantly increasing risk. In an attempt to limit interest rate risk, we follow guidelines to limit the average and longest single maturity dates, place ourinvestments with high quality issuers and follow internally developed guidelines to limit the amount of credit exposure to any one issuer. Some of thesecurities that we invest in may be subject to market risk. This means that a change in prevailing interest rates may cause the value of the investment tofluctuate. For example, if we purchase a security that was issued with a fixed interest rate and the prevailing interest rate later rises, the value of ourinvestment may decline. If a 10 percent change in interest rates were to have occurred on December 31, 2017, this change would not have had a materialeffect on the fair value of our investment portfolio as of that date. In general, money market funds are not subject to market risk because the interest paidon 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. We cannot provide assurance that we will not experience losses on these investments. Item 8. Financial Statements and Supplementary Data The financial statements required by this item are attached to this Form 10-K beginning with page F-1. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures We have carried out an evaluation, under the supervision, and with the participation, of management including our principal executive officer andprincipal financial officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e)) of the Securities Exchange Act of 1934, as amended, orthe Exchange Act) as of the end of the period covered by this Annual Report on Form 10–K. Based on their evaluation, our principal executive officerand principal financial officer concluded that, subject to the limitations described below, our disclosure controls and procedures were effective as ofDecember 31, 2017. 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. 78 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, 2017 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. 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, 2017. 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 controlsystem are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, ifany, within an organization have been detected. Accordingly, our disclosure controls and procedures and our internal control over financial reporting aredesigned to provide reasonable, not absolute, assurance that the objectives of the control system are met. We continue to implement, improve and refineour disclosure controls and procedures and our internal control over financial reporting. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Stockholders and Board of DirectorsAcelRx Pharmaceuticals, Inc.Redwood City, California Opinion on Internal Control over Financial Reporting We have audited AcelRx Pharmaceutical, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2017, based on criteriaestablished in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the“COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,2017, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidatedbalance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of comprehensive loss, stockholders’ (deficit)equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and our report dated March 8, 2018expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting, included in the accompanying Item 9A, Management Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firmregistered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we planand perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, andtesting and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such otherprocedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. 79 Definition and Limitations of Internal Control over Financial Reporting 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. /s/ OUM & CO. LLP San Francisco, CaliforniaMarch 8, 2018 Item 9B. Other Information None. 80 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 2018 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 andCommittees—Compensation Committee Interlocks and Insider Participation," "Executive Compensation" and "Executive Compensation—Compensation Committee Report" 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 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. 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 Incorporation By ReferenceExhibitNumber Exhibit Description Form SECFile No. Exhibit Filing Date 3.1 Amended and Restated Certificate of Incorporation of the Registrant, currently ineffect. 8-K 001-35068 3.1 2/28/2011 3.2 Amended and Restated Bylaws of the Registrant, currently in effect. S-1 333-170594 3.4 1/7/2011 4.1 Reference is made to Exhibits 3.1 through 3.2. 4.2 Specimen Common Stock Certificate of the Registrant. S-1 333-170594 4.2 1/31/2011 81 Incorporation By ReferenceExhibitNumber Exhibit Description Form SECFile No. Exhibit Filing Date 4.3 Second Amended and Restated Investors’ Rights Agreement, among the Registrantand certain of its security holders, dated as of November 23, 2009. S-1 333-170594 4.3 11/12/2010 4.4 Warrant to Purchase Common Stock of the Registrant, issued to 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 Securities PurchaseAgreement dated May 29, 2012, between the Registrant and the purchasersidentified 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 Technology GrowthCapital, 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 Unit Agreementunder 2011 Equity Incentive Plan. 10-K 001-35068 10.6 3/30/2011 10.7+ 2011 Employee Stock Purchase Plan. S-8 333-172409 99.6 2/24/2011 10.8 Lease between Metropolitan Life Insurance Company and the Registrant, datedDecember 15, 2011. 10-K 001-35068 10.9 3/23/2012 10.9 Amendment to Lease between Metropolitan Life Insurance and the Registrant,dated May 2, 2014 8-K 001-35068 10.1 5/7/2014 10.10 Second Amendment to Lease between Metropolitan Life Insurance and theRegistrant, dated June 14, 2017 8-K 001-35068 10.1 6/20/2017 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 82 Incorporation By ReferenceExhibitNumber Exhibit Description Form SECFile No. Exhibit Filing Date 10.12 Amendment No. 3 to Amended and Restated Loan and Security Agreement, datedas of December 16, 2013, and amended as of September 30, 2016, among theRegistrant, Hercules Technology II, L.P. and Hercules Capital, Inc., formerlyknown 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, datedDecember 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 Jane Wright-Mitchell, dated June 13,2014. 10-K 001-35068 10.18 3/13/2015 10.17+ Offer Letter between the Registrant and Vincent J. Angotti, effective as of March 6,2017. 10-Q 001-35068 10.4 5/8/2017 10.18+ Separation Agreement and General Release of Claims between Timothy E. Morrisand the Registrant, effective as of June 5, 2017. 10-Q 001-35068 10.1 8/2/2017 10.19+ Offer Letter between the Registrant and Raffi Asadorian, dated July 18, 2017. 8-K 001-35068 10.1 7/19/2017 10.20+ Non-Employee Director Compensation Policy. 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 as ofMay 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 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 Registrant andPatheon Pharmaceuticals, Inc., dated as of January 18, 2013 10-Q 001-35068 10.2 5/8/2013 83 Incorporation By ReferenceExhibitNumber Exhibit Description Form SECFile No. Exhibit Filing Date 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 Registrant andPatheon Pharmaceuticals, Inc., effective as of January 19, 2016. 10-Q 001-35068 10.6 5/2/2016 10.33# Amendment #2 to Manufacturing Services Agreement between the Registrant andPatheon Pharmaceuticals, Inc., effective as of August 4, 2017. 10-Q 001-35068 10.1 11/9/2017 10.34# Award/Contract between the Registrant and the U.S. Army Medical Research andMateriel Command, dated May 11, 2015. 10-Q 001-35068 10.2 8/4/2015 10.35 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 10.36 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 10.37 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 10.38# 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 10.39 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 10.40 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 10.41# Purchase and Sale Agreement between Registrant and ARPI LLC, dated as ofSeptember 18, 2015. 10-Q 001-35068 10.6 11/3/2015 10.42# Subsequent Purchase and Sale Agreement between ARPI LLC (a wholly ownedsubsidiary of the Registrant) and PDL BioPharma, Inc., dated as of September 18,2015. 10-Q 001-35068 10.7 11/3/2015 10.43 Controlled Equity OfferingSM Sales Agreement between the Registrant andCantor Fitzgerald & Co., dated as of June 21, 2016. 8-K 001-35068 10.1 6/21/2016 10.44 Amended and Restated Loan and Security Agreement among the Registrant,Hercules Technology II, L.P., Hercules Capital Funding Trust 2014-1 and HerculesTechnology II, L.P., dated as of March 2, 2017. 10-K 001-35068 10.43 3/3/2017 21.2 Subsidiaries of the Registrant. 23.1 Consent of OUM & Co., LLP, Independent Registered Public Accounting Firm. 24.1 Power of Attorney (included in signature page). 84 Incorporation By ReferenceExhibitNumber Exhibit Description Form SECFile No. Exhibit Filing Date 31.1 Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended. 31.2 Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended. 32.1 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Actof 2002. 