AcelRx Pharmaceuticals
Annual Report 2018

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549FORM 10-K☑ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2018 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:None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ☑ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405of Regulation S-T (§-232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit suchfiles). 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 ☐ 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 29, 2018 (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$177,225,920. The calculation excludes 893,483 shares of the registrant’s common stock held by current executive officers and directors that theregistrant has concluded are affiliates of the registrant. Exclusion of such shares should not be construed to indicate that any such person possesses thepower, direct or indirect, to direct or cause the direction of the management or policies of the registrant or that such person is controlled by or undercommon control with the registrant. As of February 25, 2019, the number of outstanding shares of the registrant’s common stock was 78,757,930.DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's notice of annual meeting of stockholders and proxy statement to be filed pursuant to Regulation 14A within 120 days afterRegistrant's fiscal year end of December 31, 2018, are incorporated by reference into Part III of this report. 1 ACELRX PHARMACEUTICALS, INC. 2018 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Page PART I Item 1. Business4Item 1A. Risk Factors23Item 1B. Unresolved Staff Comments55Item 2. Properties55Item 3. Legal Proceedings55Item 4. Mine Safety Disclosures55PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities56Item 6. Selected Financial Data57Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations58Item 7A. Quantitative and Qualitative Disclosures About Market Risk73Item 8. Financial Statements and Supplementary Data73Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure73Item 9A. Controls and Procedures73Item 9B. Other Information75PART III Item 10. Directors, Executive Officers and Corporate Governance76Item 11. Executive Compensation76Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters76Item 13. Certain Relationships and Related Transactions, and Director Independence76Item 14. Principal Accounting Fees and Services76PART IV Item 15. Exhibits, Financial Statement Schedules76Item 16. Form 10-K Summary80Signatures81 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 success in commercializing DSUVIA™ (sufentanil sublingual tablet, 30 mcg) in the United States, including the marketing, sales, anddistribution of the product; •our ability to maintain regulatory approval of DSUVIA in the United States, including effective management of and compliance with theDSUVIA Risk Evaluation and Mitigation Strategies, or REMS, program; •acceptance of DSUVIA by physicians, patients and the healthcare community, including the acceptance of pricing and placement of DSUVIAon payers’ formularies; •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; •successfully establishing and maintaining commercial manufacturing with third parties; •our ability to manage effectively, and the impact of any costs associated with, potential governmental investigations, inquiries, regulatoryactions or lawsuits that may be brought against us; •continued demonstration of an acceptable safety profile of DSUVIA; •effectively competing with other medications for the treatment of moderate-to-severe acute pain in medically supervised settings, includingIV-opioids and any subsequently approved products; •our ability to maintain regulatory approval of DZUVEO™ in the European Union or EU, and enter into a collaboration agreement with astrategic partner for the commercialization of DZUVEO in Europe; •our ability to manufacture and supply DZUVEO in Europe to any future strategic partner; •our ability to successfully execute the pathway towards a resubmission of the Zalviso® (sufentanil sublingual tablet system) New DrugApplication, or NDA, and subsequently obtain, without further delays, and maintain regulatory approval of Zalviso in the United States andany related restrictions, limitations, and/or warnings in the label of Zalviso, if approved; •the outcome of any potential FDA Advisory Committee meeting held for Zalviso; •our ability to manufacture and supply Zalviso to Grünenthal GmbH, or Grünenthal, in accordance with their forecast and the Manufacture andSupply 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 ability to attract additional collaborators with development, regulatory and commercialization expertise; •our ability to successfully retain our key commercial, scientific, engineering, medical or management personnel and hire new personnel asneeded; •the size and growth potential of the markets for DSUVIA, and Zalviso, if approved in the United States, and our ability to serve those markets; •our ability to successfully commercialize Zalviso, if approved in the United States; •the rate and degree of market acceptance of Zalviso, if approved in the United States; •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; 3 •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 DSUVIA/DZUVEO and Zalviso. 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. DSUVIA™ (known as DZUVEO in Europe) and Zalviso, are both focused on the treatment of acute pain, and each utilize sufentanil, deliveredvia a non-invasive route of sublingual administration, exclusively for use in medically supervised settings. On November 2, 2018, the U.S. Food and DrugAdministration, or FDA, approved our resubmitted NDA for DSUVIA for use in adults in certified medically supervised healthcare settings, such ashospitals, surgical centers, and emergency departments, for the management of acute pain severe enough to require an opioid analgesic and for whichalternative treatments are inadequate. In June 2018, the European Commission, or EC, granted marketing approval of DZUVEO for the treatment ofpatients with moderate-to-severe acute pain in medically monitored settings. We are developing a distribution capability and commercial organization tomarket and sell DSUVIA in the United States. The commercial launch of DSUVIA in the United States occurred in the first quarter of 2019. In geographieswhere we decide not to commercialize ourselves, including for DZUVEO in Europe, we may seek to out-license commercialization rights. We currentlyintend to commercialize and promote DSUVIA/DZUVEO outside the United States with one or more strategic partners, although we have not yet enteredinto any such arrangement. We are currently evaluating the timing of the resubmission of the NDA for Zalviso. If we are successful in obtaining approvalof Zalviso in the United States, we plan to potentially promote Zalviso either by ourselves or with strategic partners. Zalviso is approved in Europe and iscurrently being commercialized by Grünenthal GmbH, or Grünenthal. 4 Our Portfolio The following table summarizes our portfolio. Product Description Target Use StatusDSUVIA (known asDZUVEO in Europe) Sufentanil sublingualtablet, 30 mcg Moderate-to-severe acutepain in a medicallysupervised setting,administered by ahealthcare professional Received FDA approval in November 2018, commerciallaunch began Q1 2019. Received European Commission (EC) approval in June 2018. Zalviso Sufentanil sublingualtablet system, 15 mcg Moderate-to-severe acutepain in the hospitalsetting, administered bythe patient as needed Positive results from Phase 3 trial, IAP312, announced in August2017. Currently evaluating the timing of the resubmission of theNDA.Zalviso is approved in the European Union where it is marketedcommercially by Grünenthal. We have chosen sufentanil as the therapeutic ingredient for DSUVIA and Zalviso. Opioids have been utilized for pain relief for centuries and are thestandard-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 provide an effective and well-tolerated treatment for acute pain. The following table illustrates the difference between thetherapeutic 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. 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. 5 DSUVIA™ (sufentanil sublingual tablet, 30 mcg) DSUVIA, known as DZUVEO in Europe, approved by the FDA in November 2018, is indicated for use in adults in a certified medically supervisedhealthcare setting, such as hospitals, surgical centers, and emergency departments, for the management of acute pain severe enough to require an opioidanalgesic and for which alternative treatments are inadequate. DSUVIA was designed to provide rapid analgesia via a non-invasive route and to eliminatedosing errors associated with IV administration. DSUVIA is a single-strength solid dosage form administered sublingually via a single-dose applicator, orSDA, by healthcare professionals. Sufentanil is an opioid analgesic currently marketed for intravenous, or IV, and epidural anesthesia and analgesia. Thesufentanil pharmacokinetic profile when delivered sublingually avoids the high peak plasma levels and short duration of action observed with IVadministration. The European Commission, or EC, approved DZUVEO for marketing in Europe in June 2018. DSUVIA was approved with a Risk Evaluation and Mitigation Strategy, or REMS, which restricts distribution to certified medically supervised healthcaresettings in order to prevent respiratory depression resulting from accidental exposure. DSUVIA will only be distributed to facilities certified in theDSUVIA REMS program following attestation by an authorized representative to comply with appropriate dispensing and use restrictions of DSUVIA. Tobecome certified, a healthcare setting will need to train their healthcare professionals on the proper use of DSUVIA and have the ability to managerespiratory depression. DSUVIA will not be available in retail pharmacies or for outpatient use. As part of the REMS program, we will monitor distributionand audit wholesalers’ data, evaluate proper usage within the healthcare settings and monitor for any diversion and abuse. Additionally, we will de-certifyhealthcare settings that are non-compliant with the REMS program. Examples of potential patient populations and settings in which DSUVIA could be used include: emergency room patients; patients who are recoveringfrom short-stay or ambulatory surgery and do not require more long-term analgesia; post-operative patients who are transitioning from the operating roomto the recovery floor; certain types of office-based or hospital-based procedures; patients being treated and transported by paramedics; and for battlefieldcasualties. In the emergency room and in ambulatory care environments, patients often do not have immediate IV access available, or maintaining IVaccess may provide an impediment to rapid discharge. Moreover, IV dosing results in high peak plasma levels, thereby limiting the opioid dose andrequiring frequent redosing intervals to titrate to satisfactory analgesia. Oral pills and liquids generally have slow and erratic onset of analgesia. Based oninternal market research conducted to date, we believe that additional treatment options are needed that can safely and effectively treat acute trauma pain,in both civilian and military settings, and that can provide an alternative to currently marketed oral pills and liquids, as well as IV-administered opioids,for moderate-to-severe acute pain. Zalviso® (sufentanil sublingual tablet system, 15 mcg) Zalviso is intended for the management of moderate-to-severe acute pain in hospitalized adult patients. Zalviso consists of a pre-filled cartridge of 40sufentanil sublingual tablets, 15 mcg, delivered by the Zalviso System, a needle-free, handheld, patient-administered, pain management system. Whilestill 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-controlled analgesia,or PCA. Zalviso allows patients to self-administer sufentanil sublingual tablets via a pre-programmed, secure system designed in part to eliminate the riskof 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 andprovides 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. The Zalviso System consists of the following components: a disposable dispenser tip, a disposable dispenser cap, an adhesive thumb tag, a cartridge of 40sufentanil sublingual 15 mcg tablets (approximately a two-day supply) in a disposable radio frequency identification and bar-coded cartridge, a reusable,rechargeable handheld controller, a tether, and an authorized access card. 6 Drugs are classified or scheduled by the Drug Enforcement Agency, or DEA, according to their potential for abuse and addiction. Sufentanil is classifiedas a Schedule II controlled substance. Scheduled drugs, when they are under patient control in a hospital setting, must be secured and have adequate doseaccess control and tracking 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, as amended July 17, 2015 andSeptember 20, 2016, or the Amended Agreements. The License Agreement grants Grünenthal rights to commercialize Zalviso, our novel sublingual PCAsystem, or the Product, in the countries of the EU, Switzerland, Liechtenstein, Iceland, Norway and Australia, or the Territory, for human use in paintreatment within, or dispensed by, hospitals, hospices, nursing homes and other medically supervised settings, or the Field. We retain rights with respect tothe Product in countries outside the Territory, including the United States, Asia and Latin America. Under the MSA, we will exclusively manufacture andsupply the Product to Grünenthal for the Field in the Territory. Grünenthal shall purchase from us, during the first five years after the effective date of theMSA, 100% and thereafter 80% of Grünenthal’s and its sublicensees’ and distributors’ requirements of Product for use in the Field for the Territory. Foradditional information on the Amended Agreements, see Note 7 “Collaboration Agreement” in the accompanying notes to the Consolidated FinancialStatements. Zalviso was approved for commercial sale by the EC in September 2015 and Grünenthal began its commercial launch of Zalviso in the European Union inApril 2016. On September 18, 2015, we sold a majority of the expected royalty stream and commercial milestones from the sales of Zalviso in Europe byGrünenthal to PDL, which we refer to in this report as the Royalty Monetization. For additional information on the Royalty Monetization with PDL, seeNote 9 “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 2019. We submitted an NDA for Zalviso in September 2013, or Zalviso NDA, and on July 25, 2014, the Division of Anesthesia, Analgesia, and AddictionProducts of the FDA issued a Complete Response Letter, or CRL, for the Zalviso NDA. The CRL contained requests for additional information on theZalviso System to ensure proper use of the device. The requests include submission of data demonstrating a reduction in the incidence of device errors,changes to address inadvertent dosing, among other items, and submission of additional data to support the shelf life of the product. In March 2015, wereceived correspondence from the FDA stating that, in addition to the work we had performed to address the items in the CRL, a clinical study would berequired to test the modifications to the Zalviso device and mitigations put in place to reduce the risk of inadvertent dosing/misplaced tablets. 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-administer 15mcg 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 than the5% 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. 7 Clinical Trials Active comparator trial (IAP309) In November 2012, we reported top-line data showing that Zalviso had met its primary endpoint of non-inferiority in the Phase 3 open-label activecomparator trial designed to compare the efficacy and safety of Zalviso (15 mcg/dose) to IV PCA with morphine (1mg/dose) for the treatment of moderate-to-severe acute post-operative pain. Utilizing a randomized, open-label, parallel group design, this trial enrolled 359 adult patients at 26 U.S. sites for thetreatment of pain immediately following open-abdominal or major orthopedic surgery (hip and knee replacement). Patients were randomized 1:1 totreatment with Zalviso or IV PCA morphine and were treated for a minimum of 48 hours and up to 72 hours. Double-blind, placebo-controlled, abdominal surgery trial (IAP310) In March 2013, we reported top-line data results demonstrating that Zalviso met its primary endpoint in a pivotal Phase 3 trial designed to compare theefficacy and safety of Zalviso to placebo in the management of acute post-operative pain after major open abdominal surgery. Adverse events reported inthe trial were generally mild or moderate in nature and similar in both placebo and treatment groups. Utilizing a randomized, double-blind, placebo-controlled design, this Phase 3 trial enrolled 178 adult patients at 13 U.S. sites. Patients were treated for post-operative pain for a minimum of 48 hours,and up to 72 hours. Patients were randomized 2:1, with 119 patients randomized to sufentanil sublingual tablet treatment and 59 to placebo treatment.Both treatments were delivered by the patient, as needed, using Zalviso with a 20-minute lock-out period. Patients in both groups could receive up to 2mg morphine intravenously per hour as a rescue medication, the primary purpose of this rescue medication being to provide placebo-treated patientsaccess to pain medication to enable them to stay in the trial as long as possible. Pre-rescue pain scores were imputed to minimize the impact of this rescueopioid on efficacy evaluations. The primary endpoint evaluated pain intensity over the 48-hour study period compared to baseline, or Summed Pain Intensity Difference, or SPID-48, inpatients following major open abdominal surgery. Patients receiving sufentanil sublingual tablets demonstrated a significantly greater SPID-48 comparedto placebo-treated patients during the study period (105.6 and 55.6, respectively; p=0.001). Double-blind, placebo-controlled, orthopedic surgery trial (IAP311) In May 2013, we reported top-line data results demonstrating that Zalviso met its primary endpoint in a pivotal Phase 3 trial designed to compare theefficacy and safety of Zalviso to placebo in the management of acute post-operative pain after major orthopedic surgery. Adverse events reported in thestudy were generally mild or moderate in nature and were similar in both placebo and treatment groups for the majority of adverse events. Utilizing arandomized, double-blind, placebo-controlled design, this pivotal Phase 3 study enrolled 426 adult patients at 34 U.S. sites for treatment of moderate-to-severe acute pain immediately following major orthopedic surgery. Seven patients did not receive study drug, resulting in 419 patients being included inthe ITT population. Patients were treated for a minimum of 48 hours, and up to 72 hours. Patients were randomized 3:1, with 323 patients randomized tosufentanil sublingual tablet treatment and 104 to placebo treatment. Both treatments were delivered by the patient, as needed, using the Zalviso Systemwith a 20-minute lock-out period. Patients in both groups could receive up to 2 mg morphine intravenously per hour as a rescue medication, the primarypurpose of this rescue medication being to enable placebo-treated patients to stay in the study. Pain scores recorded just prior to the delivery of rescuemedication were gathered and imputed forward to minimize the impact of this rescue opioid on efficacy evaluations. The primary endpoint evaluated SPID-48 in patients following major orthopedic surgery. Patients receiving Zalviso demonstrated a significantly greaterSPID-48 compared to placebo-treated patients during the study period (+76.1 and -11.5, respectively; p < 0.001). Two hundred fifteen (68.3%) sufentanilsublingual tablet-treated patients completed the 48-hour study period, compared to 43 (41.3%) placebo-treated patients. Primary reasons for drop-out inthe sufentanil sublingual tablet- and placebo-treated groups were adverse events (7.0% and 6.7%, respectively) and lack of efficacy (14.3% and 48.1%,respectively). 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). 8 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. 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% limitspecified 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) 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, 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's concernsregarding 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 and vomitingrepresenting the most commonly reported adverse events. A total of 5 patients experienced serious adverse events, but all were considered unrelated tostudy 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. 9 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; •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 products to potentially replace IV opioid use inpatients with moderate-to-severe acute pain in the proposed medically-supervised settings. This may be especially true for DSUVIA in the emergencymedical settings in the United States, where the number of emergency departments is decreasing, resulting in an increased focus on resource managementto treat a growing number of patients in an efficient manner. United States MarketBased on commissioned research conducted in 2016, we estimate that there are over 90 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 acertified medically supervised healthcare setting, such as hospitals, surgical centers, and emergency departments, for less than 24 hours. The target patientpopulation for Zalviso are patients in a hospital setting for greater than 24 hours. Our current estimate of patients in moderate-to-severe acute pain inmedically supervised settings, by setting, is as follows: Emergency services (includes pre-hospital and Emergency Department treatment)52 millionOutpatient surgery11 millionHospital/surgery center/office-based procedures20 millionInpatient surgery/inpatient conditions10 million The market for Zalviso, given the target patients in a hospital setting for greater than 24 hours, is the approximately 10 million inpatient surgeries andinpatient conditions 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. 10 Our Strategy DSUVIAOur specific strategy with respect to DSUVIA is to: •advance our staged approach to the launch of DSUVIA in the United States, including the expansion of targeted sales force focused on theemergency room, hospitals and surgical centers in the United States to promote DSUVIA; •complete our transition to automated packaging equipment with our contract manufacturing organization to leverage improved technology tolower production cost; •supply the DoD and other military organizations as requested and appropriate; and •seek commercial partnerships for DSUVIA/DZUVEO in countries outside of the United States. Zalviso Our specific strategy with respect to Zalviso is to: •continue to collaborate with Grünenthal to support commercial sales of Zalviso in their licensed territories; •complete our transition of the Zalviso contract manufacturing to one supplier; and •resubmit the Zalviso NDA to seek regulatory approval in the United States and, if successful, promote Zalviso as a follow-on product toDSUVIA or potentially seek a commercial partnership. We are currently evaluating the timing of the resubmission of the NDA for Zalviso. Sales and Marketing We have established and will continue developing our distribution capability and commercial organization in the United States to market and sellDSUVIA in the United States. In geographies where we decide not to commercialize ourselves, we will seek to out-license commercialization rights. We are building commercial capability in the United States progressively to support the launch of DSUVIA in the United States market. We foresee twostages of commercial execution to support successful introduction of DSUVIA in the United States: To date, we have: •created and deployed a focused scientific support team to gather a detailed understanding of individual emergency room and hospital needs inorder to present DSUVIA effectively; •increased awareness of the clinical profile of sublingual administration of sufentanil through publication of our clinical data; •engaged appropriate Advisory Boards that include representative emergency room physicians, anesthesiologists, surgeons, nurses, pharmacyand therapeutics, 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; •built a sales and marketing organization that can define appropriate segmentation and positioning strategies and tactics for DSUVIA; and •gathered relevant clinical and health economic data identifying the limitations of IV opioids and other relevant treatments for moderate-to-severe acute pain in use today. Next, we are expanding our commercialization plan through: •establishing DSUVIA on hospital and ambulatory surgery center formularies through deployment of an experienced team to explain the clinicaland health economic attributes of DSUVIA; •building and progressively deploying a high-quality, customer-focused and experienced sales organization dedicated to bringing innovative,highly valued healthcare solutions to patients, payers and healthcare providers, including progressively building a targeted sales force ofapproximately 60 people in the United States; •potentially expanding the label to include pediatric populations by conducting post-approval clinical trials for DSUVIA; and •establishing DSUVIA as a suitable choice for moderate-to-severe acute pain in certified medically supervised settings. 11 If we are unable to establish successful sales and marketing capabilities or enter into agreements with third parties to market and sell our products, 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 DSUVIA and Zalviso” appearing elsewhere in this Form 10-K. Collaborative Arrangements Grünenthal Collaboration On December 16, 2013, and as amended July 17, 2015 and September 20, 2016, we and Grünenthal entered into the Amended Agreements. Under theterms of the Amended Agreements with Grünenthal, we received an upfront cash payment of $30.0 million in December 2013, a milestone payment 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 of the MAA forZalviso in September 2015. Under the Amended Agreements, we are eligible to receive approximately $194.5 million in additional milestone payments,based upon successful regulatory and product development efforts ($28.5 million) and net sales target achievements ($166.0 million). Grünenthal willalso 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 7 “Collaboration Agreement” in theaccompanying 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 Europe by Grünenthalto PDL, or the Royalty Monetization. We received gross proceeds of $65.0 million in the Royalty Monetization. PDL will receive 75% of the Europeanroyalties under the Amended Agreements with Grünenthal, as well as 80% of the first four commercial milestones worth $35.6 million (or 80% of $44.5million), subject to the capped amount of $195.0 million. For additional information on the Royalty Monetization with PDL, see Note 9 “LiabilityRelated to Sale of Future Royalties” in the accompanying notes to the Consolidated Financial Statements. Grünenthal is responsible for all commercial activities for Zalviso, including obtaining and maintaining pharmaceutical product regulatory approval inthe Territory. We are responsible for obtaining and maintaining device regulatory approval in the Territory and manufacturing and supply of Zalviso toGrünenthal for commercial sales. Intellectual Property We seek patent protection in the United States and internationally for DSUVIA and Zalviso. 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 DSUVIA and Zalviso. Our commercial success also depends in part on our non-infringement of thepatents or proprietary rights of third parties. For a more comprehensive discussion of the risks related to our intellectual property, please see “Risk Factors—Risks Related to Our Intellectual Property” appearing elsewhere in this Form 10-K. Our success will depend significantly on our ability to: •obtain and maintain patent and other proprietary protection for DSUVIA and Zalviso; •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 DSUVIA and Zalviso and related technology in the United States and abroad. As of December 31, 2018, 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. 12 We continue to seek and expand our patent protection for both compositions of matter and delivery devices, as well as methods of treatment related toDSUVIA and Zalviso. In particular, we are pursuing additional patent protection for our DSUVIA and Zalviso 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 2031, excluding any additional term for patent term adjustments or patent term extensions in the United States. We note that thepatent laws of foreign countries differ from those in United States, and the degree of protection afforded by foreign patents may be different from theprotection offered by U.S. patents. Further, we seek trademark protection in the United States and internationally where available and when appropriate. We have registered our ACELRXmark in Class 5, “Pharmaceutical preparations for treating pain; pharmaceutical preparations for treating anxiety,” and Class 10, “Drug delivery systems;medical device, namely, a mechanical and electronic device used to administer medications, perform timed medication delivery, and to provide secureaccess to and delivery of medications,” in the United States. Our ACELRX mark is also registered in the European Community, Canada, and India. Competition Our industry is highly competitive and subject to rapid and significant technological change. Our potential competitors include large pharmaceutical andbiotechnology companies, specialty pharmaceutical and generic drug companies, and medical technology companies. We believe the key competitivefactors that will affect the development and commercial success of our products are the safety, efficacy and tolerability profile, the patient and healthcareprofessional satisfaction with using our products in relation to available alternatives and the reliability, convenience of dosing, price and reimbursementof our products. Over the past year, we have monitored changes in the pharmaceutical industry in response to opioid use in the United States.Pharmaceutical companies engaged in the distribution and sale of opioids, in particular for the treatment of chronic pain, are refocusing their efforts inorder to support responsible opioid use. While our products are designed for the treatment of moderate to severe acute pain for use in medically supervisedsettings, rather than for the treatment of chronic pain or for outpatient use, these industry changes could impact the commercial success of DSUVIA, orZalviso, if approved, in the United States. 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 compete withEgalet Corporation’s SPRIX (intranasal ketorolac) or products that are in development, such as INSYS’ sublingual buprenorphine spray. Transmucosalfentanyl products, such as ACTIQ or FENTORA (Cephalon, Inc., a subsidiary of Teva Pharmaceutical Products Ltd.), are approved for opioid-tolerantpatients suffering from cancer pain and are contraindicated for the management of acute or post-operative pain and therefore are not a competitor forDSUVIA. Orally administered tablets or liquids containing oxycodone or hydrocodone often have slower absorption and slower analgesic onset thantransmucosal opioids. Examples of oral opioids include Acura Pharmaceuticals, Inc.’s OXAYDO (marketed by Egalet Corporation), CollegiumPharmaceuticals, Inc.’s NUCYNTA, 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, or NSAIDS, for treatment of acute pain, such as generic IV ketorolac, Pfizer’s DYLOJECT,Cumberland Pharmaceuticals Inc.’s CALDOLOR and recently Recro Pharma, Inc. resubmitted its 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. 13 Potential Competition for Zalviso We are developing Zalviso for the management of moderate-to-severe acute pain in adult patients during hospitalization. We believe that Zalviso wouldcompete with a number of opioid-based treatment options that are currently available, as well as some products that are in development. The hospitalmarket for opioids for moderate-to-severe acute pain is large and competitive. The primary competition for Zalviso is the IV PCA pump, which is widelyused in the moderate-to-severe acute pain in the hospital setting. Leading manufacturers of IV PCA pumps include Hospira, Inc. (sold by Pfizer, Inc. toICU Medical), CareFusion Corporation (purchased by Becton, Dickinson and Company), Baxter International, Inc., Curlin Medical, Inc. and SmithsMedical. The most common opioids used to treat moderate-to-severe acute pain are morphine, hydromorphone and fentanyl, all of which are available asgenerics both from generic product manufacturers as well as from compounding pharmacies. In addition, branded manufacturers (e.g., Hospira, Inc.) sellpre-filled glass syringes of morphine to fit their IV PCA pump systems. These systems, however, are invasive and require programming, which can lead todosing errors, and therefore, while they are commonly used, we do not believe they are direct competitors for Zalviso. Also available on the market is the Avancen Medication on Demand, or MOD, an oral PCA device developed by Avancen MOD Corporation. Oral opioidsand other agents can be used in this system. Oral opioids tend to have slower onset than transmucosal opioids, such as Zalviso. The Medicine Company’sIONSYS is a non-invasive transdermal opioid PCA that could potentially compete with Zalviso; however, a worldwide recall of the product wasannounced due to a commercial refocusing of the company. Additional potential opioid competitors for Zalviso include Cara Therapeutics, Inc., who isdeveloping a kappa opioid agonist, CR845, as an IV agent for the management of post-operative moderate-to-severe pain. Also, Trevena, Inc., is pursuingFDA approval for IV oliceridine, an intravenous G-protein biased ligand that targets the mu-opioid receptor for the treatment of moderate-to-severe acutepain, with a clinical development focus in acute post-operative pain. Both of these product candidates are invasive and, therefore, we do not believe theyare direct competition to the non-invasive Zalviso. Pharmaceutical Manufacturing and Supply We currently rely on contract manufacturers to produce sufentanil sublingual tablets for commercial production of DSUVIA and Zalviso under currentGood Manufacturing 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 products, if and when approved for marketing by the FDA. We currently rely on a singlemanufacturer for the commercial supplies of the active pharmaceutical ingredient, or API, for DSUVIA and Zalviso, and do not currently have agreementsin place for redundant supply or a second source for either DSUVIA or Zalviso. We have identified other manufacturers that could satisfy our commercialsupply and packaging requirements and we continue to evaluate those manufacturers. Device Manufacturing and Supply All contract manufacturers and component suppliers have been selected for their specific competencies in the manufacturing processes and materials thatmake up DSUVIA and Zalviso. We currently rely on single manufacturers for the commercial supplies of our drug components and packaging for DSUVIAand Zalviso, and do not currently have agreements in place for redundant supply or a second source for either DSUVIA or Zalviso. DSUVIA utilizes anSDA in the delivery of the tablets. FDA regulations require that materials be produced under cGMPs or Quality System Regulation, or QSR, as required forthe respective 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. The device components of Zalviso are manufactured by contract manufacturers, component fabricators and secondary service providers. We outsourceinjection molding of all the plastic parts for the cartridge and device and product sub-assemblies; tablet cartridge filling and packaging; and assembly,packaging and labeling of the dispenser and controller. 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 DSUVIA and Zalviso. Product candidates, such as Zalviso, must be approved by the FDA through theNDA process before they may legally be marketed in the United States. 14 In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and its implementing regulations. The process ofobtaining regulatory approvals and complying with applicable laws and regulations requires the expenditure of substantial time and financial resources.Failure to comply at any time during the product development and approval process, or after approval, may subject an applicant to administrative orjudicial sanctions. These sanctions could include the FDA’s refusal to approve pending applications, withdrawal of an approval, a clinical hold, warningletters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts,restitution, disgorgement or civil or criminal penalties. The process required by the FDA before a drug product may be marketed in the United Statesgenerally involves the following: •completion of non-clinical laboratory tests, animal trials and formulation studies according to Good Laboratory Practices regulations; •submission to the FDA of an investigational new drug, or IND, application which must become effective before human clinical trials maybegin; •performance of adequate and well-controlled human clinical trials according to Good Clinical Practices, or GCP, to establish the clinicalsafety and efficacy of the proposed drug product for its intended use; •submission to the FDA of an NDA for a new drug product; •satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the drug product and the drug substance(s)are produced to assess compliance with cGMP; •payment of application, 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 approval for our product candidate,Zalviso, will be granted on a timely basis, if at all. Human clinical trials are typically conducted in three sequential phases that may overlap or be combined: •Phase 1. The product is initially introduced into healthy human subjects and tested for safety, dosage tolerance, absorption, metabolism,distribution and excretion. In the case of some products for severe or life-threatening diseases, especially when the product may be tooinherently toxic to ethically administer to healthy volunteers, the initial human testing is often conducted in patients. •Phase 2. Involves trials in a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate theefficacy of the product for specific targeted conditions and to determine dosage tolerance and optimal dosage and schedule. •Phase 3. Clinical trials are undertaken to further evaluate dosage, clinical safety and efficacy in an expanded patient population atgeographically dispersed clinical trial sites. These trials are intended to establish the overall risk/benefit ratio of the product and provide anadequate basis for product labeling. Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and safety reports must be submitted to the FDAand the investigators for serious and unexpected adverse events. The FDA or the sponsor may suspend or terminate a clinical trial at any time on variousgrounds, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an Institutional ReviewBoard, or IRB, can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with theIRB’s requirements or if the drug or biological product has been associated with unexpected serious harm to patients. Concurrent with clinical trials, companies usually complete additional animal trials and must also develop additional information about the chemistryand physical characteristics of the product and finalize a process for manufacturing the product in commercial quantities in accordance with cGMP andQSR for medical device requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and,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. 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, the 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 the drugproduct for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation forwhich the product is safe and effective. The FDA may grant deferrals for submission of data or full or partial waivers. 