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. Item 16. Form 10-K Summary None. 85 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 8, 2018AcelRx Pharmaceuticals, Inc. (Registrant) /s/ Vincent J. Angotti Vincent J. AngottiChief Executive Officer and Director(Principal Executive Officer) /s/ Raffi M. Asadorian Raffi M. AsadorianChief Financial Officer(Principal Financial and Accounting Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Vincent J. Angotti andRaffi M. Asadorian, 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: Signature TitleDate /s/ Vincent J. Angotti Chief Executive Officer and DirectorMarch 8, 2018Vincent J. Angotti (Principal Executive Officer) /s/ Raffi M. Asadorian Chief Financial OfficerMarch 8, 2018Raffi M. Asadorian (Principal Financial and Accounting Officer) /s/ Adrian Adams ChairmanMarch 8, 2018Adrian Adams /s/ Pamela P. Palmer, M.D., Ph.D. DirectorMarch 8, 2018 Pamela P. Palmer, M.D., Ph.D. /s/ Mark G. Edwards DirectorMarch 8, 2018Mark G. Edwards /s/ Stephen J. Hoffman, Ph.D., M.D. DirectorMarch 8, 2018Stephen J. Hoffman, Ph.D., M.D. /s/ Richard Afable, M.D. DirectorMarch 8, 2018Richard Afable, M.D. /s/ Howard B. Rosen DirectorMarch 8, 2018Howard B. Rosen /s/ Mark Wan DirectorMarch 8, 2018Mark Wan 86 ACELRX PHARMACEUTICALS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReports of Independent Registered Public Accounting FirmsF-2Consolidated Balance Sheets at December 31, 2017 and 2016F-3Consolidated Statements of Comprehensive Loss for each of the three years in the period ended December 31, 2017F-4Consolidated Statements of Stockholders’ (Deficit) Equity for each of the three years in the period ended December 31, 2017F-5Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2017F-6Notes to Consolidated Financial StatementsF-7 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Stockholders and Board of DirectorsAcelRx Pharmaceuticals, Inc.Redwood City, California Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of AcelRx Pharmaceuticals, Inc. (the “Company”) as of December 31, 2017 and 2016,the related consolidated statements of comprehensive loss, stockholders’ (deficit) equity, and cash flows for each of the three years in the period endedDecember 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financialstatements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of theiroperations and their cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generallyaccepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company'sinternal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issuedby the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 8, 2018 expressed an unqualifiedopinion thereon. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on theCompany’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to beindependent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities andExchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error orfraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts anddisclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates madeby management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonablebasis for our opinion. /s/ OUM & CO. LLP San Francisco, CaliforniaMarch 8, 2018We have served as the Company's auditor since 2015. F-2 AcelRx Pharmaceuticals, Inc. Consolidated Balance Sheets(in thousands, except share data) December 31,2017 December 31,2016 Assets Current Assets: Cash and cash equivalents $52,902 $80,310 Short-term investments 7,567 — Accounts receivable, net 1,533 5,833 Inventories 956 2,154 Prepaid expenses and other current assets 455 756 Total current assets 63,413 89,053 Property and equipment, net 11,051 10,712 Restricted cash 178 178 Long-term tax receivable 703 — Other assets 207 50 Total Assets $75,552 $99,993 Liabilities and Stockholders’ Deficit Current Liabilities: Accounts payable $1,424 $1,558 Accrued liabilities 3,543 4,595 Long-term debt, current portion 7,727 2,912 Deferred revenue, current portion 362 362 Liability related to the sale of future royalties, current portion 604 764 Total current liabilities 13,660 10,191 Deferred rent, net of current portion 378 43 Long-term debt, net of current portion 11,369 18,637 Deferred revenue, net of current portion 3,463 3,824 Liability related to the sale of future royalties, net of current portion 82,984 72,223 Contingent put option liability 207 124 Warrant liability — 288 Total liabilities 112,061 105,330 Commitments and Contingencies: Stockholders’ Deficit: Common stock, $0.001 par value—100,000,000 shares authorized as of December 31, 2017 andDecember 31, 2016; 50,899,154 and 45,333,790 shares issued and outstanding as of December 31,2017 and December 31, 2016 51 45 Additional paid-in capital 261,310 240,977 Accumulated deficit (297,870) (246,362)Accumulated other comprehensive income — 3 Total stockholders’ deficit (36,509) (5,337)Total Liabilities and Stockholders’ Deficit $75,552 $99,993 See notes to consolidated financial statements. F-3 AcelRx Pharmaceuticals, Inc. Consolidated Statements of Comprehensive Loss(in thousands, except share and per share data) Year Ended December 31, 2017 2016 2015 Revenue: Collaboration agreement $7,143 $6,440 $14,857 Contract and other 852 10,917 4,406 Total revenue 7,995 17,357 19,263 Operating costs and expenses: Cost of goods sold 10,659 12,315 1,770 Research and development 19,409 21,402 22,488 General and administrative 16,609 15,597 14,203 Restructuring costs — — 756 Total operating costs and expenses 46,677 49,314 39,217 Loss from operations (38,682) (31,957) (19,954)Other (expense) income: Interest expense (3,316) (2,770) (2,977)Interest income and other income (expense), net 510 918 1,720 Non-cash interest expense on liability related to sale of future royalties (10,721) (9,382) (2,428)Total other (expense) income (13,527) (11,234) (3,685)Net loss before income taxes (52,209) (43,191) (23,639)Benefit (provision) for income taxes 701 34 (760)Net loss (51,508) (43,157) (24,399)Other comprehensive income (loss): Unrealized gains (losses) on available for sale securities (3) 4 3 Comprehensive loss $(51,511) $(43,153) $(24,396)Net loss per share of common stock, basic $(1.10) $(0.95) $(0.55)Net loss per share of common stock, diluted $(1.10) $(0.95) $(0.60)Shares used in computing net loss per share of common stock, basic 46,883,535 45,313,118 44,300,099 Shares used in computing net loss per share of common stock, diluted –see Note 14 46,883,535 45,313,118 44,468,440 See notes to consolidated financial statements. F-4 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, 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)Stock-based compensation — — 4,294 — — 4,294 Net proceeds from issuance of commonstock in connection with equityfinancings 5,401,099 6 15,688 — — 15,694 Issuance of common stock uponexercise of stock options 69,372 — 105 — — 105 Issuance of common stock upon ESPPpurchase 94,893 — 246 — — 246 Change in unrealized gains and losseson investments — — — — (3) (3)Net loss — — — (51,508) — (51,508)Balance as of December 31, 2017 50,899,154 $51 $261,310 $(297,870) $— $(36,509) See notes to consolidated financial statements. F-5 AcelRx Pharmaceuticals, Inc. Consolidated Statements of Cash Flows(in thousands) Year Ended December 31, 2017 2016 2015 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(51,508) $(43,157) $(24,399)Adjustments to reconcile net loss to net cash used in operating activities: Non-cash royalty revenue related to royalty monetization (151) (7) — Non-cash interest expense on liability related to royalty monetization 10,721 9,382 2,428 Depreciation and amortization 1,744 2,052 1,984 Non-cash interest expense related to debt financing 1,265 877 897 Stock-based compensation 4,294 4,479 5,010 Revaluation of put option and PIPE warrant liabilities (205) (767) (2,136)Loss on disposal and impairment of property and equipment 12 — 573 Inventory impairment charge 369 — — Other (5) 17 114 Changes in operating assets and liabilities: Accounts receivable 4,300 (2,547) (3,286)Inventories 920 (1,688) (466)Prepaid expenses and other assets 175 975 (783)Restricted cash — — 72 Tax receivable (703) — — Accounts payable 309 (437) (786)Accrued liabilities (1,301) 639 325 Deferred revenue (361) 989 784 Deferred rent 360 (202) (284)Net cash used in operating activities (29,765) (29,395) (19,953)CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (2,405) (3,720) (1,456)Purchase of investments (7,565) (996) (7,266)Proceeds from maturities of investments — 6,525 16,925 Net cash (used in) provided by investing activities (9,970) 1,809 8,203 CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from sale of future royalties — — 61,184 Payment of long-term debt (3,514) — (4,534)Payment of debt modification transaction costs (204) (205) (215)Net proceeds from issuance of common stock in connection with equityfinancings 15,694 — — Net proceeds from issuance of common stock through equity plans 351 179 3,199 Net cash provided by (used in) financing activities 12,327 (26) 59,634 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (27,408) (27,612) 47,884 CASH AND CASH EQUIVALENTS—Beginning of period 80,310 107,922 60,038 CASH AND CASH EQUIVALENTS—End of period $52,902 $80,310 $107,922 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $2,043 $1,893 $2,115 Income taxes (refunded) paid $2 $(55) $782 NONCASH INVESTING AND FINANCING ACTIVITIES: Issuance of common stock upon cashless exercise of warrants $— $— $2,544 Modification of warrants for common stock $— $45 $100 Purchases of property and equipment in Accounts payable $89 $532 $98 Purchases of property and equipment in Accrued liabilities $133 $— $— See notes to consolidated financial statements. F-6 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 DZUVEO outside of the United States), and its follow-on product candidate, ZALVISO®,each utilize sublingual sufentanil, delivered via a non-invasive route of sublingual administration. Subject to obtaining regulatory approvals, AcelRxanticipates developing a distribution capability and commercial organization in the United States to market and sell DSUVIA in the United States byitself, and potentially, in certain European Economic Area, or EEA, countries with strategic partners. In geographies where AcelRx decides not tocommercialize products by itself, the Company may seek to out-license