15 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 a product candidate does receive regulatory approval, the approval may be limited to specific conditions and dosages or the indications for use mayotherwise be limited, which could restrict the commercial value of the product. DSUVIA was approved with a Risk Evaluation and Mitigation Strategy, orREMS, to mitigate the risk of respiratory depression resulting from accidental exposure by ensuring that DSUVIA is dispensed only to patients in certifiedmedically supervised healthcare settings. Zalviso, if approved, will also require a REMS, which can include a medication guide, patient package insert, acommunication plan, elements to assure safe use and implementation system, and must include a timetable for assessment of the REMS. Further, the FDAmay require that certain contraindications, warnings or precautions be included in the product labeling and may require testing and surveillance programsto monitor the safety of approved products that have been commercialized. In addition, the FDA may require post-approval testing which involvesclinical trials designed to further assess a drug product’s safety and effectiveness after the NDA. Post-Approval Requirements Any drug products for which we receive FDA approval 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 meet specificationsand regulatory standards, and test each product batch or lot prior to its release. In the case of Zalviso, the device component must comply with FDA’sQuality Systems Regulation. We rely, and expect to continue to rely, on third parties for the production of clinical and commercial quantities of our products. Future FDA and stateinspections may identify compliance issues at the facilities of our contract manufacturers that may disrupt production or distribution or may requiresubstantial resources to correct. The FDA may withdraw a product approval if compliance with regulatory standards is not maintained or if problems occur after the product reaches themarket. Later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of theproduct from the market. Further, the failure to maintain compliance with regulatory requirements may result in administrative or judicial actions, such asfines, warning letters, holds on clinical trials, product recalls or seizures, product detention or refusal to permit the import or export of products, refusal toapprove pending applications or supplements, restrictions on marketing or manufacturing, injunctions or civil or criminal penalties. Foreign Regulation In addition to regulations in the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial sales anddistribution of our products to the extent we choose to sell any products outside of the United States. 16 In June 2018, the European Commission, or EC, granted marketing approval of DZUVEO for the treatment of patients with moderate-to-severe acute painin medically monitored settings. We currently intend to commercialize and promote DZUVEO in Europe with a strategic partner, although we have notyet entered into such an arrangement. 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. The CE Mark was originally issued by the BritishStandards Institution, or BSI, a Notified Body, or NB, located in the United Kingdom, or UK, or BSI-UK. Recently, the CE Mark file and certification hasbeen transferred to the Netherlands NB of BSI, or BSI-NL, to mitigate the uncertainty with regards to the Brexit situation. The ISO certification issuedthrough BSI-UK was recently upgraded to the latest version of the standard, ISO 13484:2016 through BSI-UK and remains in effect, regardless of theBrexit situation. BSI ISO 13485:2016 certification recognizes that consistent quality policies and procedures are in place for the development, design andmanufacturing of medical devices. The certification indicates that we have successfully implemented a quality system that conforms to ISO 13485standards for medical devices. Certification to this standard is one of the key regulatory requirements for a CE Mark in the EU and EEA, as well as to meetequivalent requirements in other international markets. Controlled Substances Regulations Sufentanil, a Schedule II controlled substance, is the API in DSUVIA and Zalviso. Controlled substances are governed by the DEA. Similarly, sufentanil isregulated as a controlled substance in Europe and other territories outside of the U.S. The handling of controlled substances and/or drug product by us,our contract manufacturers, analytical laboratories, packagers and distributors, are regulated by the Controlled Substances Act and regulations thereunder. The Drug Supply Chain Security Act of 2013, or DSCSA, imposes obligations on manufacturers of pharmaceutical products, among others, related toproduct tracking and tracing. Among the requirements are that manufacturers must provide certain information regarding the drug product to individualsand entities to which product ownership is transferred, label drug product with a product identifier, and keep certain records regarding the drug product.Further, manufacturers 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 for distribution suchthat they would be reasonably likely to result in serious health consequences or death. Unforeseen delays to the drug substance and drug product manufacture and supply chain may occur due to delays, errors or other unforeseen problemswith the permitting and quota process. Also, any one of our suppliers, contract manufacturers, laboratories, packagers and/or distributors could be thesubject of DEA violations and enforcement could lead to delays or even loss of DEA license by the contractors. Federal and State Fraud and Abuse and Data Privacy and Security and Transparency Laws and Regulations In addition to FDA restrictions on marketing of pharmaceutical products, federal and state healthcare laws restrict certain business practices in thepharmaceutical industry. These laws include, but are not limited to, anti-kickback, false claims, data privacy and security, and transparency statutes andregulations. The federal Anti-Kickback Statute prohibits, among other things, any person or entity from knowingly and willfully offering, paying, soliciting orreceiving remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or in return for, purchasing, leasing, ordering or arrangingfor the purchasing, leasing or ordering of any item or service reimbursable under Medicare, Medicaid or other federal healthcare program. The term“remuneration” has been broadly interpreted to include anything of value, including for example, gifts, discounts, the furnishing of supplies orequipment, credit arrangements, payments of cash, waivers of payment, ownership interests and providing anything at less than its fair market value. TheAnti-Kickback Statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasersand/or formulary managers on the other. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain commonactivities from prosecution, the exceptions and safe harbors are drawn narrowly, and practices involving remuneration that may be alleged to be intendedto induce purchasing, leasing or ordering may be subject to scrutiny if they do not qualify for an exception or safe harbor. The failure to satisfy all of therequirements of an applicable exception or safe harbor do not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality of thearrangement will be evaluated on a case-by-case basis based on a cumulative review of all of its facts and circumstances. Our practices may not in all casesmeet all of the criteria for protection under an exception or safe harbor. 17 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 committed aviolation. 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 been prosecutedunder these laws for, among other things, allegedly providing free product to customers with the expectation that the customers would bill federalprograms for the product. Other companies have been prosecuted for causing false claims to be submitted because of the companies’ marketing of theproduct for unapproved, and thus non-reimbursable, uses. Further, the Civil Monetary Penalties Law imposes penalties against any person or entity who,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 created fournew 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 European Union General Data Protection Regulation (“GDPR”) (EU 2016/679) and Swiss Federal Act on Data Protection,regulate the processing of personal data within the European Union and between countries in the European Union and countries outside of the EuropeanUnion, including the United States. Failure to provide adequate privacy protections and maintain compliance with safe harbor mechanisms couldjeopardize business transactions across borders 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. 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 described above or any other laws that apply to us, we may be subject topenalties, 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, diminishedprofits and future earnings, additional reporting requirements and/or oversight if we become subject to a corporate integrity agreement or similaragreement to resolve allegations of non-compliance with these laws and the curtailment or restructuring of our operations, any of which could adverselyaffect our ability to operate our business and our results of operations. To the extent that any of our products will be sold in a foreign country, we may besubject to similar foreign laws and regulations, which may include, for instance, applicable post-marketing requirements, including safety surveillance,anti-fraud and abuse laws and implementation of corporate compliance programs and reporting of payments or transfers of value to healthcareprofessionals. 18 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 products. Third-party payers and hospitals may refuse to include a particular branded drug in their formularies or otherwise restrictpatient access to a branded drug when a less costly generic equivalent or other alternative is available. Because each third-party payer individuallyapproves coverage and reimbursement levels, obtaining coverage and adequate reimbursement is a time-consuming, costly and sometimes unpredictableprocess. We may be required to provide scientific and clinical support for the use of any product to each third-party payer and hospital separately with noassurance that approval would be obtained, and we may need to conduct expensive pharmacoeconomic studies in order to demonstrate the cost-effectiveness of our products. This process could delay the market acceptance of any product and could have a negative effect on our future revenues andoperating results. We cannot be certain that DSUVIA and Zalviso, once approved for commercial sale, 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 approved products 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. 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 products from lower-priced products in foreign countries that have placedprice controls on pharmaceutical products. In addition, there may be importation of foreign products that compete with our own products, which couldnegatively 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 of thecosts of prescription drugs may increase demand for our products for which we receive marketing approval. However, any negotiated prices for our futureproducts will likely be lower than the prices we might otherwise obtain from non-governmental payers. Moreover, private payers often follow federalhealthcare coverage policy and payment limitations in setting their own payment rates. 19 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 116th 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. In July 2018, Centers for Medicare & Medicaid Services, or CMS, published a final rule permitting further collections and payments toand from certain PPACA qualified health plans and health insurance issuers under the PPACA risk adjustment program in response to the outcome offederal district court litigation regarding the method CMS uses to determine this risk adjustment. 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 bypharmaceutical manufacturers who participate in Medicare Part D and to close the coverage gap in most Medicare drug plans, commonly referred to as the“donut hole”. On December 14, 2018, a Texas U.S. District Court Judge ruled that the Affordable Care Act is unconstitutional in its entirety because the“individual mandate” was repealed by Congress as part of the Tax Cuts and Jobs Act of 2017. While the Texas U.S. District Court Judge, as well as theTrump Administration and CMS, have stated that the ruling will have no immediate effect pending appeal of the decision, it is unclear how this decision,subsequent appeals, and other efforts to repeal and replace the Affordable Care Act will impact the PPACA. We expect that the Affordable Care Act, ascurrently enacted or as it may be amended or repealed in the future, and other healthcare reform measures that may be adopted in the future, could have amaterial adverse effect on our industry generally and on our ability to successfully commercialize DSUVIA and Zalviso, if approved. We cannot predictthe likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States orabroad. If we or our collaborators are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if weor our collaborators are not able to maintain regulatory compliance, our products may lose any regulatory approval that may have been obtained and wemay not achieve or sustain profitability, which would adversely affect our business. Further, there may continue to be additional proposals relating to the reform of the U.S. healthcare system, some of which could further limit the prices weare able to charge for our products, or the amounts of reimbursement available for our products. If future legislation were to impose direct governmentalprice controls and access restrictions, it could have a significant adverse impact on our business. Managed care organizations, as well as Medicaid andother government agencies, continue to seek price discounts. Some states have implemented, and other states are considering, price controls or patientaccess constraints under the Medicaid program, and some states are considering price-control regimes that would apply to broader segments of theirpopulations that are not Medicaid-eligible. Due to the volatility in the current economic and market dynamics, we are unable to predict the impact of anyunforeseen or unknown legislative, regulatory, payer or policy actions, which may include cost containment and other healthcare reform measures. Suchpolicy actions could have a material adverse impact on our profitability. Reimbursement and Healthcare 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 DSUVIA, and Zalviso, if approved for commercial sale, will depend, in part, on the extent to which third-partypayers provide coverage and establish adequate reimbursement levels for approved products. 20 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, andreform government program reimbursement methodologies for drugs. At the federal level, the Trump Administration’s budget proposal for fiscal year 2019contains 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. Additionally, the Trump Administration released a“Blueprint” to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals to increase manufacturer competition, increasethe negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products and reduce the out ofpocket costs of drug products paid by consumers. The U.S. Department of Health and Human Services has already started the process of solicitingfeedback on some of these measures and, at the same time, is immediately implementing others under its existing authority. For example, in September2018, CMS announced that it will allow Medicare Advantage Plans the option to use step therapy for Part B drugs beginning January 1, 2019, and inOctober 2018, CMS proposed a new rule that would require direct-to-consumer television advertisements of prescription drugs and biological products,for which payment is available through or under Medicare or Medicaid, to include in the advertisement the Wholesale Acquisition Cost, or list price, ofthat drug or biological product. Although a number of these, and other proposed measures will require authorization through additional legislation tobecome effective, Congress and the Trump Administration have each indicated that it will continue to seek new legislative and/or administrativemeasures to control drug costs. At the state level, legislatures are increasingly passing legislation and implementing regulations designed to controlpharmaceutical and biological product pricing, including price or patient reimbursement constraints, 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. 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, DSUVIA and Zalviso, if approved, 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 •a Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research,along with funding for such research. 21 Although the recent U.S. District Court holding that the PPACA is unconstitutional has been appealed, its long term viability remains unclear. In addition,other legislative changes have been proposed and adopted in the United States since the Affordable Care Act was enacted. Aggregate reductions ofMedicare payments to providers of 2% per fiscal year went into effect on April 1, 2013 and will stay in effect through 2027 unless Congressional action istaken. 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 products, if any, may be. Employees As of December 31, 2018, we employed 61 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. 22 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 Commercialization of DSUVIA and Zalviso Our success depends heavily on successful commercialization of DSUVIA, which received approval in November 2018 from the U.S. Food and DrugAdministration, or FDA, for use in adults in a certified medically supervised healthcare setting, for the management of acute pain severe enough torequire an opioid analgesic and for which alternative treatments are inadequate. To the extent DSUVIA is not commercially successful, our business,financial condition and results of operations will be materially harmed. We have invested and continue to invest a significant portion of our efforts and financial resources in the development, approval and nowcommercialization of DSUVIA for use in adults in a certified medically supervised healthcare setting for the management of acute pain. The success ofDSUVIA will depend on numerous factors, including: •our success in commercializing DSUVIA, including the marketing, sales, and distribution of the product; •successfully establishing and maintaining commercial manufacturing with third parties; •acceptance of DSUVIA by physicians, patients and the healthcare community; •the acceptance of pricing and placement of DSUVIA on payers’ formularies; •effectively competing with other medications for the treatment of moderate-to-severe acute pain in medically supervised settings, includingIV-opioids and any subsequently approved products; •effective management of and compliance with the DSUVIA Risk Evaluation and Mitigation Strategies, or REMS program; •continued demonstration of an acceptable safety profile of DSUVIA following approval; and •obtaining, maintaining, enforcing, and defending intellectual property rights and claims. If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfullycommercialize DSUVIA, which would materially harm our business. The commercial success of DSUVIA, and Zalviso®, if approved, in the United States, as well as DZUVEO and Zalviso in Europe, will depend upon theacceptance of these products by the medical community, including physicians, nurses, patients, and pharmacy and therapeutics committees. The degree of market acceptance of DSUVIA, and Zalviso, if approved, in the United States, or DZUVEO and Zalviso in Europe, will depend on a numberof factors, including: •demonstration of clinical safety and efficacy compared to other products; •the relative convenience, ease of administration and acceptance by physicians, patients and health care payors; •the use of DSUVIA 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 adverse events, or AEs, or serious adverse events, or SAEs; •overcoming any perceptions of sufentanil as a potentially unsafe drug due to its high potency; •limitations or warnings contained in the FDA-approved label for DSUVIA, or the European Medicines Agency, or EMA-approvedlabel for DZUVEO, or Zalviso; •restrictions or limitations placed on DSUVIA due to the REMS; •availability of alternative treatments; 23 •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 pharmacy and therapeutics committees, wemay not generate sufficient revenue and we may not become or remain profitable. If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our products, we may beunable to generate any product revenue. In order to commercialize DSUVIA, and Zalviso, if approved, in the United States, we must build our internal sales, marketing, distribution, managerialand other capabilities or make arrangements with third parties to perform these services. We have entered into agreements with third parties for thedistribution of DSUVIA, and plan to enter into such agreements for, if approved, Zalviso, in the United States; however, if these third parties do notperform as expected or there are delays in establishing such relationships for, if approved, Zalviso, our ability to effectively distribute products wouldsuffer. 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 products outside of the United States. DZUVEO was approved by the EC in June 2018. Wehave not yet entered into a collaboration agreement with a strategic partner for the commercialization of DZUVEO in Europe, and there can be noassurance that we will successfully enter into such an agreement. We may also consider the option to enter into strategic partnerships for DSUVIA, orZalviso, if approved, in the United States. We face significant competition in seeking appropriate strategic partners, and these strategic partnerships can beintricate 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 DSUVIA/DZUVEO, or may otherwise fail intheir commercialization due to factors beyond our control. If we are unable to establish effective collaborations to enable the sale of our products tohealthcare professionals and in geographical regions that will not be covered by our own marketing and sales force, or if our potential future collaborationpartners do not successfully commercialize our products, our ability to generate revenues from product sales will be adversely affected. 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. Guidelines and recommendations published by government agencies, as well as non-governmental organizations, can reduce the use of DSUVIA, andZalviso, if approved in the United States. Government agencies and non-governmental organizations promulgate regulations and guidelines applicable to certain drug classes that may includeDSUVIA and Zalviso, if approved in the United States. Recommendations of government agencies or non-governmental organizations may relate to suchmatters as maximum 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 DSUVIA and our ability to gain marketing approval of Zalviso in the United States. Regulations or guidelines suggesting thereduced use of certain drug classes that may include DSUVIA or Zalviso, or the use of competitive or alternative products as the standard-of-care to befollowed by patients and healthcare providers, could result in decreased use of DSUVIA or Zalviso, if approved, or negatively impact our ability to gainmarket acceptance and market share. The U.S. government and state legislatures have prioritized combatting the growing misuse and addiction to opioidsand have enacted legislation and regulations as well as other measures intended to fight the opioid epidemic. Addressing opioid drug abuse is a priorityfor the current U.S. administration and the FDA and is part of a broader initiative led by the Department of Health and Human Services. Overall, there isgreater scrutiny of entities involved in the manufacture, sale and distribution of opioids. These initiatives, existing regulations, and any negativepublicity related to opioids may have a material impact on our business and our ability to manufacture opioid products. 24 Governmental investigations, inquiries, and regulatory actions and lawsuits brought against us by government agencies and private parties withrespect to our commercialization of opioids could adversely affect our business, financial condition, results of operations and cash flows. As a result of greater public awareness of the public health issue of opioid abuse, there has been increased scrutiny of, and investigation into, thecommercial practices of opioid manufacturers by state and federal agencies. As a result of our manufacturing and commercial sale of DSUVIA and Zalviso,we could become the subject of federal, state and foreign government investigations and enforcement actions, focused on the misuse and abuse of opioidmedications. In addition, a significant number of lawsuits have been filed against other opioid manufacturers, distributors, and others in the supply chain by cities,counties, state Attorney's General and private persons seeking to hold them accountable for opioid misuse and abuse. The lawsuits assert a variety ofclaims, including, but not limited to, public nuisance, negligence, civil conspiracy, fraud, violations of the Racketeer Influenced and CorruptOrganizations Act (“RICO”) or similar state laws, violations of state Controlled Substance Act or state False Claims Act, product liability, consumer fraud,unfair or deceptive trade practices, false advertising, insurance fraud, unjust enrichment and other common law and statutory claims arising fromdefendants’ manufacturing, distribution, marketing and promotion of opioids and seek restitution, damages, injunctive and other relief and attorneys’ feesand costs. The claims generally are based on alleged misrepresentations and/or omissions in connection with the sale and marketing of prescription opioidmedications and/or an alleged failure to take adequate steps to prevent abuse and diversion. While our products are designed for use solely in supervisedcertified medically supervised healthcare settings and administered only by a healthcare professional in these settings, and are not distributed or availableat retail pharmacies to patients by prescription, we can provide no assurance that parties will not file lawsuits of this type against us in the future. Inaddition, current public perceptions of the public health issue of opioid abuse may present challenges to favorable resolution of any potential claims.Accordingly, we cannot predict whether we may become subject of these kinds of investigations and lawsuits in the future, and if we were to be named asa defendant in such actions, we cannot predict the ultimate outcome. Any allegations against us may negatively affect our business in various ways,including through harm to our reputation. If we were required to defend ourselves in these matters, we would likely incur significant legal costs and could in the future be required to pay significantamounts as a result of fines, penalties, settlements or judgments. It is unlikely that our current product liability insurance would fully cover these potentialliabilities, if at all. Moreover, we may be unable to maintain insurance in the future on acceptable terms or with adequate coverage against potentialliabilities or other losses. For more information about our product liability insurance and exclusions therefrom, please see the risk factor entitled “We facepotential product liability, and, if successful claims are brought against us, we may incur substantial liability” elsewhere in this section. The resolution ofone or more of these matters could have a material adverse effect on our business, financial condition, results of operations and cash flows. Furthermore, in the current climate, stories regarding prescription drug abuse and the diversion of opioids and other controlled substances are frequentlyin the media or advocated by public interest groups. Unfavorable publicity regarding the use or misuse of opioid drugs, the limitations of abuse-deterrentformulations, the ability of drug abusers to discover previously unknown ways to abuse opioid products, public inquiries and investigations intoprescription drug abuse, litigation, or regulatory activity regarding sales, marketing, distribution or storage of opioids could have a material adverse effecton our reputation and impact on the results of litigation. Finally, various government entities, including Congress, state legislatures or other policy-making bodies, or public interest groups have in the past andmay in the future hold hearings, conduct investigations and/or issue reports calling attention to the opioid crisis, and may mention or criticize theperceived role of manufacturers, including us, in the opioid crisis. Similarly, press organizations have and likely will continue to report on these issues,and such reporting may result in adverse publicity for us, resulting in reputational harm. A key part of our business strategy is to establish collaborative relationships to commercialize and fund development and approval of our products,particularly outside of the United States. We may not succeed in establishing and maintaining collaborative relationships, which may significantlylimit 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 ourproducts. The process of establishing and maintaining collaborative relationships is difficult, time-consuming and involves significant uncertainty,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; 25 •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 drugs, maintain regulatory approvals and our ability to successfully manufacture and achieve market acceptance of ourproducts; •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 products; 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 undertake development and commercializationactivities at our own expense or find alternative sources of capital. Approval of Zalviso and DZUVEO in Europe has resulted in a variety of risks associated with international operations that could materially adverselyaffect our business. Our existing collaboration with Grünenthal for Zalviso requires us to supply product to support the European commercialization of Zalviso. In addition,with the June 2018 approval of DZUVEO in Europe, we intend to enter into agreements with third parties to market DZUVEO in Europe, which may alsorequire us to supply product to those third parties. We may be subject to additional risks related to entering into international business relationships,including: •different regulatory requirements for drug approvals in foreign countries; •reduced protection for intellectual property rights; •unexpected changes in tariffs, trade barriers and regulatory requirements; •different payor reimbursement regimes, governmental payors, patient self-pay systems and price controls; •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 products may not reach their commercial potential. The U.S. market for DSUVIA and Zalviso is characterized by intense competition and cost pressure. DSUVIA, and Zalviso, if approved in the U.S., willcompete with a number of existing and future pharmaceuticals and drug delivery devices developed, manufactured and marketed by others. We or ourcurrent and potential partners will compete against fully integrated pharmaceutical companies and smaller companies that are collaborating with largerpharmaceutical companies. 26 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 compete withEgalet Corporation’s SPRIX (intranasal ketorolac) or products that are in development, such as INSYS’ sublingual buprenorphine spray. Transmucosalfentanyl products, such as ACTIQ or FENTORA (Cephalon, Inc., a subsidiary of Teva Pharmaceutical Products Ltd.), are approved for opioid-tolerantpatients suffering from cancer pain and are contraindicated for the management of acute or post-operative pain and therefore are not a competitor forDSUVIA. Orally administered tablets or liquids containing oxycodone or hydrocodone often have slower absorption and slower analgesic onset thantransmucosal opioids. Examples of oral opioids include Acura Pharmaceuticals, Inc.’s OXAYDO (marketed by Egalet Corporation), CollegiumPharmaceuticals, Inc.’s NUCYNTA, 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, or NSAIDS, for treatment of acute pain, such as generic IV ketorolac, Pfizer’s DYLOJECT,Cumberland Pharmaceuticals Inc.’s CALDOLOR and recently Recro Pharma, Inc. resubmitted its New Drug Application, or NDA, for IV meloxicam for thetreatment 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 directcompetitors 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 are indevelopment. The hospital market for opioids for moderate-to-severe acute pain is large and competitive. The primary competition for Zalviso is the IVPCA pump, which is widely used in the treatment of moderate-to-severe acute pain in the hospital setting. Leading manufacturers of IV PCA pumpsinclude 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 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. Oral opioidsand other agents can be used in this system. Oral opioids tend to have slower onset than transmucosal opioids, such as Zalviso. The Medicine Company’sIONSYS is a non-invasive transdermal opioid PCA that could potentially compete with Zalviso; however, a worldwide recall of the product wasannounced due to a commercial refocusing of the company. Additional potential opioid competitors for Zalviso include Cara Therapeutics, Inc., who isdeveloping 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. It is possible that any of these competitors could develop or improve technologies or products that would render DSUVIA or Zalviso obsolete or non-competitive, which could adversely affect our revenue potential. Key competitive factors affecting the commercial success of our approved products 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 we may seek to commercialize. This may render our products obsolete or non-competitive before we can recover our losses. We anticipate that we will face intense and increasing competition as new drugs enter the market andadditional technologies become available. These new entities may also establish collaborative or licensing relationships with our competitors, which mayadversely affect our competitive position. Finally, the development of different methods for the treatment of moderate-to-severe acute pain could renderour products non-competitive or obsolete. These and other risks may materially adversely affect our ability to attain or sustain profitable operations. 27 Formulary approval may not be available, or could be subject to certain restrictions for DSUVIA, or Zalviso, if approved, in the United States, whichcould make it difficult for us to sell our products profitably. Obtaining formulary approval can be an expensive and time-consuming process. We cannot be certain if and when we will obtain formulary approval toallow us to sell our products into our target markets. Failure to obtain timely formulary approval will limit our commercial success. If we are successful inobtaining formulary approval, we may need to complete evaluation programs whereby DSUVIA, or Zalviso, if approved, is used on a limited basis forcertain patient types. Hospitals may seek to obtain DSUVIA or Zalviso devices at little or no cost during this evaluation period. Revenue generated fromthese hospitals during the evaluation period would be minimal. The evaluation period may last several months and there can be no assurance that useduring the evaluation period will lead to formulary approval of DSUVIA, or Zalviso, if approved. Further, even successful formulary approval may besubject to certain restrictions based on patient type or hospital protocol. Failure to obtain timely formulary approval for DSUVIA, and/or Zalviso, ifapproved, would materially adversely 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 or Zalviso inEurope, 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, any future collaboration partner’s ability to commercialize DZUVEOin Europe, or Grünenthal’s ability to expand sales of Zalviso in Europe successfully will depend, in part, on the extent to which coverage and adequatereimbursement will be available from government payer programs at the federal and state levels, authorities, including Medicare and Medicaid, privatehealth 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 Europe.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 our approved drugs and our overall financial condition. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and other third-party 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, or Zalviso, if approved inthe United States, and DSUVIA/DZUVEO and Zalviso in Europe and elsewhere. The application of user fees to generic drug products may expedite theapproval of additional pain medication generic drugs. We expect to experience pricing pressures in connection with our sales of DSUVIA, and Zalviso, ifapproved, in the United States, Grünenthal’s European sales of Zalviso, and future product sales of DZUVEO, due to the trend toward managed healthcare,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 products andour business will be harmed. Furthermore, market acceptance and sales of our products will depend on reimbursement policies and may be affected by future healthcare reformmeasures. Government authorities and third-party payers, such as private health insurers, hospitals and health maintenance organizations, decide whichdrugs they will pay for and establish reimbursement levels. We cannot be sure that reimbursement will be available for DSUVIA in the United States, orDZUVEO or Zalviso in Europe or Zalviso, if approved in the United States. Also, reimbursement amounts may reduce the demand for, or the price of, ourproducts. For example, we anticipate we may need comparator studies of DZUVEO in Europe to ensure premium reimbursement in certain countries. Ifreimbursement is not available, or is available only to limited levels, we may not be able to successfully commercialize DSUVIA in the United States, orDZUVEO or Zalviso in Europe, or Zalviso, if approved in the United States. 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, separate pricing and reimbursement approvals may impactGrünenthal’s ability to market and successfully commercialize Zalviso in its territory which includes the 28 EU member states as well as Norway, Icelandand Liechtenstein. Adverse pricing limitations may hinder our ability to recoup our investment in DSUVIA in the United States, or Zalviso, even afterobtaining FDA marketing approval. 28 In the United States, there has been increasing legislative and enforcement interest with respect to specialty drug pricing practices. Specifically, there havebeen 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. Additionally, the Trump Administration released a “Blueprint” to lower drug prices and reduce out ofpocket costs of drugs that contains additional proposals to increase manufacturer competition, increase the negotiating power of certain federal healthcareprograms, incentivize manufacturers to lower the list price of their products and reduce the out of pocket costs of drug products paid by consumers. TheU.S. Department of Health and Human Services has already started the process of soliciting feedback on some of these measures and, at the same time, isimmediately implementing others under its existing authority. For example, in September 2018, Centers for Medicare & Medicaid Services, or CMS,announced that it will allow Medicare Advantage Plans the option to use step therapy for Part B drugs beginning January 1, 2019, and in October 2018,CMS proposed a new rule that would require direct-to-consumer television advertisements of prescription drugs and biological products, for whichpayment is available through or under Medicare or Medicaid, to include in the advertisement the Wholesale Acquisition Cost, or list price, of that drug orbiological product. Although a number of these, and other 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, restrictions on certain product access and marketing costdisclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. Furthermore, evenafter initial price and reimbursement approvals, reductions in prices and changes in reimbursement levels can be triggered by multiple factors, includingreference pricing systems and publication of discounts by third party payers or authorities in other countries. In Europe, prices can be reduced further byparallel distribution and parallel trade, i.e. arbitrage between low-priced and high-priced countries. If any of these events occur, revenue from sales ofZalviso and DZUVEO in Europe would be negatively affected. The FDA and other regulatory agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses. If we are found to have improperly promoted off-label uses of our products, including DSUVIA, or Zalviso, if approved in the United States, we maybecome subject to significant liability. Such enforcement has become more common in the industry. The FDA and other regulatory agencies strictlyregulate the promotional claims that may be made about prescription drug products. In particular, a product may not be promoted for uses that are notapproved by the FDA or such other regulatory agencies as reflected in the product’s approved labeling. While we have received marketing approval forDSUVIA for our proposed indication, physicians may nevertheless use our products for their patients in a manner that is inconsistent with the approvedlabel, if the physicians personally believe in their professional medical judgment it could be used in such manner. However, if the FDA determines thatour promotional materials or training constitutes promotion of an off-label use, it could request that we modify our training or promotional materials orsubject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine or criminalpenalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our promotional or trainingmaterials to constitute promotion of an off-label use, which could result in significant civil, criminal and/or administrative penalties, damages, fines,disgorgement, individual imprisonment, exclusion from government-funded healthcare programs, such as Medicare and Medicaid, contractual damages,reputational harm, increased losses and diminished profits and the curtailment or restructuring of our operations, any of which could adversely affect ourability to operate our business and our financial results. The FDA or other enforcement authorities could also request that we enter into a consent decree ora corporate integrity agreement or seek a permanent injunction against us under which specified promotional conduct is monitored, changed or curtailed.If we cannot successfully manage the promotion of DSUVIA in the United States, or Zalviso, if approved in the United States, we could become subject tosignificant liability, which would materially adversely affect our business and financial condition. 