commercialization rights. AcelRx intends to seek regulatory approval forZALVISO in the United States and, if successful, potentially promote ZALVISO either by itself or with strategic partners. DSUVIA DSUVIA, is a 30 mcg sufentanil sublingual tablet in a single-dose applicator intended for the treatment of moderate-to-severe acute pain administered bya healthcare professional. DSUVIA was initially developed at the request of the U.S. Department of Defense as a replacement for injections of morphine onthe battlefield. In addition to the military application, AcelRx is developing DSUVIA for the treatment of patients suffering from moderate-to-severe acutepain in multiple settings, such as emergency room patients; patients who are recovering from short-stay or ambulatory surgery and do not require morelong-term analgesia; post-operative patients who are transitioning from the operating room to the recovery floor; certain types of office-based or hospital-based procedures; patients being treated and transported by paramedics. The Company completed the Phase 3 clinical program for DSUVIA and inFebruary 2017 a New Drug Application, or NDA, was accepted for filing by the U.S. Food and Drug Administration, or FDA, for DSUVIA for the treatmentof moderate-to-severe acute pain to be administered by a healthcare professional in medically supervised settings. On October 12, 2017, the Companyreceived a Complete Response Letter, or CRL, from the FDA regarding its NDA for DSUVIA which states the FDA determined it cannot approve the NDAin its present form and provides recommendations for resubmission. The CRL contained two primary recommendations. First, while the safety databasewas suitable in number of patients, the collection of additional data was requested on at least 50 patients to assess the safety of DSUVIA dosed at themaximum amount described in the proposed labelling. Second, to ensure proper administration of the tablet with the single-dose applicator, the FDArecommended certain changes to the Directions for Use, or DFU, to address use-related errors, including dropped tablets, which changes would need to bevalidated through a Human Factors, or HF, study. The Company had a Type A post-action meeting with the FDA on January 26, 2018 to discuss thetopics covered in the CRL and to clarify the path to move towards resubmission of the DSUVIA NDA, which the Company expects to resubmit in thesecond quarter of 2018, following the completion of an HF study to validate the revised DFU. In March 2017, the European Medicines Agency, or EMA,notified the Company that the DZUVEO (sufentanil sublingual tablet, 30 mcg) Marketing Authorisation Application, or MAA, has passed validation, andthat the scientific review of the MAA is underway. The MAA for DZUVEO (formerly known as ARX-04) was filed for the treatment of patients withmoderate-to-severe acute pain in a medically supervised setting. AcelRx expects an opinion on the MAA from the Committee for Medicinal Products forHuman Use, or CHMP, in the first half of 2018. ZALVISO ZALVISO delivers 15 mcg sufentanil sublingually through a non-invasive delivery route via a pre-programmed, patient-controlled analgesia, or PCA,system. ZALVISO is approved in the EEA, Norway, Iceland and Liechtenstein and is in late-stage development in the U.S. The Company had initiallysubmitted to the FDA an NDA seeking approval for ZALVISO in September 2013 but received a CRL on July 25, 2014. Subsequently, the FDA requestedan additional clinical study, IAP312, designed to evaluate the effectiveness of changes made to the functionality and usability of the ZALVISO deviceand to take into account comments from the FDA on the study protocol. In the IAP312 study, for which top-line results were announced in August 2017,ZALVISO met safety, satisfaction and device usability expectations. These results will supplement the three Phase 3 trials already completed in theZALVISO NDA resubmission. The Company plans to resubmit the NDA for ZALVISO in the second half of 2018. F-7 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 PCA system, or the Product, in the countries of the EU, Switzerland, Liechtenstein, Iceland, Norway and Australia (collectively,the Territory) for human use in pain treatment within, or dispensed by, hospitals, hospices, nursing homes and other medically supervised settings, or theField. In September 2015, the European Commission, or EC, approved the Marketing Authorization Application, or MAA, previously submitted to theEuropean Medicines Agency, or EMA, for ZALVISO for the management of acute moderate-to-severe post-operative pain in adult patients. The approvalallows Grünenthal to market ZALVISO in the 28 EU member states as well as for the EEA, Norway, Iceland and Liechtenstein, or EEA. Also on December16, 2013, AcelRx and Grünenthal, entered into a related Manufacture and Supply Agreement, or the MSA, and together with the License Agreement, theAgreements. Under the MSA, the Company will exclusively manufacture and supply the Product to Grünenthal for the Field in the Territory. On July 22,2015, the Company entered into an amendment to the MSA, or the MSA Amendment, and together with the MSA, the Amended MSA, between theCompany and Grünenthal, effective as of July 17, 2015, and together with the Amended License Agreement, the Amended Agreements. Grünenthal has begun its commercial launch of ZALVISO in the European Union. Royalty revenues and non-cash royalty revenues from the commercialsales of ZALVISO in the EU are expected to be minimal for 2018. The Company has incurred recurring operating losses and negative cash flows from operating activities since inception. Although ZALVISO has beenapproved for sale in the EU, the Company sold the majority of the royalty rights and certain commercial sales milestones it is entitled to receive under theAmended License Agreement with Grünenthal to PDL BioPharma, Inc., or PDL. As a result, the Company expects to continue to incur operating lossesand 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. In particular, theamounts reported in the Consolidated Statements of Cash Flows as “Amortization of premium/discount on investments, net” have been reclassified to“Other” for the years ended December 31, 2016 and December 31, 2015. 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. F-8 Fair Value of Financial Instruments The Company measures and reports its cash equivalents, investments and financial liabilities at fair value. Fair value is defined as the exchange price thatwould be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in anorderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use ofobservable inputs and minimize the use of unobservable inputs. The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fairvalue measurements as follows: Level I—Unadjusted quoted prices in active markets for identical assets or liabilities; Level II—Inputs other than quoted prices included within Level I that are observable, unadjusted quoted prices in markets that are not active, orother inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities;and Level III—Unobservable inputs that are supported by little or no market activity for the related assets or liabilities. The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair valuemeasurement. 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 Sheets. 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, 2017, 2016and 2015. One of these customers accounted for 79% of the accounts receivable balance as of December 31, 2017, while the other customer accounted for71% and 84% of the accounts receivable balance as of December 31, 2016 and 2015, respectively. 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, 2017 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. F-9 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. During the year ended December 31, 2017, theCompany recorded an inventory impairment charge of $0.4 million, primarily for ZALVISO raw materials inventory on hand, plus related purchasecommitments. Because selling prices to Grünenthal are set to recover only direct costs with minimal mark up, all inventories are carried at net realizablevalue. 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, 2017, 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”. F-10 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. 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 ofaccounting, AcelRx evaluates certain criteria, including whether the deliverables have value to our customers on a stand-alone basis. Factors consideredin this determination include whether the deliverable is proprietary to the Company, whether the customer can use the license or other deliverables fortheir intended purpose without the receipt of the remaining elements, whether the value of the deliverable is dependent on the undelivered items, andwhether 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 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. F-11 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, and as a result, may increase or decreasebased on actual expenses incurred. 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 during the years ended December 31, 2016 and 2015, wereprimarily determined using the simplified method in accordance with guidance provided by the SEC. Such method was utilized as the Company did notbelieve its historical option exercise experience, which was limited, provided a reasonable basis upon which to estimate expected term. During thisperiod, volatility was derived from historical volatilities of several public companies within AcelRx’s industry that were deemed to be comparable toAcelRx’s business because AcelRx had insufficient history on the volatility of its common stock relative to the expected life assumptions used by theCompany. During the year ended December 31, 2017, the Company determined that its historical data provided a reasonable basis for estimating futurebehavior in regards to expected term and volatility, and as a result, began using its historical option exercise experience and the volatility of its commonstock as the basis for these assumptions. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with theexpected life assumption. Further, during the years ended December 31, 2016 and 2015, the Company estimated forfeitures at the time of grant andrevised those estimates in subsequent periods if actual forfeitures differed from those estimates. Effective January 1, 2017, the Company adopted ASU2016-09 and elected to recognize forfeitures when they occur using a modified retrospective approach, which did not have a material impact on itsConsolidated Financial Statements. 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. F-12 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. 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 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. Under this guidance, on a prospective basis,companies will no longer record excess tax benefits and certain tax deficiencies as additional paid-in capital. Instead, they will record all excess taxbenefits and tax deficiencies as income tax expense or benefit in the income statement. In addition, the guidance eliminates the requirement that excesstax benefits be realized before companies can recognize them. The ASU requires a cumulative-effect adjustment for previously unrecognized excess taxbenefits in opening retained earnings in the annual period of adoption. Effective January 1, 2017, the Company adopted this updated guidance. Uponadoption, the Company recognized additional excess tax benefits as a deferred tax asset with a corresponding increase to our deferred tax asset valuationallowance, which did not result in a net impact to retained earnings, and elected to recognize forfeitures when they occur using a modified retrospectiveapproach, which did not have a material impact on its Consolidated Financial Statements. F-13 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. ASU No. 2015-11 was adopted by the Company beginning in fiscal 2017, and did not have a material impact onits Consolidated Financial Statements. Recently Issued Accounting Pronouncements In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, to clarify whichchanges to the terms or conditions of a share-based payment award require an entity to apply modification accounting under ASC 718. Under the newguidance, an entity will not apply modification accounting to a share-based payment award if all of the following remain unchanged immediately beforeand after the change of terms and conditions: •The award’s fair value (or calculated value or intrinsic value, if those measurement methods are used), •The award’s vesting conditions, and •The award’s classification as an equity or liability instrument. ASU 2017-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 for all entities. Earlyadoption is permitted, including adoption in any interim period for which financial statements have not yet been issued or made available for issuance.The ASU will be applied prospectively to awards modified on or after the adoption date. The Company does not expect the adoption of ASU 2017-09 tohave a material effect on its results of operations, financial condition or cash flows. 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 condensed consolidated statement of cash flows. The ASUrequires that the condensed consolidated statement of cash flows explain the change in total cash and equivalents and amounts generally described asrestricted cash or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. The ASU also requires areconciliation between the total of cash and equivalents and restricted cash presented on the condensed consolidated statement of cash flows and the cashand equivalents balance presented on the condensed consolidated balance sheet. ASU 2016-18 is effective retrospectively on January 1, 2018, with earlyadoption permitted. The Company does not expect the adoption of ASU 2016-18 to have a material effect on its results of operations, financial conditionor cash flows. 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 15, 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 Consolidated Statements of Cash Flows. 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 has not yet selected a transition date, and is currently evaluating the impact of theadoption of this standard on its Consolidated Financial Statements. F-14 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 considerationto which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and makemore estimates 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 was 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; ●ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and ●ASU No. 2016-20, Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements. The Company adopted the new standard effective January 1, 2018 under the modified retrospective transition method. The analysis identifying areasimpacted by the new guidance is complete. The Company has completed its evaluation of its contract with the U.S. Department of Defense and theAmended Agreements with its collaboration partner Grünenthal, and the Company has determined that the impact of adoption of the new standard to itsfinancial statements will not be material. In addition, there is no change to the units of accounting previously identified under legacy GAAP which arenow considered performance obligations under the new guidance. 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 asnon-current. The table below summarizes the Company’s cash, cash equivalents and investments (in thousands): As of December 31, 2017 AmortizedCost Gross UnrealizedGains Gross UnrealizedLosses FairValue Cash and cash equivalents: Cash $29,765 $— $— $29,765 U.S. government agency securities 23,137 — — 23,137 Total cash and cash equivalents 52,902 — — 52,902 Marketable securities: U.S. government agency securities $7,567 $— $— $7,567 Total marketable securities 7,567 — — 7,567 Total cash, cash equivalents and investments $60,469 $— $— $60,469 F-15 As of December 31, 2016 AmortizedCost 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 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, 2017 and 2016. There were no other-than-temporary impairments for these securities as of December 31, 2017 or 2016. 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, 2017 and 2016. As of December 31, 2017 and 2016, the contractual maturity of all investments held was less than one year. Fair Value Measurement The Company’s financial instruments consist of Level II assets and Level III liabilities. For 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, 2017 and December 31, 2016, 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 amended and restated the Loan and Security Agreement dated as of June 29, 2011, which was classifiedas a Level III liability. On March 2, 2017, the Company entered into an Amended and Restated Loan and Security Agreement, or the Amended LoanAgreement with Hercules Capital Funding Trust 2014-1 and Hercules Technology II, L.P., together, Hercules. The Amended Loan Agreement amends andrestates the Original Loan Agreement. See Note 7 “Long-Term Debt” for further description. The Company’s estimate of fair value of the contingent putoption liability was determined by using a risk-neutral valuation model, wherein the fair value of the underlying debt facility is estimated both with andwithout the presence of the default provisions, holding all other assumptions constant. The resulting difference between the two estimated fair values isthe estimated fair value of the default provisions, or the contingent put option. Changes to the estimated fair value of these liabilities are recorded ininterest income and other income (expense), net in the Consolidated Statements of Comprehensive Loss. The fair value of the underlying debt facility isestimated by calculating the expected cash flows in consideration of an estimated probability of default and expected recovery rate in default, anddiscounting such cash flows back to the reporting date using a risk-free rate. As of December 31, 2016, the Company also held a Level III liabilityassociated with warrants, or PIPE warrants, issued in connection with the Company’s private placement equity offering, completed in June 2012. For adetailed description, see Note 11 “Stockholders’ Equity”. The PIPE warrants were considered a liability and were valued using the Black-Scholes option-pricing model, the inputs for which included exercise price of the PIPE warrants, market price of the underlying common shares, expected term, volatilitybased on a group of the Company’s peers and the risk-free rate corresponding to the expected term of the PIPE warrants. Changes to any of these inputscould have a significant impact to the estimated fair value of the PIPE warrants. F-16 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, 2017 Fair Value Level I Level II Level III Assets U.S. government agency obligations $30,704 $— $30,704 $— Total assets measured at fair value $30,704 $— $30,704 $— Liabilities Contingent put option liability $207 $— $— $207 Total liabilities measured at fair value $207 $— $— $207 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 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 31,2017 and 2016 (in thousands): Year EndedDecember 31,2017 Fair value—beginning of period $412 Expiration of fair value of PIPE warrants (288)Change in fair value of contingent put option associated with Original Loan Agreement 83 Fair value—end of period $207 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 F-17 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, 2017 2016 Raw materials $702 $1,126 Work-in-process 254 296 Finished goods — 732 Inventories $956 $2,154 The Company periodically evaluates the carrying value of inventory on hand for potential excess amount over demand using the same lower of cost ormarket approach as that used to value the inventory. During the year ended December 31, 2017, the Company recorded an inventory impairment chargeof $0.4 million, primarily for ZALVISO raw materials inventory on hand, plus related purchase commitments. 