29 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, for DSUVIA, and, if approved, Zalviso. Establishing and maintaining strongrelationships with these GPOs will require us to be a reliable supplier, remain price competitive and comply with FDA regulations. The GPOs with whomwe have relationships may have relationships with manufacturers that sell competing products, and such GPOs may earn higher margins from theseproducts or combinations of competing products or may prefer products other than ours for other reasons. If we are unable to establish or maintain ourGPO relationships, sales of DSUVIA, and, if approved, Zalviso, and related revenues could be negatively impacted. We intend to rely on a limited number of pharmaceutical wholesalers to distribute DSUVIA in the United States, and, if approved, Zalviso. We intend to rely primarily upon pharmaceutical wholesalers in connection with the distribution of DSUVIA in the United States, and, if approved,Zalviso. As part of the DSUVIA REMS program, we will monitor distribution and audit wholesalers’ data. If our wholesalers do not comply with theDSUVIA REMS requirements, or 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 Clinical Development and Regulatory Approval Existing and future legislation may increase the difficulty and cost for us to commercialize our products 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 of Europe. These changes will restrict or regulate post-approval activities for DSUVIA, DZUVEOand Zalviso, and affect our ability to profitably sell any products for which we obtain marketing approval. For example, in February 2016, the FDAannounced a comprehensive action plan to take concrete steps towards reducing the impact of opioid abuse on American families and communities. Aspart of this plan, the FDA announced that it intended to review product and labelling decisions and re-examine the risk-benefit paradigm for opioids. In the European Union, or EU, the pricing of prescription drugs is subject to government control. In addition, the EU provides options for its memberstates to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices ofmedicinal products for human 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, reduceor constrain the growth of healthcare spending, enhance remedies against fraud and abuse, impose new taxes and fees on the health industry and imposeadditional 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. 30 Legislative changes to the Affordable Care Act remain possible and appear likely in the 116th 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 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. In July 2018, CMS published a final rule permitting further collections and payments to and from certain PPACA qualified health plansand health insurance issuers under the PPACA risk adjustment program in response to the outcome of federal district court litigation regarding the methodCMS uses to determine this risk adjustment. 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 inMedicare Part D and to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole”. On December 14, 2018, a TexasU.S. District Court Judge ruled that the Affordable Care Act is unconstitutional in its entirety because the “individual mandate” was repealed by Congressas part of the Tax Cuts and Jobs Act of 2017. While the Texas U.S. District Court Judge, as well as the Trump Administration and CMS, have stated thatthe ruling will have no immediate effect pending appeal of the decision, it is unclear how this decision, subsequent appeals, and other efforts to repeal andreplace the Affordable Care Act will impact the PPACA. We expect that the Affordable Care Act, as currently enacted or as it may be amended or repealedin the future, and other healthcare reform measures that may be adopted in the future, could have a material adverse effect on our industry generally andon our ability to successfully commercialize our products. We cannot predict the likelihood, nature or extent of government regulation that may arisefrom future legislation or administrative action, either in the United States or abroad. If we or our collaborators are slow or unable to adapt to changes inexisting requirements or the adoption of new requirements or policies, or if we or our collaborators are not able to maintain regulatory compliance, ourproducts may lose regulatory approval 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 legislation, manufacturers are required to provide certain information regardingthe drug product to individuals and entities to which product ownership is transferred, label drug product with a product identifier, and keep certainrecords regarding the drug product. Legislative and regulatory proposals have been made to expand post-approval requirements and further restrict sales and promotional activities forpharmaceutical products. We are not sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance orinterpretations will be changed, or what the impact of such changes on the marketing approvals of our products, 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 have obtained or may obtain regulatoryapproval, our ability to set a price that we believe is fair for our products, our ability to obtain coverage and reimbursement approval for a product, ourability to generate revenues and achieve or maintain profitability, and the level of taxes that we are required to pay. We may experience market resistance, delays or rejections based upon additional government regulation from future legislation or administrativeaction, or changes in regulatory agency policy regarding opioids generally, and sufentanil specifically. In February 2016, the FDA announced a comprehensive action plan to take concrete steps towards reducing the impact of opioid abuse on Americanfamilies and communities. As part of this plan, the FDA announced that it intended to review product and labelling decisions and re-examine the risk-benefit paradigm for opioids. In May 2017, an Opioid Policy Steering Committee was established to address and advise regulators on opioid use. The Committee was charged withthree initial questions: (i) should the FDA require mandatory education for healthcare professionals, or 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. Zalviso has not been designed with an abuse-deterrent formulation and is not tamper-resistant. As a result, Zalviso has not undergone testing for tamper-resistance or abuse deterrence. 31 The FDA 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 candidate, Zalviso, as a result of such inspections. In June2014, the FDA completed an inspection at our corporate offices. We received a single observation on a Form 483 as a result of the inspection. Althoughwe believe we have adequately addressed this observation in revised standard operating procedures, we, our contract manufacturers, and their vendors, areall subject to preapproval and post-approval inspections at any time. The results of these inspections could impact our ability to obtain FDA approval forZalviso and, if approved, our ability to launch and successfully commercialize Zalviso in the United States. In addition, results of FDA inspections couldimpact our ability to maintain FDA approval of DSUVIA, and our ability to expand and sustain commercial sales of DSUVIA in the United States. Any delay in, or failure to receive or maintain, approval for Zalviso in the United States could prevent us from generating meaningful revenues orachieving profitability. Zalviso may not be approved even if we believe it has achieved its endpoints in clinical trials. Regulatory agencies, including theFDA, or their advisors, may disagree with our trial design and our interpretations of data from preclinical studies and clinical trials. Regulatory agenciesmay change requirements for approval even after a clinical trial design has been approved. The FDA exercises significant discretion over the regulation ofcombination products, including the discretion to require separate marketing applications for the drug and device components in a combination product.Zalviso is being regulated as a drug product under the NDA process administered by the FDA. The FDA could in the future require additional regulationof Zalviso, or DSUVIA, under the medical device provisions of the Federal Food, Drug and Cosmetic Act, or FDCA. We must comply with the QualitySystems Regulation, or QSR, which sets forth the FDA’s current good manufacturing practice, or cGMP, requirements for medical devices, and otherapplicable government regulations and corresponding foreign standards for drug cGMPs. If we fail to comply with these regulations, it could have amaterial adverse effect on our business and financial condition. Regulatory agencies also may approve a product candidate for fewer or more limited indications than requested or may grant approval subject to theperformance of post-marketing trials. In addition, regulatory agencies may not approve the labeling claims that are necessary or desirable for thesuccessful commercialization of our product candidates. For example, we intend to resubmit our NDA seeking approval of Zalviso for the management ofmoderate-to-severe acute pain in adult patients in the hospital setting; however, our clinical trial data was generated exclusively from the post-operativesegment of this population, and the FDA may restrict any approval to post-operative patients only, which would reduce our commercial opportunity. 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 three Phase 3clinical 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 theFDA then accepted for filing in December 2013. In July 2014, the FDA issued a Complete Response Letter, or CRL, for our NDA for Zalviso, or theZalviso CRL. The Zalviso CRL contained requests for additional information on the Zalviso System to ensure proper use of the device. The requestsinclude submission of data demonstrating a reduction in the incidence of device errors, changes to address inadvertent dosing, among other items, andsubmission of additional data to support the shelf life of the product. Furthermore, in March 2015, we received correspondence from the FDA stating thatin addition to the bench testing and two Human Factors studies we had performed in response to the issues identified in the Zalviso CRL, a clinical trialwas needed 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,which took place in September 2015, we submitted a protocol to the FDA for a clinical study. We completed the protocol review with the FDA andinitiated this study, 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. Correspondencefrom the FDA suggests that they may include the rate of inadvertent dispensing along with the device failures to calculate a total error rate. The IAP312study evaluated all incidents of misplaced tablets; however, per the protocol, the error rate calculation does not include the rate of inadvertent dispensing.If the FDA includes the rate of inadvertent dispensing along with the device failures to calculate a total error rate, the resulting error rate may beunacceptable to the FDA. Further, the correspondence from the FDA suggests that we may need to modify the Risk Evaluation and Mitigation Strategies,or REMS, for Zalviso to address dropped tablets. We intend to submit the IAP312 study results as part of our resubmission of the NDA for Zalviso. We arecurrently evaluating the timing of the resubmission of our NDA for Zalviso. 32 There is no guarantee that the additional work we performed related to Zalviso, including the IAP312 trial, will result in our successfully obtaining FDAapproval of Zalviso in a timely fashion, if at all. For example, the FDA may include the rate of inadvertent dispensing along with the device failures tocalculate a total error rate and the resulting error rate may be unacceptable to the FDA, or the FDA may still have concerns regarding the performance ofthe device, inadvertent dosing (dropped tablets), or other issues. At any future point in time, the FDA could require us to complete further clinical, HumanFactors, pharmaceutical, reprocessing or other studies, which could delay or preclude any NDA resubmission or approval of the NDA and could require usto obtain significant additional funding. There is no guarantee such funding would be available to us on favorable terms, if at all. We intend to resubmitthe Zalviso NDA seeking a label indication for the management of moderate-to-severe acute pain in adult patients in the hospital setting. However, ourclinical trial data was generated exclusively from the post-operative segment of this population, and the FDA may restrict any approval to post-operativepatients only, which would reduce our commercial opportunity. Upon resubmission of the Zalviso NDA, 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 Europe. It has also been conditionally approved by theFDA, which must approve all drug trade names to avoid medication errors and misbranding. However, the FDA may withdraw this approval in which caseany 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, once it is resubmitted, may negatively impact our stock price and harm our business operations.Any delay in obtaining, or inability to obtain, regulatory approval would prevent us from commercializing Zalviso in the United States, generatingrevenues and potentially achieving profitability. If any of these events occur, we may be forced to delay or abandon our development efforts for Zalviso,which would have a material adverse effect on our business. 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’s requestfor an additional clinical trial and our planned response to the Zalviso CRL. In response to discussions with the FDA, we agreed to complete an additionalopen-label study with Zalviso in post-operative patients, known as IAP312. We completed the protocol review for IAP312 and announced positive resultsfrom this study in August 2017, which we intend to use to support our NDA resubmission. We are currently evaluating the timing of the resubmission ofour NDA for Zalviso. 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. While we designed the protocols for bench testing and the Human Factors studies to address the issues raised in theZalviso CRL and designed the protocol for the additional Zalviso clinical trial to further address these issues, there is no guarantee the FDA will deemsuch protocols and results sufficient to address those issues when they are formally reviewed as a part of an NDA resubmission. Any delay in obtaining, orinability to obtain, regulatory approval would prevent us from commercializing Zalviso in the United States, generating revenues and achievingprofitability. If any of these events occur, we may be forced to delay or abandon our development and commercialization efforts for Zalviso in the UnitedStates, which would have a material adverse effect on our business. 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 that 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. 33 Positive clinical results obtained to date for Zalviso may be disputed in FDA review, do not guarantee regulatory approval and may not be obtainedfrom future clinical trials. We have reported positive top-line data from each of our four Zalviso Phase 3 clinical trials completed to date, as well as our Phase 2 clinical trials forZalviso. However, even if we believe that the data obtained from clinical trials is positive, the FDA has, and in the future could, determine that the datafrom our trials was negative or inconclusive or could reach a different conclusion than we did on that same data. Negative or inconclusive results of aclinical trial or difference of opinion could cause the FDA to require us to repeat the trial or conduct additional clinical trials prior to obtaining approvalfor commercialization, and there is no guarantee that additional trials would achieve positive results or that the FDA will agree with our interpretation ofthe results. For example, although we had achieved the primary endpoints in each of our three Phase 3 clinical trials for Zalviso which were included inour NDA filed in 2013, 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 would be needed to assess the risk of inadvertentdispensing and overall risk of dispensing failures. While we believe Zalviso met safety, satisfaction and device usability expectations in this trial, knownas IAP312, there is no guarantee the FDA will agree with our interpretation of these results. If the FDA were to require any additional clinical trials forZalviso, our development efforts would be further delayed, which would have a material adverse effect on our business. Any such determination by theFDA would delay the timing of our commercialization plan for Zalviso 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 four Phase 3 clinicaltrials and several Phase 2 clinical trials for Zalviso, future clinical trials may not begin on time, have an effective design, enroll a sufficient number ofpatients or be completed on schedule, if at all. For example, we postponed the start of IAP312, originally planned for the first quarter of 2016, toSeptember 2016. The postponement was due to a delay in the receipt and testing of final clinical supplies for this trial. As a result, the developmenttimeline for Zalviso was further extended. Our post-approval clinical trials for DSUVIA, or any future FDA-required clinical trials for Zalviso, 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, Institutional Review Board, or IRB, 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 IRB 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 DSUVIA or Zalviso; •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 database closure; •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 FDA-required clinical trials are delayed for any of the above reasons, our development costs may increase, our approval process for Zalvisocould be delayed, our ability to commercialize and commence sales of Zalviso could be materially harmed, and our ability to maintain FDA approval ofDSUVIA could be jeopardized, which could have a material adverse effect on our business. Zalviso may cause adverse effects or have other properties that could delay or prevent regulatory approval or limit the scope of any approved label ormarket acceptance. DSUVIA may cause adverse effects or have other properties that could limit market acceptance. Adverse events, or AEs, caused by Zalviso could cause us, other reviewing entities, clinical trial sites or regulatory authorities to interrupt, delay or haltany future FDA-required clinical trials and could result in the denial of regulatory approval. Phase 2 clinical trials we conducted with Zalviso did generatesome AEs, but no significant adverse events, or SAEs, related to the trial drug. In our Phase 3 active-comparator clinical trial (IAP309), 7% of Zalviso-treated patients dropped out of the trial prematurely due to an AE (10% in placebo group), and we observed three serious adverse events, or SAEs, thatwere assessed as possibly or probably related to study drug (one in the Zalviso group and two in the IV patient-controlled morphine group). In our Phase3, 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 were no SAEs determined to be related to study drug. In our Phase 3, double-blind, placebo-controlled, orthopedic surgerytrial (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 theZalviso group and placebo group) experienced an SAE considered possibly or probably related to the trial drug by the investigator. In our Phase 3multicenter, open-label study of Zalviso (IAP312), 2% of patients dropped out prematurely due to an AE. Five patients experienced SAEs in the IAP312study (four in the sufentanil sublingual tablet group and one in the placebo group) considered possibly or probably related to the study drug by theinvestigator. 34 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 DSUVIA or, if approved, Zalviso cause serious or unexpected side effects after receiving marketing approval, a number of potentially significantnegative consequences could result, including: •regulatory authorities may withdraw their approval of the product or impose restrictions on its distribution in the form of modified RiskEvaluation and Mitigation Strategies, or REMS; •regulatory authorities may require the addition of labeling statements, such as warnings or contraindications; •we may be required to change the way the product is administered or conduct additional clinical trials; •we could be sued and held liable for harm caused to patients; or, •our reputation may suffer. Any of these events could prevent us from achieving or maintaining market acceptance of DSUVIA or, if approved, Zalviso, and could substantiallyincrease the costs of commercializing our products. Additional time may be required to obtain U.S. regulatory approval for Zalviso because it is a drug/device combination product candidate. DSUVIA and Zalviso are combination products with both drug and device components. The FDA requires both the drug and device components ofcombination product candidates to be reviewed as part of an NDA submission. There are very few examples of the FDA approval process for drug/devicecombination products such as DSUVIA and Zalviso. As a result, we have in the past, experienced delays in the development and commercialization ofDSUVIA, and may in the future, experience delays in the development and commercialization of Zalviso, due to regulatory uncertainties in the productdevelopment and approval process, in particular as it relates to a drug/device combination product approval under an NDA. For example, we originallysubmitted the NDA for DSUVIA in December 2016. In October 2017, we received a CRL from the FDA for DSUVIA which contained requests foradditional information and testing of DSUVIA to assess the safety of DSUVIA dosed at the maximum amount described in the proposed label in at least 50patients. AcelRx had a Type A post-action meeting with the FDA in January 2018 to discuss the topics covered in the CRL and to clarify the path to movetowards resubmission of the DSUVIA NDA. In the Type A meeting, we discussed a proposal to address the safety of DSUVIA dosed at the maximumamount by reducing the maximum dose in the proposed label. In April 2018, we completed the HF study to validate the revised Directions for Use, orDFU, and in May 2018, we resubmitted the DSUVIA NDA. As a result, the DSUVIA NDA was not approved by the FDA until November 2018. We cannot predict when we will obtain regulatory approval to commercialize Zalviso, if at all, and we cannot, therefore, predict the timing of anyfuture associated revenue. In the United States, we received the Zalviso CRL on July 25, 2014, which contains requests for additional information on the Zalviso System. Inaddition, in March 2015, we received correspondence from the FDA stating that in addition to the bench testing and two Human Factors studies we hadperformed in response to the issues identified in the Zalviso CRL, a clinical trial is needed to assess the risk of inadvertent dispensing and overall risk ofdispensing failures. Based on our Type C meeting with the FDA in early September 2015 to discuss the FDA’s request for an additional clinical trial andour planned response to the Zalviso CRL, we submitted a protocol to the FDA for a clinical study in post-operative patients designed to evaluate theeffectiveness of changes made to the functionality and usability of the Zalviso device and to take into account comments from the FDA on the studyprotocol. We completed the protocol review and announced positive results from this study in August 2017, which we intend to use to support our NDAresubmission. We are currently evaluating the timing of the resubmission of our NDA for Zalviso. 35 Although the FDA reviewed the protocol for IAP312, the FDA required us to complete additional clinical work prior to resubmitting the NDA for Zalviso.Additional delays may result if Zalviso is taken before an FDA advisory committee which may recommend restrictions on approval or recommend non-approval. The process for obtaining approval of an NDA is time consuming, subject to unanticipated delays and costs, and requires the commitment of substantialresources. 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 our product candidate, Zalviso, and would have a materialadverse effect on our business and financial condition. In addition, an NDA may not be approved, or approval may be delayed, as a result of changes inFDA policies for drug approval during the review period. For example, although many products have been approved by the FDA in recent years underSection 505(b)(2) of the FDCA objections have been raised to the FDA’s interpretation of Section 505(b)(2). If challenges to the FDA’s interpretation ofSection 505(b) (2) are successful, the FDA may be required to change its interpretation, which could delay or prevent the approval of such an NDA. Moregenerally, the FDA’s comprehensive action plan to take concrete steps towards reducing the impact of opioid abuse on American families andcommunities may result in delays and challenges in obtaining NDA approval. Any significant delay in the acceptance, review or approval of an NDA thatwe have submitted would have a material adverse effect on our business and financial condition and would require us to obtain significant additionalfunding. Although we have obtained regulatory approval for DSUVIA, and even if we obtain regulatory approval for Zalviso in the United States, we and ourcollaborators face extensive regulatory requirements and our products may face future development and regulatory difficulties. Although we have obtained regulatory approval for DSUVIA, and even if we obtain regulatory approval for Zalviso in the United States, the FDA mayimpose significant restrictions on the indicated uses or marketing of our products or impose ongoing requirements for potentially costly post-approvaltrials or post-market surveillance. Additionally, the labeling approved for DSUVIA includes restrictions on use due to the opioid nature of sufentanil. Ifapproved, the labeling for Zalviso will likely include similar restrictions on use. DSUVIA in the United States will also be subject to ongoing FDA requirements governing the labeling, packaging, storage, distribution, safetysurveillance, advertising, promotion, record-keeping and reporting of safety and other post-market information. The holder of an approved NDA isobligated to monitor and report AEs and any failure of a product to meet the specifications in the NDA. The holder of an approved NDA must also submitnew or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process.Advertising and promotional materials must comply with FDA rules and are subject to FDA review, in addition to other potentially applicable federal andstate laws. If approved, Zalviso will be subject to these same requirements. 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 drug isapproved 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, aregulatory agency may impose restrictions relative to that product or the manufacturing facilities, including requiring recall or withdrawal of the productfrom the market or suspension of manufacturing. If we fail to comply with applicable regulatory requirements following approval of our products, a regulatory agency may: •issue a warning letter asserting that we are in violation of the law; •seek an injunction or impose civil or criminal penalties or monetary fines; •suspend or withdraw regulatory approval; •suspend any ongoing clinical trials; 36 •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 DSUVIA, or, if approved, Zalviso,and generate revenues. Except for Zalviso and DZUVEO approval in Europe, we may never obtain approval for any other products outside of the United States, which wouldlimit 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 the EChad approved Grünenthal’s MAA for Zalviso for the management of acute moderate-to-severe post-operative pain in adult patients. In April 2016,Grünenthal completed the first commercial sale of Zalviso. In June 2018, we announced that the EC had granted marketing approval of DZUVEO for thetreatment of patients with moderate-to-severe acute pain in medically monitored settings. We have not yet entered into a collaboration agreement with astrategic partner for the commercialization of DZUVEO in Europe and there can be no assurance that we will successfully enter into such an agreement. Part of the foreign regulatory approval process includes compliance inspections of manufacturing facilities to ensure adherence to applicable regulationsand guidelines. The foreign regulatory agency may delay, limit or deny marketing approval as a result of such inspections. We, our contractmanufacturers, and their vendors, are all subject to preapproval and post-approval inspections at any time. The results of these inspections could impactour ability to obtain regulatory approval of DSUVIA and Zalviso in countries outside of the United States and Europe, or our ability to launch andsuccessfully commercialize these products, once approved. In addition, results of EMA inspections could impact our ability to maintain EC approval ofZalviso and DZUVEO, and Grünenthal’s ability to expand and sustain commercial sales of Zalviso in Europe. 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 or premium reimbursement in all territories. For example, we anticipate we may need comparator studies forDZUVEO in Europe to ensure premium reimbursement in certain countries. Grünenthal does have products approved in international markets; however,Grünenthal’s experience in international markets does not guarantee compliance with regulatory requirements in those markets. Similarly, while we haveobtained approval of DZUVEO in Europe, even if we are successful in entering into a collaboration agreement with a commercial partner, we will besubstantially dependent on that commercial partner to comply with regulatory requirements. If we, or our commercial partners, fail to comply withregulatory requirements in international markets or to obtain and maintain required approvals, or if regulatory approvals in international markets aredelayed, our target market will be reduced and our ability to realize the full market potential of our products will be harmed. DSUVIA requires, and, if approved, Zalviso, will require Risk Evaluation and Mitigation Strategies, or REMS, and are, and may be, subject topostmarketing study requirements. DSUVIA was approved in the United States with a REMS. If Zalviso is approved in the United States, it will also require a REMS. The DSUVIA REMSincludes restrictions on product distribution and use only in certified medically supervised settings. Before DSUVIA is distributed, an authorizedrepresentative from each medically supervised setting must sign an attestation that they have the ability to manage acute opioid overdose, and will trainall relevant staff on administration of DSUVIA, including the importance of only dispensing the product in a medically supervised setting. The REMSprogram for DSUVIA may significantly increase our costs to commercialize this product. While we have received pre-clearance from the FDA regardingcertain aspects of the proposed required REMS for Zalviso, we cannot predict the final REMS to be required as part of any FDA approval of Zalviso.Depending on the extent of the REMS requirements, any U.S. launch may be delayed, the costs to commercialize Zalviso may increase substantially andthe potential commercial market could be restricted. Furthermore, risks of sufentanil that are not adequately addressed through the proposed REMSprogram for Zalviso, may also prevent or delay its approval for commercialization. DSUVIA is also subject to a deferred postmarketing requirement for study in the pediatric population ages 6-17 years. Our protocol for this trial is not dueuntil August 2020. 37 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 2019 and may continue to incurlosses in the future. We have incurred significant net losses in each year since our inception in July 2005, and as of December 31, 2018, we had an accumulated deficit of$345.0 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 support commercialization activities for DSUVIA, conductresearch and development activities, including the FDA regulatory review of the resubmitted Zalviso NDA, once resubmitted, and support themanufacturing and supply of Zalviso in Europe for Grünenthal. While Grünenthal has begun European commercial sales of Zalviso, if DSUVIA is notsuccessfully commercialized, or if Zalviso is not successfully developed or commercialized, or if revenues are insufficient following marketing approval,we will not achieve profitability and our business may fail. Our success is also dependent on current and future collaborations to market our productsoutside of the United States, 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 products. Although we received FDA approval ofDSUVIA, and recently began the commercial launch of DSUVIA in the United States, we may never generate significant revenues from sales of DSUVIA,or, if approved, Zalviso, in the United States to become profitable. Although DZUVEO was approved by the EC in June 2018, we have not yet entered intoa collaboration agreement with a strategic partner to commercialize DZUVEO in Europe and there can be no assurance that we will successfully enter intosuch an agreement. While we have a collaboration agreement with Grünenthal for commercialization of Zalviso in Europe and Australia, Grünenthal maynot recognize a level of commercial sales of Zalviso for which we would receive sales milestone payments. Even if Grünenthal is successful incommercialization of Zalviso, as a result of our sale to PDL of certain expected royalties from the sales of Zalviso by Grünenthal and a majority of our firstfour commercial sales milestones, we will receive only 25% of the sales royalties and 20% of the first four commercial milestones under the AmendedAgreements. In addition, we do not anticipate generating significant revenues from DSUVIA, or Zalviso, if approved in the United States, in the near term.Our ability to generate future revenues from product sales depends heavily on our success in: •maintaining regulatory approval for DSUVIA and obtaining and maintaining regulatory approval for Zalviso in the United States; and •launching and commercializing DSUVIA, and, if approved, Zalviso, in the United States, by building internally or through entering acollaboration, a hospital-directed sales force in the United States, and with third parties internationally, including Grünenthal and any futurecollaboration partner for DZUVEO, which may require additional funding. Because of the numerous risks and uncertainties associated with launching a commercial pharmaceutical product, pharmaceutical product developmentand the regulatory environment, we are unable to predict the timing or amount of increased expenses, or when, or if, we will be able to achieve or maintainprofitability. Our expenses could increase beyond expectations if we are delayed in receiving regulatory approval for Zalviso in the United States, or if weare required by the FDA to complete activities in addition to those we currently anticipate or have already completed. We anticipate incurring significant costs associated with commercializing DSUVIA in the United States. Even if we are able to generate revenues from thesale of DSUVIA, or, if approved, Zalviso, in the United States, we may not become profitable and may need to obtain additional funding to continueoperations. 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 28 EU member states, Switzerland,Liechtenstein, Iceland, Norway and Australia, or the Territory, for human use in pain treatment within, or dispensed by, hospitals, hospices, nursing homesand other medically supervised settings, 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 began its European launch of Zalviso with the first commercial sale occurring in April2016. During the pilot and launch phases in the various European countries, Grünenthal has reported certain issues from HCPs with the initial set up of theZalviso controllers before being given to patients for use. To address the issues, we have assisted Grünenthal with implementing additional training forHCPs and we have revised the controller software. Controllers with the revised software, which was delivered in December 2016, have undergoneextensive bench testing and we believe we have successfully addressed the issues as presented. Additional devices were delivered beginning in early2017. Controllers with the U.S. version of the revised software were also used in the IAP312 clinical study that was initiated in September 2016. There canbe no assurance that the issues identified in the initial pilot and launch phases by Grünenthal will not have a material adverse impact on the current andfuture sales of Zalviso in Europe. Further, if new issues occur, there may be a material adverse impact on the future sales of Zalviso in Europe which mayhave a negative impact on future revenues received and recognized by us. 38 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 million 75%of the European royalties from sales of Zalviso and 80% of the first four commercial milestones under the License Agreement, subject to a capped amount,referred to as the Royalty Monetization. Accordingly, even if Grünenthal is successful in the commercialization of Zalviso in the Territory, we will receiveonly 25% of the royalties and 20% of the first four commercial milestones under the License Agreement, and 100% of the royalties after the cappedamount is reached. Any failures in commercialization of Zalviso outside the United States could have a material adverse impact on our business, including an adverse impacton the commercialization of DSUVIA or the development of Zalviso in the United States, if related to issues underlying the sufentanil sublingual tablettechnology, safety or efficacy. Additionally, we agreed to certain representations and covenants relating to the Amended Agreements under ouragreements with PDL, and, if we breach those representations or covenants, we may become subject to indemnification claims by PDL and liable to PDLfor its indemnifiable losses relating to such breaches. The amount of such losses could be material and could have a material adverse impact on ourbusiness. We have not yet entered into a collaboration agreement with a strategic partner for the commercialization of DZUVEO in Europe. DZUVEO was approved by the EC in June 2018, but we have not yet entered into a collaboration agreement with a strategic partner to commercializeDZUVEO in Europe. If we are unable to enter into such an agreement, we may never generate revenues from sales of DZUVEO. If we are successful inidentifying a commercial partner and entering into a collaboration agreement, we will be substantially dependent on this partner to successfullycommercialize DZUVEO in Europe. Any failures in the commercialization of DZUVEO in Europe could have a significant adverse impact on our revenuesand operating results. Any future collaboration agreement for DZUVEO, will likely require us to support the manufacturing and supply of the product in Europe for ourcommercial partner. In addition, we anticipate we may need comparator studies in Europe to ensure premium reimbursement in certain countries. Ourinability to profitably manufacture and supply DZUVEO to any future commercial partner, or to successfully complete these additional comparatorstudies and obtain premium reimbursement in certain countries, may prevent, limit or delay commercialization and any associated future revenues fromDZUVEO in Europe. 