4. Property and Equipment Property and equipment consist of the following (in thousands): As of December 31, 2017 2016 Laboratory equipment $3,920 $3,775 Leasehold improvements 4,469 4,469 Computer equipment and software 241 266 Construction in process 9,703 7,816 Tooling 1,109 1,074 Furniture and fixtures 47 48 19,489 17,448 Less accumulated depreciation and amortization (8,438) (6,736)Property and equipment, net $11,051 $10,712 Depreciation and amortization expense was $1.7 million, $2.1 million and $2.0 million during the years ended December 31, 2017, 2016 and 2015,respectively. Property and equipment, net in the Consolidated Balance Sheets at December 31, 2017 and 2016, includes $0.3 million and $1.5 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 an award contract (referred to as the DoD Contract) supported by the Clinical and Rehabilitative MedicineResearch Program, or CRMRP, of the United States Army Medical Research and Materiel Command, or the USAMRMC, within the U.S. Department ofDefense, or the DoD, in which the DoD agreed to provide up to $17.0 million to the Company in order to support the development of DSUVIA (sufentanilsublingual tablet, 30 mcg), a proprietary, non-invasive, single-use tablet in a disposable, pre-filled single-dose applicator, or SDA, for the treatment ofmoderate-to-severe acute pain. Under the terms of the DoD Contract, the DoD has reimbursed the Company for costs incurred for development,manufacturing, regulatory and clinical costs outlined in the DoD Contract, including reimbursement for certain personnel and overhead expenses. Theperiod of performance under the DoD Contract began on May 11, 2015. The DoD Contract gives the DoD the option to extend the term of the DoDContract and provide additional funding for the research. On March 2, 2016, the DoD Contract was amended to approve enrollment of additional patientsin the SAP302 study, approve the addition of the SAP303 study, and extend the DoD Contract period of performance by four months from November 10,2016 to March 9, 2017, to accommodate the increased SAP302 patient enrollment and the SAP303 study. The costs for these changes were includedwithin the current DoD Contract value. On March 9, 2017, the DoD Contract was amended to incorporate additional activities including the developmentand testing of packaging changes; additional stability testing; and preparation for any FDA advisory committee meeting for DSUVIA. The amendmentalso extends the DoD Contract period of performance by 11 months through February 28, 2018 to accommodate these additional activities. At December31, 2017, the additional activities as outlined under the DoD Contract through February 28, 2018 were substantially complete. On February 28, 2018, theDoD contract was amended to incorporate additional services in the amount of $0.5 million and to extend the contract period by twelve months throughFebruary 28, 2019. If DSUVIA is approved by the FDA, the DoD has the option to purchase a certain number of units of commercial product pursuant tothe terms of the DoD Contract. F-18 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 $0.9 million, $10.9 million and $4.4 million for the years ended December 31, 2017, 2016 and 2015,respectively. 6. Collaboration Agreement As described in Note 1 “Organization and Summary of Significant Accounting Policies,” the Company has entered into amendments to the Agreementswith Grünenthal related to ZALVISO. In the Amended Agreements, the parties amended the Product supply configurations and packaging of Productcomponents and accessories, and associated pricing therefor, which the Company will manufacture and supply to Grünenthal for the Territory. The partiesagreed to increase the pricing of the Product components and accessories in exchange for a reduction of $5.5 million in the total milestone payments duefrom Grünenthal contingent upon achieving specified net sales targets from a total of $171.5 million to $166.0 million. The parties also updated thedevelopment plan for the Product in the Territory, providing for additional near-term development services to be rendered by AcelRx in exchange forpayments by Grünenthal of $0.7 million. In accordance with the terms of the Amended MSA, AcelRx also received a binding Product forecast fromGrünenthal for approximately $3.7 million, which was fully delivered by the end of 2016. 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. A CE Mark for ZALVISO was obtained in the fourth quarter of 2014 whichspecifies AcelRx as the device design authority and manufacturer. In September 2015, the European Commission approved the MAA for ZALVISO for the28 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 EC approval of the MAA for ZALVISO,which was approved in September 2015. Under the Amended License Agreement, the Company is 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 and supply and trademark fee payments in the mid-teens up to the mid-twenties percent range,depending on the level of sales achieved, on net sales of ZALVISO. A portion of the tiered royalty payment, exclusive of the supply and trademark feepayments, will be paid to PDL in connection with the Royalty Monetization. For additional information on the Royalty Monetization with PDL, see Note8 “Liability Related to Sale of Future Royalties”. Unless earlier terminated, the Amended License Agreement continues in effect until the expiration ofthe obligation of Grünenthal to make royalty and supply and trademark fee payments, which supply and trademark fee continues for so long as theCompany continues to supply the Product to Grünenthal. The Amended License Agreement is subject to earlier termination in the event the partiesmutually agree, by a party in the event of an uncured material breach by the other party, upon the bankruptcy or insolvency of either party, or byGrünenthal 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, or December 16, 2013 throughDecember 15, 2018, 100% and thereafter 80% of Grünenthal’s and its sublicensees’ and distributors’ requirements of Product for use in the Field for theTerritory. The Product will be supplied at prices approximating the Company’s manufacturing cost, subject to certain caps, as defined in the MSAAmendment. The MSA Amendment requires the Company to use commercially reasonable efforts to enter stand-by contracts with third parties providingsignificant supply and manufacturing services and, under certain specified conditions, permits Grünenthal to use a third party back-up manufacturer tomanufacture the Product for Grünenthal’s commercial 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. F-19 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. 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 were 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 VSOE, or sufficient TPE of selling price, as none of them have been sold separately by theCompany, and as there is only limited information about third party pricing for similar deliverables. Accordingly, the Company developed BESP for eachdeliverable in order to allocate the noncontingent arrangement consideration to the units of accounting, based on current information available as of themodification 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. F-20 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. 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, 2017, 2016 and 2015 (in thousands): Years Ended December 31, 2017 2016 2015 License $— $— $13,167 Product sales 6,673 5,742 — Joint steering committee, research and development services anddemonstration devices 269 688 1,690 Non-cash royalty revenue related to Royalty Monetization (SeeNote 8) 151 7 — Royalty revenue 50 3 — Total $7,143 $6,440 $14,857 F-21 As of December 31, 2017, the Company had current and noncurrent portions of the deferred revenue balance under the Amended Agreements of$0.4 million and $3.5 million, respectively. 7. Long-Term Debt Amended Loan and Security Agreement On December 16, 2013, AcelRx entered into an Amended and Restated Loan and Security Agreement with Hercules Technology II, L.P. and HerculesCapital, Inc., formerly known as Hercules Technology Growth Capital, Inc., together, the Lenders, or the Original Loan Agreement, under which theCompany was provided the ability to borrow up to $40.0 million in three tranches. The loans were represented by secured convertible term promissorynotes, collectively, the 2013 Notes. The Original Loan Agreement amended and restated the prior Loan and Security Agreement between the Companyand the Lenders dated as of June 29, 2011. The Company borrowed the first tranche of $15.0 million upon closing of the transaction on December 16,2013, and the second tranche of $10.0 million on June 16, 2014. The Company used approximately $8.6 million of the proceeds from the first tranche torepay its obligations under the prior Loan and Security Agreement with the Lenders. The Company recorded the new debt at an estimated fair value of$24.9 million as of December 31, 2014. In connection with the Original Loan Agreement, the Company issued a warrant to each Lender which,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 previous exerciseprice of $3.88 per share to $3.07 per share. On March 2, 2017, the Company amended and restated the Original Loan Agreement with the Lenders, which is referred to as the Amended LoanAgreement. Pursuant to the Amended Loan Agreement, the Company borrowed the first tranche of approximately $20.5 million upon closing of thetransaction on March 2, 2017, which is represented by secured term promissory notes, or the Notes. The Company used all of the proceeds from the firsttranche to repay its obligations under the Original Loan Agreement, including a final payment of $1.7 million made on October 1, 2017. The interest rateis calculated at a rate equal to the greater of either (i) 9.55% plus the prime 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 were interest-only until October 1, 2017 followed by equal monthly payments of principal andinterest through the scheduled maturity date of March 1, 2020. A final payment equal to 6.5% of the aggregate principal amount of loans funded underthe Amended Loan Agreement, or End of Term Fee, or EOT Fee, will be due on the earliest of (i) the maturity date, (ii) prepayment in full of the loans(other than by a refinancing with Hercules) or (iii) the date on which the loans under the Amended Loan Agreement become due and payable. TheCompany’s obligations under the Amended Loan Agreement are secured by a security interest in substantially all of its assets, other than its intellectualproperty. If the Company prepays the loans under the Amended Loan Agreement prior to the maturity date, it will pay Hercules a prepayment charge, based on apercentage of the then outstanding principal balance, equal to 3% if the prepayment occurs prior to March 2, 2018, 2% if the prepayment occurs afterMarch 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 Hercules’ security interest or in the value of the collateral, and events relating to bankruptcy or insolvency. Upon theoccurrence of an event of default, a default interest rate of an additional 5% may be applied to the outstanding loan balances, and Hercules may declareall outstanding obligations immediately due and payable and take such other actions as set forth in the Amended Loan Agreement. F-22 Upon an event of default, including a change of control, Hercules has the option to accelerate repayment of the Amended Loan Agreement, includingpayment of any applicable prepayment charges. This option is considered a contingent put option liability, as the holder of the loan has the ability toexercise the option in the event of default, and is 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 and Security Agreement, which had an estimated fair value of $32 at the time of the amendment, waswritten off as a part of the loss on extinguishment, and a new contingent put option liability was established. As of December 31, 2017 and 2016, theestimated fair value of the contingent put option liability was $0.2 million and $0.1 million, 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 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 Amended Loan Agreement was $19.1 million at December 31, 2017 and was $21.5 million under the Original LoanAgreement at December 31, 2016. Interest expense related to the Amended Loan Agreement was $3.3 million for the year ended December 31, 2017 andwas $2.8 million and $3.0 million under the Original Loan Agreement for the years ended December 31, 2016 and 2015, respectively. 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, 2017 (in thousands): 2018 $9,350 2019 9,350 2020 3,704 Total payments 22,404 Less amount representing interest (2,420)Notes payable, gross 19,984 Unamortized portion of final payment (741)Unamortized discount on notes payable (147)Long-term debt 19,096 Less current portion of notes payable, including unamortized discount (7,727)Long-term debt, current portion $11,369 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. F-23 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. The following table shows the activity within the liability account during the year ended December 31, 2017 (in thousands): Year endedDecember 31,2017 Period frominception toDecember 31,2017 Liability related to sale of future royalties — beginning balance $72,987 $— Proceeds from sale of future royalties — 61,184 Non-cash royalty revenue (120) (127)Non-cash interest expense recognized 10,721 22,531 Liability related to sale of future royalties as of December 31, 2017 83,588 83,588 Less: current portion (604) (604)Liability related to sale of future royalties — net of current portion $82,984 $82,984 Estimated non-cash royalty revenue of $31.0 thousand recognized in the fourth quarter of 2017 has not yet been remitted to PDL and therefore is notincluded in the table above. 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 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 of 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 $45.0thousand at the issuance date, and which was used in estimating the fair value of the amended debt instrument in September 2016 and was recorded asequity. F-24 As of December 31, 2017, 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.” 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. Thechange in fair value for the years ended December 31, 2017, 2016 and 2015, which was recorded as other income, was $0.3 million, $0.6 million and $2.1million, respectively. During the year ended December 31, 2017, 512,456 warrants expired unexercised. During the year ended December 31, 2015, PIPE warrants to purchase847,058 shares were net exercised for 527,101 shares of common stock. 10. Commitments and Contingencies Operating Leases In December 2011, the Company entered into a non-cancelable lease agreement with Metropolitan Life Insurance Company, or the Landlord, referred toas the Existing Lease, for approximately 13,787 square feet of office and laboratory facilities located at 301 Galveston Drive, Redwood City, California,or the Current Premises, which serve as the Company headquarters, effective April 2012. Rent expense from the facility lease is recognized on a straight-line basis from the inception of the lease in December 2011, the early access date, through the end of the lease. In May 2014, the Company entered into an amendment, or the Lease Amendment, to the Existing Lease for the Current Premises. Pursuant to the LeaseAmendment, the term of the Existing Lease was extended for a period of twenty (20) months and twenty-two (22) days and expiring on January 31, 2018,unless sooner terminated pursuant to the terms of the Existing Lease. In addition, the Lease Amendment included a new lease on an additionalapproximately 12,106 square feet of office space located at 351 Galveston Drive in Redwood City, California, or the Expansion Space, which is adjacentto the Current Premises. The new lease for the Expansion Space has a term of 42 months commencing on August 1, 2014, and expiring on January 31,2018. On October 2, 2015, the Company executed an agreement to sublease approximately 11,871 square feet of the Expansion Space for a term of 26 monthscommencing on December 1, 2015. The sublessee was entitled to abatement of the first two monthly installments of rent. Subsequent monthlyinstallments of rent start at a rental rate of $2.05 per square foot (subject to agreed nominal increases). Minimum rents received under this sublease were$0.3 million for the year ended December 31, 2017 and are expected to be $25.0 thousand for the year ending December 31, 2018. F-25 On June 14, 2017, the Company entered into a second amendment, or the Second Lease Amendment, to the Existing Lease, and as amended by theSecond Lease Amendment, the Lease, with the Landlord, for approximately 25,893 square feet located at 301 – 351 Galveston Drive, Redwood City,California, or the Current Premises and the Expansion Space, together, the Premises. Pursuant to the Second Lease Amendment, the term of the ExistingLease has been extended for a period of seventy-two (72) months, or the Extended Term, beginning February 1, 2018 and expiring January 31, 2024, orthe Expiration Date, unless sooner terminated pursuant to the terms of the Lease. Pursuant to the Lease Amendment, the Company will pay on a monthly basis annual rent of approximately $1.2 million, with annual increases each 12-month period beginning February 1st, and the first two months to be abated provided that the Company is not in default thereunder. In addition, theCompany will pay the Landlord specified percentages of certain operating expenses related to the leased facility incurred by the Landlord. Rent expense was $0.6 million, $0.3 million and $0.6 million for the Premises during the years ended December 31, 2017, 2016 and 2015, respectively. Future minimum payments under the Lease as of December 31, 2017, are as follows (in thousands): Year Ending December 31: 2018 $959 2019 1,231 2020 1,268 2021 1,305 2022 1,345 Thereafter 1,501 Total minimum payments $7,609 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 OfferingSM 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 offering of Shares pursuantto 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 SalesAgreement by Cantor or the Company, as permitted therein. The Company will pay Cantor a commission rate in the low single digits on the aggregategross proceeds from each sale of Shares and have agreed to provide Cantor with customary indemnification and contribution rights. During the yearended December 31, 2017, the Company issued and sold 5.4 million shares of common stock pursuant to the 2016 ATM Agreement, for which theCompany received net proceeds of approximately $15.7 million, after deducting commissions, fees and expenses of $0.5 million. Stock Plans 2006 Stock Plan In August 2006, the Company established the 2006 Plan in which 342 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 shares of common stock were reserved for issuance under the 2006 Plan and, in November 2009, an additional approximately 1.4 million shares ofcommon stock were reserved for issuance under the 2006 Plan. Per the 2006 Plan, the exercise price of ISOs and NSOs granted to a stockholder who at thetime of grant owns 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 thefair value per share of the underlying common stock on the date of grant. Effective upon the execution and delivery of the underwriting agreement for theCompany’s IPO, no additional stock options or other stock awards may be granted under the 2006 Plan. F-26 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 approximately 52 sharesreserved under the 2006 Plan that remained available for future grant at the time of the IPO were transferred to the share reserve of the 2011 IncentivePlan. 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 isapproximately 1.9 million shares, which number was the sum of (i) 52 shares remaining available for future grant under the 2006 Plan at the time of theexecution and delivery of the underwriting agreement for the Company’s IPO, and (ii) an additional approximately 1.8 million new shares. Then, thenumber of shares of common stock reserved for issuance under the 2011 Incentive Plan will automatically increase on January 1st each year, starting onJanuary 1, 2012 and continuing through January 1, 2020, by 4% of the total number of shares of the Company’s common stock outstanding onDecember 31 of the preceding calendar year, or such lesser number of shares of common stock as determined by the Board of Directors. The term of theoption is determined by the Board of Directors on the date of grant but shall not be longer than 10 years. Options under the 2011 Equity Incentive Plangenerally vest over four years, and all options expire after 10 years. The Company issues new shares for settlement of vested restricted stock units andexercises of stock options. The Company does not have a policy of purchasing its shares relating to its share-based programs. 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 shares of the Company’s common stock were authorized for issuance under the ESPP pursuant to purchase rights granted to the Company’semployees or to employees of any of its designated affiliates. The number of shares of the Company’s common stock reserved for issuance willautomatically 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, 2017, 94,893 shares have been issued to employees and there are 1,041,249 shares available for issuance under the ESPP. Theweighted average fair value of shares issued under the ESPP in 2017, 2016 and 2015 was $2.59, $2.98 and $4.48 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 31,2017 December 31,2016 December 31,2015 Cost of goods sold $324 $302 $67 Research and development 1,901 2,308 2,587 General and administrative 2,069 1,869 2,356 Total $4,294 $4,479 $5,010 F-27 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, 2016 6,307,756 $5.00 Granted 3,007,155 2.99 Forfeited (438,519) 4.28 Expired (351,922) 7.31 Exercised (69,372) 1.52 December 31, 2017 8,455,098 $4.25 7.1 $13 Vested and exercisable options—December 31, 2017 4,529,174 $5.11 5.56 $13 Vested and expected to vest—December 31, 2017 8,455,098 $4.25 7.1 $13 As of December 31, 2017, there were 2,368,992 shares available for future grant under the 2011 Plan. In January 2018, an additional 2,035,966 shareswere authorized for issuance under the 2011 Incentive Plan. Additional information regarding the Company’s stock options outstanding and vested and exercisable as of December 31, 2017 is summarized below: Options Outstanding Options Vested and Exercisable Exercise Prices Number ofStock OptionsOutstanding Weighted-AverageRemainingContractual Life(Years) Weighted-AverageExercise PriceperShare Shares Subjectto StockOptions Weighted-AverageExercise PriceperShare $1.20-$2.30 105,900 8.4 $2.13 38,400 $1.84 $2.40-$3.77 5,592,633 7.7 $3.10 1,948,300 $3.17 $3.92-$6.60 2,060,565 5.7 $5.45 1,880,190 $5.36 $8.18-$10.55 696,000 6.2 $10.28 662,284 $10.28 8,455,098 7.1 $4.25 4,529,174 $5.11 The weighted average grant-date fair value of options granted during the years ended December 31, 2017, 2016 and 2015 was $1.91, $2.24 and $2.69 pershare, respectively. As of December 31, 2017, total stock-based compensation expense related to unvested options to be recognized in future periods was$7.1 million which is expected to be recognized over a weighted-average period of 2.6 years. The grant date fair value of shares vested during the yearsended December 31, 2017, 2016 and 2015 was $3.5 million, $3.9 million and $5.4 million, respectively. The total intrinsic value of options exercisedduring the year ended December 31, 2017 was $40 thousand. There were no option exercises during the year ended December 31, 2016, and the totalintrinsic value of options exercised during the year ended December 31, 2015 was $1.3 million. The Company used the following assumptions to calculate the fair value of each employee stock option: Year Ended December 31, 2017 2016 2015 Expected term (in years) 5.70 5.25-6.25 5.25-6.25 Risk-free interest rate 1.82%-2.09% 1.24%-1.47% 1.35%-1.82% Expected volatility 73% 80% 72% Expected dividend rate 0% 0% 0% 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 $0.8 million in the year ended December 31, 2015. The restructuring liability was fully disbursed as ofDecember 31, 2015. F-28 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. The PIPE warrants expired during the year ended December 31, 2017. During the year ended December 31, 2016, the exercise price of the PIPE warrantsexceeded the average of AcelRx’s closing share price in the period. As a result, the PIPE warrants were anti-dilutive during the year ended December 31,2016. However, during the year ended December 31, 2015, the PIPE warrants had a dilutive impact to net loss per share due to a lower share price atDecember 31, 2015, compared to the closing share price on December 31, 2014. The decrease in share price created a lower Black-Scholes value andlower liability for the PIPE warrants, which resulted in other income during the year ended December 31, 2015. The calculation of diluted net loss pershare requires that, to the extent the average market price of the underlying shares for the reporting period exceeds the exercise price of the PIPE warrantsand the presumed exercise of such securities are dilutive to loss per share for the period, adjustments to net loss used in the calculation are required toremove the change in fair value of the PIPE warrants for the period. Likewise, adjustments to the denominator are required to reflect the related dilutiveshares. 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, 2017, 2016 and 2015: Years Ended December 31, 2017 2016 2015 (in thousands, except share and per share amounts) Numerator: Net loss used to compute net loss per share Basic $(51,508) $(43,157) $(24,399)Adjustments for change in fair value of warrant liability — — (2,120)Diluted $(51,508) $(43,157) $(26,519)Denominator: Weighted average shares outstanding used to compute net loss pershare: Basic 46,883,535 45,313,118 44,300,099 Dilutive effect of warrants — — 168,341 Diluted 46,883,535 45,313,118 44,468,440 Net loss per share—basic $(1.10) $(0.95) $(0.55)Net loss per share—diluted $(1.10) $(0.95) $(0.60) 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, 2017 2016 2015 ESPP and stock options to purchase common stock 8,767,783 6,395,879 4,699,121 Convertible debt into common stock — 553,763 553,763 Common stock warrants 176,730 692,611 180,155 F-29 15. Accrued Liabilities Accrued liabilities consist of the following (in thousands): December 31, 2017 2016 Accrued compensation and employee benefits $2,190 $2,556 Inventory and other contract manufacturing accruals 511 1,218 Other accrued liabilities 842 821 Total accrued liabilities $3,543 $4,595 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 $0.3 million, $0.3 million and $0.3 million for the years ended December 31, 2017, 2016 and 2015, 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 $0.3 million. The Company makes royalty payments to PDL in connection with the Royalty Monetization as described in Note 8“Liability Related to Sale of Future Royalties.” 18. Income Taxes The Company recorded a benefit for income taxes of $0.7 million during the year ended December 31, 2017, and a benefit for income taxes of $34.0thousand during the year ended December 31, 2016. The Company recorded a provision for income taxes of $0.8 million during the year endedDecember 31, 2015. The provision (benefit) for income taxes consisted of the following (in thousands): December 31,2017 December 31,2016 Current: Federal $(702) $(39)State 1 6 Total Current (701) (33)Deferred: Federal — (1)State — — Total Deferred — (1)Provision (benefit) for income taxes $(701) $(34) F-30 Net deferred tax assets as of December 31, 2017 and 2016 consist of the following (in thousands): December 31,2017 December 31,2016 Deferred tax assets: Accruals and other $2,717 $3,746 Research credits 6,530 5,670 Net operating loss carryforward 31,064 36,224 Section 59(e) R&D expenditures 12,156 16,782 Deferred revenue 18,384 24,836 AMT credit — 703 Total deferred tax assets 70,851 87,961 Valuation allowance (70,851) (87,961)Net deferred tax assets $— $— Reconciliations of the statutory federal income tax to the Company’s effective tax during the years ended December 31, 2017, 2016 and 2015 are asfollows (in thousands): Year Ended December 31, 2017 2016 2015 Tax at statutory federal rate $(17,751) $(14,685) $(8,037)State tax—net of federal benefit 350 (73) 2,853 PIPE Warrant liability (70) (260) (726)General Business credits (316) (360) (455)Stock Options 42 1,115 1,559 Other 51 33 73 Change in valuation allowance (17,110) 14,196 5,493 Tax Reform – Tax Rate Change 34,103 — — Provision for income taxes $(701) $(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 allowancedecreased by $17.1 million during year ended December 31, 2017 and increased by $14.2 million and $5.5 million during the years ended 2016 and2015, respectively. As of December 31, 2017, the Company had federal net operating loss carryforwards of $115.6 million, which begin to expire in 2029. As ofDecember 31, 2017, the Company had state net operating loss carryforwards of $97.2 million, which begin to expire in 2028. As of December 31, 2017, the Company had a federal alternative minimum tax credit carryover of $0.7 million which is now refundable under the taxreform enacted on December 22, 2017 and classified as a non-current receivable on the Company’s balance sheet. As of December 31, 2017, the Company had federal research credit carryovers of $5.9 million, which begin to expire in 2026. As of December 31, 2017,the Company had state research credit carryovers of $3.6 million, which will carryforward indefinitely. The Company has adopted ASU 2016-09 in calendar year end December 31, 2017. As a result of this adoption, the Company is reflecting the excess taxbenefit related to share based compensation in the current year. The impact of this adoption results in a gross increase of $2.9 million and $2.0 million tofederal and state NOLs respectively. The Company has recorded a full valuation allowance against its deferred tax assets. 