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 sell Zalviso at a predetermined transfer price that is currently less than the direct cost of manufactureat our contract manufacturers. In addition, we do not recover internal indirect costs as part of the transfer price. Furthermore, the Amended Agreementsinclude declining maximum transfer prices over the term of the contract with Grünenthal. These transfer prices were agreed to assuming economies ofscale that would occur with increasing production volumes (from the potential approval of Zalviso in the U.S. and an increase in demand in Europe) 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 sales by Grünenthal in Europe have not been substantial. If we do notreceive timely approval 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 without acorresponding decrease in our gross margin on Zalviso product sales. 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 DSUVIA and Zalviso, understanding the market potential for DSUVIA and Zalviso and preparing for the commercialization of DSUVIA and thepotential commercialization Zalviso in the United States. We have never ourselves directly commercialized a product. Consequently, any predictions thatare made about our future success, or viability, or evaluation of our business and prospects, may not be accurate. 39 We will require additional capital and may be unable to raise capital, which would force us to delay, reduce or eliminate our commercialization effortsand product development programs and could cause us to cease operations. Launch of a commercial pharmaceutical product and pharmaceutical development activities can be time consuming and costly. We expect to incursignificant expenditures in connection with our ongoing activities including the commercial launch of DSUVIA in the United States and support for FDAregulatory review of the resubmitted Zalviso NDA, once resubmitted. While we believe we have sufficient capital resources to continue plannedoperations through at least the end of the first quarter of 2020, we will need additional capital to pursue full commercialization of DSUVIA and Zalviso, ifapproved. Clinical trials, regulatory reviews, and the launch of commercial product are expensive activities. In addition, commercialization costs for DSUVIA, and, ifapproved, Zalviso in the United States, may be significantly higher than estimated. We may experience technical difficulties in our commercializationefforts or otherwise, which could substantially increase the costs of commercialization. Revenues may be lower than expected and accordingly costs toproduce such revenues may exceed those revenues. We will need to seek additional capital to continue operations. Such capital demands could besubstantial. In the future, we may seek to sell additional equity or debt securities, including under the Sales Agreement with Cantor, monetize or securitizecertain assets including future royalty streams and milestones, obtain a credit facility, or enter into product development, license or distributionagreements with third parties, or divest DSUVIA or Zalviso. Such arrangements may not be available on favorable terms, if at all. 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 are currently evaluating the timing of the resubmission ofour NDA for Zalviso. The IAP312 clinical trial, and the corresponding extension of the Zalviso development program, unexpectedly increased our capitalrequirements. 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 would berequired to reduce our workforce, reduce the scope of, or cease, the commercial launch of DSUVIA, or the development of Zalviso in advance of the dateon 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 commercializeDSUVIA or develop Zalviso. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, ifat all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to: •significantly scale back or discontinue the commercialization of DSUVIA, or the development of Zalviso; •seek additional corporate partners for Zalviso on terms that might be less favorable than might otherwise be available; •seek corporate partners for DSUVIA/DZUVEO on terms that might be less favorable than might otherwise be available; or •relinquish, or license on unfavorable terms, our rights to technologies or products that we otherwise would seek to develop or commercializeourselves. 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, as of December 31, 2018, we had issued and sold an aggregate of 9.8 million shares of common stock pursuant to the Sales Agreement withCantor, for which we had received net proceeds of approximately $32.5 million. In addition, in the third quarter of 2018, we completed an underwrittenpublic offering of 8,636,636 shares of common stock, at a price of $2.75 per share to the public, less underwriting discounts and commissions. In thefourth quarter of 2018, we completed an additional underwritten public offering of 14,603,173 shares of common stock, at a price of $3.15 per share to thepublic, less underwriting discounts and commissions. The incurrence of additional indebtedness would result in increased fixed payment obligations andcould also result in certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell orlicense 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. 40 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, 2018, we have approximately $12.0 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 or becomeinsolvent, Hercules could elect to declare all amounts outstanding, together with accrued and unpaid interest and penalty, to be immediately due andpayable. Additional capital may not be available on terms acceptable to us, or at all. In addition, the Royalty 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 pastfunding. 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 and extended through February 28,2019. Funding under the DoD Contract will be subject to audit by the DoD to ensure adherence to specific guidance, policies and procedures. The DoDmay find deficiencies during the course of an audit which could jeopardize, or even eliminate, continued funding from the DoD, as well as requirerepayment of any funds they had provided us since inception of the DoD Contract. In addition, if the DoD determines that we have failed to comply withspecific contractual or legal requirements, or fail to satisfy an audit, a variety of penalties can be imposed in addition to monetary damages, includingcriminal and civil penalties. The DoD could suspend or debar us from all government contract work. The occurrence of any of these actions could harmour reputation and could have a material adverse impact on our results of operations. Risks Related to Our Reliance on Third Parties We rely on third party manufacturers to produce commercial supplies of DSUVIA, as well as clinical drug supplies for Zalviso. 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; 41 •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 products in a timely fashion, in sufficientquantities 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. In addition, we have not yet entered into a collaboration agreement for the sale of DZUVEO in Europe, but we anticipate that any future collaborationagreement will likely require us to manufacture and supply DZUVEO to our commercial partner. As mentioned above, we are obligated to manufactureand supply Zalviso under the Amended Agreements with Grünenthal for use in Europe and their other licensed territories. If we are unable to establish areliable commercial supply of Zalviso for Grünenthal’s Territory, we may be unable to satisfy our obligations under the Amended Agreements in a timelymanner or at all, and we may, as a result, be in breach of the Amended Agreements. If any such breach were to be material and remain uncured, it couldresult in Grünenthal terminating the Amended Agreements, which in turn could result in us being responsible for indemnification of losses suffered byPDL under the Royalty Monetization. If any of these events were to occur, our business would be materially adversely affected. We rely on limited sources of supply for the active pharmaceutical ingredient, or API, of DSUVIA and Zalviso and any disruption in the chain of supplymay cause delay in developing and commercializing DSUVIA and Zalviso. Currently we only have one supplier qualified for our manufacture of DSUVIA, known as DZUVEO in Europe, and Zalviso qualified as a vendor with theFDA and EMA, respectively. If supply from the approved vendor is interrupted, there could be a significant disruption in commercial supply. For example,our API provider is changing its process for manufacturing our drug. There is no guarantee that this change will not impact our commercial supply of API.This change in process requires a regulatory submission to the FDA and European Health Authority which must be approved before the new process APIcan be used commercially in each corresponding territory. Any alternative vendor would need to be qualified through an NDA supplement and/or anMAA variation which could result in further delay. The FDA or other regulatory agencies outside of the United States may also require additional trials ifa new sufentanil supplier is relied upon for commercial production. Manufacture of sufentanil sublingual tablets requires specialized equipment and expertise. Ethanol, which is used in the manufacturing process for our sufentanil sublingual tablets, is flammable, and sufentanil is a highly potent, Schedule IIcontrolled substance. These factors necessitate the use of specialized equipment and facilities for manufacture of sufentanil sublingual tablets. There are alimited number of facilities that can accommodate our manufacturing process and we need to use dedicated equipment throughout development andcommercial manufacturing to avoid the possibility of cross-contamination. If our equipment breaks down or needs to be repaired or replaced, it may causesignificant disruption in clinical or commercial supply, which could result in delay in the process of obtaining approval for or sale of our products.Furthermore, we are using one manufacturer to produce our sufentanil sublingual tablets and have not identified a back-up commercial facility to date.Any problems with our existing facility or equipment, including ongoing expansion, may impair our ability to commercialize DSUVIA, or, if approved,Zalviso, complete our clinical trials and increase our cost. Manufacturing issues may arise that could delay or increase costs related to commercialization, product development and regulatory approval. As we scale up manufacturing of DSUVIA, and if approved, Zalviso, and conduct required stability testing, product, packaging, equipment and process-related issues may require refinement or resolution. In the past we have identified impurities in DSUVIA and Zalviso. In the future, we may identifysignificant impurities which could result in failure to maintain regulatory approval of DSUVIA, increased scrutiny by regulatory agencies, delays inclinical program and regulatory approval, increases in our operating expenses, or failure to obtain approval for Zalviso in the United States. 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. 42 In January 2013, we entered into a Manufacturing Services Agreement, or the Services Agreement, with Patheon under which Patheon has agreed tomanufacture, supply, and provide certain validation and stability services with respect to Zalviso for potential sales in the United States, Canada, Mexicoand other countries, subject to agreement by the parties to any additional fees for such other countries. 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 sales in the United States, and potential sales in Canada and Mexico, and other countries. There is no guarantee thatPatheon’s services will be satisfactory or that they will continue to meet the strict regulatory guidelines of the FDA or other foreign regulatory agencies. IfPatheon cannot provide us with an adequate supply of sufentanil sublingual tablets, we may be required to pursue alternative sources of manufacturingcapacity. Switching or adding commercial manufacturing capability can involve substantial cost and require extensive management time and focus, aswell as additional regulatory filings which may result in significant delays. In addition, there is a natural transition period when a new manufacturingfacility commences work. As a result, delays may occur, which can materially impact our ability to meet our desired commercial timelines, therebyincreasing our costs and reducing our ability to generate revenue. The facilities of any of our future manufacturers of sufentanil-containing sublingual tablets must be approved by the FDA or the relevant foreignregulatory agency, such as the EMA, before commercial distribution from such manufacturers occurs. We do not fully control the manufacturing processof sufentanil 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 approval for Zalviso, and other foreign regulatory agency approval of DSUVIA/DZUVEO and Zalviso outsideEurope. These challenges 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 resubmitted ZalvisoNDA. We submitted a protocol to the FDA for a clinical study in post-operative patients designed to evaluate the effectiveness of changes made to thefunctionality and usability of the Zalviso device and to take into account comments from the FDA on the study protocol in response to the Zalviso CRL.We completed the protocol review with the FDA for the study, known as IAP312, and announced positive results from this study in August 2017, whichwe intend to use to support the planned NDA resubmission. We are currently evaluating the timing of the resubmission of our NDA for Zalviso. 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 approve the devicefor commercial use. In the first quarter of 2019, we began the commercial launch of DSUVIA. In addition, we have manufactured and shipped commercial supplies of Zalvisofor delivery to Grünenthal; however, our experience with manufacturing and shipping both DSUVIA and Zalviso is limited. We have and will continue torely on contract manufacturers, component fabricators and third-party service providers to produce the necessary DSUVIA single-dose applicator, or SDA,and Zalviso devices for the commercial marketplace. We currently outsource manufacturing and packaging of the DSUVIA SDA and the controller,dispenser and cartridge components of the Zalviso device to third parties and intend to continue to do so. Some of these purchases and components weremade and will continue to be made utilizing short-term purchase agreements and we may not be able to enter into long-term agreements for commercialsupply of DSUVIA, DZUVEO or Zalviso devices with each of the third-party manufacturers or may be unable to do so on acceptable terms. In addition, wehave encountered and may continue to encounter production issues with our current or future contract manufacturers and other third party serviceproviders, including the reliability of the production equipment, quality of the components produced, their inability to meet demand or otherunanticipated delays including scale-up and automating processes, which could adversely impact our ability to supply our customers with DSUVIA,Zalviso and DZUVEO in Europe, and, if approved, Zalviso 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 supply while we seek to secure another supplier that meets all regulatoryrequirements. In addition, if we are unable to establish a reliable commercial supply of Zalviso for Grünenthal’s Territory, we may be unable to satisfy ourobligations under the Amended Agreements in a timely manner or at all, and we may, as a result, be in breach of the Amended Agreements. 43 For DSUVIA, we currently package the finished goods under a manual process at the Sharp facility and have a secondary contract packaging facilityidentified. We also intend to package finished goods of DZUVEO at the Sharp facility in the same manner. The capacity and cost to package the finishedgoods under this manual process is not optimal to support successful future sales of DSUVIA and DZUVEO. We have initiated the process to purchase anautomated filling and packaging line to support increased capacity packaging for DSUVIA. We expect to complete the acquisition and installation of thisline in 2019. There is no assurance that we will be able to successfully purchase, install or validate the automated filling and packaging line for DSUVIA.If we are successful in the purchase, installation and validation of this equipment and process, there can be no assurance that we will be able to obtain thenecessary regulatory approvals to manufacture product. Reliance on third party manufacturers entails risks to which we would not be subject if we manufactured the products ourselves, including the possiblebreach of the manufacturing agreements by the third parties because of factors beyond our control; and the possibility of termination or nonrenewal of theagreements 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 post-approval clinical programs for DSUVIA and any FDA-required clinical programs forZalviso, as well as the execution of nonclinical and clinical trials. We control only certain aspects of our CROs’ activities. Nevertheless, we areresponsible for ensuring that each of our trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards and ourreliance on the CROs does not relieve us of our regulatory responsibilities. We, and our CROs, are required to comply with the FDA’s current good clinical practices, or cGCPs, which are regulations and guidelines enforced by theFDA for all product candidates in clinical development. The FDA enforces these cGCPs through periodic inspections of trial sponsors, principalinvestigators and clinical trial sites. If we or our CROs fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may bedeemed unreliable and the FDA may require us to perform additional clinical trials before approving our marketing applications. Upon inspection, theFDA may determine that our clinical trials do not comply with cGCPs. Accordingly, if our CROs or clinical trial sites fail to comply with theseregulations, we may be required to repeat clinical trials, which would delay the regulatory process. Our CROs are not our employees, and we cannot control whether or not they devote sufficient time and resources to our ongoing clinical and nonclinicalprograms. These CROs may also have relationships with other commercial entities, including our competitors, for whom they may also be conductingclinical trials, or other drug development activities which could harm our competitive position. We face the risk of potential unauthorized disclosure ormisappropriation of our intellectual property by CROs, which may allow our potential competitors to access our proprietary technology. If our CROs donot successfully carry out their contractual duties or obligations, fail to meet expected deadlines, or if the quality or accuracy of the clinical data theyobtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements, or for any other reasons, our clinical trials may beextended, delayed or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize Zalviso. As a result, ourfinancial results and the commercial prospects for Zalviso, if approved, would be harmed, our costs could increase, and our ability to generate revenuescould be delayed. Risks Related to Our Business Operations and Industry Failure to receive required quotas of controlled substances or comply with the Drug Enforcement Agency regulations, or the cost of compliance withthese 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 classified as a ScheduleII controlled substance, considered to present a high risk of abuse. The manufacture, shipment, storage, sale and use of controlled substances are subject toa high degree of regulation, including security, record-keeping and reporting obligations enforced by the DEA and also by comparable state agencies. Inaddition, our contract manufacturers are required to maintain relevant licenses and registrations. This high degree of regulation can result in significantcompliance costs, which may have an adverse effect on the commercialization of DSUVIA and the development and commercialization of Zalviso, ifapproved. 