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. If it isdetermined that an ownership change occurred post 2013, the Company’s tax attributes may be subject to limitation. F-31 On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law resulting in significant changes to the Internal Revenue Code.The Act reduces the federal corporate income tax rate decrease from 35% to 21% effective for tax periods beginning after December 31, 2017, changesU.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the untaxed cumulative foreign earningsand profits as of December 31, 2017. The Act also includes provisions for the elimination of the Alternative Minimum Tax, among other changes. TheCompany has calculated its best estimate of the impact of the Act in its year end income tax provision in accordance with its understanding of the Act andguidance available as of the date of this filing and as a result has recorded $0.7 million as an additional income tax benefit in the fourth quarter of 2017,the period in which the legislation was enacted. The provisional amount of $0.7 million related to the reversal of AMT credits which are now refundablecredits under the provisions of the Act. The Company has remeasured the deferred tax assets and liabilities based on the rate at which they are expected toreverse in the future. No provision or benefit has been recorded as the Company has recorded a full valuation allowance against its deferred tax assets. Theeffects of other provisions of the Act are not expected to have a material impact on the Company’s financial statements. Uncertain Tax Positions A reconciliation of the beginning and ending balances of the unrecognized tax benefits during the years ended December 31, 2017, 2016 and 2015 is asfollows (in thousands): Year Ended December 31, 2017 2016 2015 Unrecognized benefit—beginning of period $2,162 $1,939 $1,667 Gross decreases—prior period tax positions — — — Gross increases—current period tax positions 203 223 272 Unrecognized benefit—end of period $2,365 $2,162 $1,939 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 2017 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. 19. 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, 2017. 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. 2017 2016 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Revenues $3,109 $2,659 $1,487 $740 $3,025 $4,531 $3,366 $6,435 Operating costs and expenses $15,182 $12,600 $10,348 $8,547 $11,547 $12,853 $11,341 $13,573 Net income / (loss) $(15,551) $(13,059) $(13,013) $(9,885) $(10,981) $(11,092) $(11,402) $( 9,682)Net income / (loss) per share(basic) $(0.34) $(0.29) $(0.28) $(0.20) $(0.24) $(0.24) $(0.25) $(0.21)Net income / (loss) per share(diluted) $(0.34) $(0.29) $(0.28) $(0.20) $(0.25) $(0.24) $(0.25) $(0.21) F-32 Exhibit 10.20 Non-Employee Director Compensation Policy Cash Compensation Arrangements Compensation for our non-employee directors consists of cash and stock options. The Compensation Committee periodically reviews thecompensation paid to non-employee directors for their service on the Board and its committees and recommends any changes considered appropriate tothe full Board for its approval. In 2013, the Compensation Committee conducted a competitive analysis of industry practices and director compensationprograms at comparable companies. Based on this analysis, in January 2013 the Compensation Committee recommended revisions to our non-employeedirector compensation program. In February 2013, our Board revised the non-employee director compensation policy, which became effective January 1,2013. Pursuant to the revised non-employee director compensation policy, each member of our Board, who is not our employee, receives an annualretainer of $40,000. In addition, our non-employee directors receive the following cash compensation for Board services, as applicable: •the Board Chair receives an additional annual retainer of $20,000; •the Audit Committee Chair receives an additional annual retainer of $15,000; •the Compensation Committee Chair receives an additional annual retainer of $7,500; •the Nominating and Corporate Governance Committee Chair receives an additional annual retainer of $6,000; •an Audit Committee member receives an additional annual retainer of $7,500; •a Compensation Committee member receives an additional annual retainer of $3,750; and •a Nominating and Corporate Governance Committee member receives an additional retainer of $3,000. All Board and committee retainers accrue and are payable on a quarterly basis at the end of each calendar quarter of service. We continue toreimburse our non-employee directors for travel, lodging and other reasonable expenses incurred in connection with their attendance at Board orcommittee meetings. Equity Compensation Arrangements Our non-employee director compensation policy provides for automatic grants of stock options to our non-employee directors under our 2011Incentive Plan. Upon election or appointment to our Board, each non-employee director will receive an initial grant of a stock option to purchase 15,000shares of our common stock, which will vest as to 1/36th of the shares subject to the option on an equal monthly basis over a three-year period. Beginningwith our 2013 annual meeting, each non-employee director who is then serving as a director or who is elected to our Board of directors on the date of suchannual meeting is eligible to receive a grant of a stock option to purchase 15,000 shares of our common stock, which will vest as to 1/24th of the sharessubject to the option on an equal monthly basis over a two-year period. Each of these options will be granted with an exercise price equal to the fairmarket value of our common stock on the date of the grant, and shall be entitled to full vesting acceleration as of immediately prior to the effective dateof certain change of control transactions involving us, such as our liquidation or a dissolution of or an event that results in a material change in theownership of our Company. 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: (i)Registration Statements on Form S-8 (Nos. 333-216492, 333-209998, 333-202709, 333-194634, 333-187206 and 333-180334) pertaining tothe 2011 Equity Incentive Plan, (ii)Registration Statements on Form S-8 (Nos. 333-209998 and 333-180334) pertaining to the 2011 Equity Incentive Plan and 2011 EmployeeStock Purchase Plan, (iii)Registration Statement on Form S-8 (No. 333-172409) pertaining to the 2006 Stock Plan, 2011 Equity Incentive Plan and 2011 EmployeeStock Purchase Plan, and (iv)Registration Statement on Form S-3 (No. 333-218506). of our reports dated March 8, 2018, with respect to the consolidated financial statements and the effectiveness of internal control over financial reportingof AcelRx Pharmaceuticals, Inc. included in this Annual Report on Form 10-K of AcelRx Pharmaceuticals, Inc. for the year ended December 31, 2017. /s/ OUM & CO. LLP San Francisco, CaliforniaMarch 8, 2018 /s/ Vincent J. AngottiVincent J. AngottiChief Executive Officer(Principal Executive Officer)Exhibit 31.1 CERTIFICATIONS I, Vincent J. Angotti, 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 thefinancial condition, 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)) forthe registrant 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 thoseentities, 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 theeffectiveness of 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 recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’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 controlover financial reporting. Date: March 8, 2018 /s/ Raffi M. AsadorianRaffi M. AsadorianChief Financial Officer(Principal Financial Officer)Exhibit 31.2 CERTIFICATIONS I, Raffi M. Asadorian, 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 thefinancial condition, 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)) forthe registrant 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 thoseentities, 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 theeffectiveness of 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 recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’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 controlover financial reporting. Date: March 8, 2018 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), Vincent J. Angotti, Chief Executive Officer of AcelRx Pharmaceuticals, Inc. (the“Company”), and Raffi M. Asadorian, 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, 2017, 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 8th day of March 2018. /s/ Vincent J. Angotti /s/ Raffi M. AsadorianVincent J. AngottiChief Executive Officer Raffi M. AsadorianChief 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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