44 The DEA limits the availability and production of all Schedule II controlled substances, including sufentanil, through a quota system. The DEA requiressubstantial evidence and documentation of expected legitimate medical and scientific needs before assigning quotas to manufacturers. Our contractmanufacturers apply for quotas on our behalf. We will need significantly greater amounts of sufentanil to successfully commercialize DSUVIA, implementGrünenthal’s European commercialization plans for Zalviso, to support European commercialization of DZUVEO and to commercialize, if approved inthe United States, Zalviso. Any delay or refusal by the DEA in establishing the procurement quota or a reduction in our quota for sufentanil, or a failure toincrease it over time to meet anticipated increases in demand, could delay or stop the commercial sale of our approved products or the clinicaldevelopment of Zalviso in the United States. This, in turn, could have a material adverse effect on our business, results of operations, financial conditionand prospects. Our relationships with clinical investigators, health care professionals, consultants, commercial partners, third-party payers, hospitals, and othercustomers are subject 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 business orfinancial 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, individuallyidentifiable health information, with respect to safeguarding the privacy, security and transmission of individually identifiable healthinformation; •failure to comply with foreign laws, regulations, standards and regulatory guidance governing the collection, use, disclosure, retention,security and transfer of personal data, including the European Union General Data Privacy Regulation, or GDPR, which introduces strictrequirements for processing personal data of individuals within the European Union; •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, •the federal Foreign Corrupt Practices Act of 1977, United Kingdom Bribery Act 2010 and other similar anti-bribery laws in other jurisdictionsgenerally prohibit companies and their intermediaries from providing money or anything of value to officials of foreign governments, foreignpolitical parties, or international organizations with the intent to obtain or retain business or seek a business advantage. Recently, there hasbeen a substantial increase in anti-bribery law enforcement activity by U.S. regulators, with more frequent and aggressive investigations andenforcement proceedings by both the Department of Justice and the U.S. Securities and Exchange Commission. A determination that ouroperations or activities are not, or were not, in compliance with United States or foreign laws or regulations could result in the imposition ofsubstantial fines, interruptions of business, loss of supplier, vendor or other third-party relationships, termination of necessary licenses andpermits, and other legal or equitable sanctions. Other internal or government investigations or legal or regulatory proceedings, includinglawsuits brought by private litigants, may also follow as a consequence. 45 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 received CEMark approval in December 2014, which permits the commercial sale of the Zalviso device in Europe. In connection with the CE Mark approval, we werealso 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. The CE Mark was originally issued by the British Standards Institution, or BSI, a NotifiedBody, or NB, located in the United Kingdom, or UK, or BSI-UK. Recently, the CE Mark file and certification has been transferred to the Netherlands NB ofBSI, or BSI-NL, to mitigate the uncertainty with regards to the Brexit situation. The ISO certification issued through BSI-UK was recently upgraded to thelatest version of the standard, ISO 13484:2016 through BSI-UK and remains in effect, regardless of the Brexit situation. BSI ISO 13485:2016 certificationrecognizes that consistent quality policies and procedures are in place for the development, design and manufacturing of medical devices. Thecertification indicates that we have successfully implemented a quality system that conforms to ISO 13485 standards for medical devices. Certification tothis standard is one of the key regulatory requirements for a CE Mark in the EU and European Economic Area (which includes the 28 EU member states aswell as Norway, Iceland and Liechtenstein), or EEA, as well as to meet equivalent requirements in other international markets. The certification applies tothe Redwood City, California location which designs, manufactures and distributes finished medical devices, and includes critical suppliers. If we fail toremain in compliance with applicable European laws and directives, we would be unable to continue to affix the CE Mark to our Zalviso device, whichwould prevent Grünenthal from selling these devices within the EU and EEA. The UK’s planned withdrawal from the EU, commonly referred to as Brexit, may have a negative effect on global economic conditions, financialmarkets and our business. Brexit has created significant uncertainty concerning the future relationship between the UK and the EU, particularly if the UK withdraws from the EUwithout a ratified withdrawal agreement in place. From a regulatory perspective, there is uncertainty about which laws and regulations will apply. Asignificant portion of the regulatory framework in the UK is derived from EU laws. However, it is unclear which EU laws the UK will decide to replace orreplicate in connection with its withdrawal from the EU and the regulatory regime applicable to our operations may change. A basic requirement related to the grant of a marketing authorization for a medicinal product in the EU is the requirement that the applicant be establishedin the EU. Following withdrawal of the UK from the EU, marketing authorizations previously granted to applicants established in the UK through thecentralized, mutual recognition or decentralized procedures may no longer be valid. Moreover, depending upon the exact terms of the UK's withdrawal,there is a risk that the scope of a marketing authorization for a medicinal product granted by the EC pursuant to the centralized procedure, or by thecompetent authorities of other EU member states through the decentralized or mutual recognition procedures, would not encompass the UK. In thatcircumstance, a separate authorization granted by the UK competent authorities would be required to place medicinal products on the UK market. 46 Brexit has also given rise to calls for the governments of other EU member states to consider withdrawal from the EU. These developments, or theperception that they could occur, have had and may continue to have a material adverse effect on global economic conditions and the stability of globalfinancial markets, including by significantly reducing global market liquidity or restricting the ability of key market participants to operate in certainfinancial markets. Significant disruptions of our information technology systems or data security incidents could result in significant financial, legal, regulatory, businessand reputational harm to us. We are increasingly dependent on information technology systems and infrastructure, including mobile technologies, to operate our business. In theordinary course of our business, we collect, store, process and transmit large amounts of sensitive information, including intellectual property, proprietarybusiness information, personal information and other confidential information. It is critical that we do so in a secure manner to maintain theconfidentiality, integrity and availability of such sensitive information. We have also outsourced elements of our operations (including elements of ourinformation technology infrastructure) to third parties, and as a result, we manage a number of third-party vendors who may or could have access to ourcomputer networks or our confidential information. In addition, many of those third parties in turn subcontract or outsource some of their responsibilitiesto third parties. While all information technology operations are inherently vulnerable to inadvertent or intentional security breaches, incidents, attacksand exposures, the accessibility and distributed nature of our information technology systems, and the sensitive information stored on those systems,make such systems potentially vulnerable to unintentional or malicious internal and external attacks on our technology environment. Potentialvulnerabilities can be exploited from inadvertent or intentional actions of our employees, third-party vendors, business partners, or by malicious thirdparties. Attacks of this nature are increasing in their frequency, levels of persistence, sophistication and intensity, and are being conducted bysophisticated and organized groups and individuals with a wide range of motives (including, but not limited to, industrial espionage) and expertise,including organized criminal groups, “hacktivists,” nation states and others. In addition to the extraction of sensitive information, such attacks couldinclude the deployment of harmful malware, ransomware, denial-of-service attacks, social engineering and other means to affect service reliability andthreaten the confidentiality, integrity and availability of information. In addition, the prevalent use of mobile devices increases the risk of data securityincidents. Significant disruptions of our third-party vendors’ and/or business partners’ information technology systems or other similar data security incidents couldadversely affect our business operations and/or result in the loss, misappropriation, and/or unauthorized access, use or disclosure of, or the prevention ofaccess to, sensitive information, which could result in financial, legal, regulatory, business and reputational harm to us. In addition, informationtechnology system disruptions, whether from attacks on our technology environment or from computer viruses, natural disasters, terrorism, war andtelecommunication and electrical failures, could result in a material disruption of our development programs and our business operations. For example,the loss of clinical trial data from completed or future clinical trials could result in delays in our regulatory approval efforts and significantly increase ourcosts to recover or reproduce the data. There is no way of knowing with certainty whether we have experienced any data security incidents that have not been discovered. While we have noreason to believe this to be the case, attackers have become very sophisticated in the way they conceal access to systems, and many companies that havebeen attacked are not aware that they have been attacked. Any event that leads to unauthorized access, use or disclosure of personal information,including but not limited to personal information regarding our patients or employees, could disrupt our business, harm our reputation, compel us tocomply with applicable federal and/or state breach notification laws and foreign law equivalents, subject us to time consuming, distracting and expensivelitigation, regulatory investigation and oversight, mandatory corrective action, require us to verify the correctness of database contents, or otherwisesubject us to liability under laws, regulations and contractual obligations, including those that protect the privacy and security of personal information.This could result in increased costs to us, and result in significant legal and financial exposure and/or reputational harm. In addition, any failure orperceived failure by us or our vendors or business partners to comply with our privacy, confidentiality or data security-related legal or other obligations tothird parties, or any further security incidents or other inappropriate access events that result in the unauthorized access, release or transfer of sensitiveinformation, which could include personally identifiable information, may result in governmental investigations, enforcement actions, regulatory fines,litigation, or public statements against us by advocacy groups or others, and could cause third parties, including clinical sites, regulators or current andpotential partners, to lose trust in us or we could be subject to claims by third parties that we have breached our privacy- or confidentiality-relatedobligations, which could materially and adversely affect our business and prospects. Moreover, data security incidents and other inappropriate access canbe difficult to detect, and any delay in identifying them may lead to increased harm of the type described above. While we have implemented securitymeasures intended to protect our information technology systems and infrastructure, there can be no assurance that such measures will successfullyprevent service interruptions or security incidents. 47 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. 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 qualified scientific, clinical, manufacturing, and commercial personnel will also be critical to oursuccess. We may not be able to attract and retain these personnel on acceptable terms given the competition among numerous pharmaceutical andbiotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities andresearch institutions. 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. In addition, failure to succeed in clinical trials, or delays in the regulatory approval process, maymake it more challenging to recruit and retain qualified personnel. The inability to recruit or loss of the services of any executive or key employee mightimpede 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, 2018, we had 61 full-time employees. With FDA approval of DSUVIA and the commercial launch in the United States, we plan tocontinue 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 growth couldrequire significant capital expenditures and may divert financial resources from other projects. If our management is unable to effectively manage ourgrowth, our expenses may increase more than expected, our ability to generate and/or grow revenues could be reduced, and we may not be able toimplement our business strategy. Our future financial performance and our ability to commercialize 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. Commercial sales of DSUVIA and Zalviso exposes us to the risk of product liability claims. Product liability claims might be brought against us bypatients, health care providers, pharmaceutical companies or others selling or otherwise coming into contact with our products. If we cannot successfullydefend against product liability claims, we could incur substantial liability and costs. In addition, regardless of merit or eventual outcome, productliability claims may result in: •impairment of our business reputation; •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 products; and, •decreased demand for our products. Our current product liability insurance coverage may not be sufficient to reimburse us for any expenses or losses we may suffer. In addition, our currentproduct liability insurance contains an exclusion related to any claims related to our products from a governmental body, or payor, or those claims arisingfrom a multi-plaintiff action. This exclusion does not apply to any bodily injury claim related to our products made by an individual. On occasion, largejudgments have been awarded in class action lawsuits based on drugs that had unanticipated adverse effects. A successful product liability claim or seriesof claims brought against us could cause our stock price to decline and, if judgments are excluded from our insurance coverage or exceed our insurancecoverage, could adversely affect our results of operations and business. Moreover, insurance coverage is becoming increasingly expensive and, in thefuture, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. 48 With the European approval of Zalviso, we expanded our insurance coverage to include the sale of Zalviso to our commercial partner, Grünenthal. Weintend to commercialize and promote DZUVEO in Europe with a strategic partner which may result in further expansion of our insurance coverage toinclude sales of DZUVEO in Europe. There can be no assurance that such coverage will be adequate to protect us against any future losses due to liability. 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, 2018, we are the owner of record of 68 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 until at least 2027 – 2031. In addition, we are pursuing a number of U.S. non-provisional patent applications and foreign national applications directed to DSUVIA and Zalviso. Thepatent 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. Evenif 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 ours, can be highly uncertain and involve complex and evolving legal and factualquestions. No consistent policy regarding the breadth of claims allowed in pharmaceutical patents has emerged to date in the United States. Legaldevelopments may 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. 49 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 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 DSUVIA or Zalviso, the pharmaceutical industry is characterizedby extensive litigation regarding patents and other intellectual property rights. As we enter our target markets, it is possible that competitors or other third parties will claim that our products and/or processes infringe on theirintellectual property rights. These third parties may have obtained and may in the future obtain patents covering products or processes that are similar to,or may include compositions or methods that encompass our technology, allowing them to claim that the use of our technologies infringes on thesepatents. 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 successful in our defense. Our business may suffer if a finding of infringement is established. 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. 50 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 results tobe 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 DSUVIA, andZalviso, if approved, 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. 51 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 be broughtregarding the validity of our patents by third parties and regulatory agencies in the United States and foreign countries. In addition, changes in the lawand legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and theenforcement of intellectual property. 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, inNovember 2018, the FDA accepted the DSUVIA mark. Although we are not currently aware of any oppositions to or cancellations of our registeredtrademarks or pending applications, it is possible that one or more of the applications could be subject to opposition or cancellation after the marks areregistered. The registrations will be subject to use and maintenance requirements. It is also possible that we have not yet registered all of our trademarks inall of our potential markets, and that there are names or symbols other than “ACELRX” that may be protectable marks for which we have not soughtregistration, and failure to secure those registrations could adversely affect our business. Opposition or cancellation proceedings may be filed against ourtrademarks 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. The trading price of our common stock has experienced significant volatility and is likely to be volatile in the future. For example, our stock pricedropped by 60% on October 12, 2017, the day we announced the receipt of the DSUVIA CRL from the FDA. Our stock price could be subject to widefluctuations in response to a variety of factors, including the following: •failure to successfully commercialize DSUVIA in the United States and/or to successfully develop and commercialize Zalviso in the UnitedStates; •inability to obtain additional funding, including funding necessary for the planned commercialization and manufacturing of DSUVIA, ifapproved, Zalviso, in the United States; •any delay in resubmitting the NDA for Zalviso, and any additional adverse developments or perceived adverse developments with respect tothe FDA’s review of the Zalviso NDA, upon resubmission; •adverse results or delays in future clinical trials; •changes in laws or regulations applicable to our products; •inability to obtain adequate product supply for our products, 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 generally, and of opioid manufacturers more specifically, by the public, legislatures, regulatorsand 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 management or scientific personnel; •costs associated with potential governmental investigations, inquiries, regulatory actions or lawsuits that may be brought against us as a resultof us being an opioid manufacturer; •other types of significant lawsuits, including patent or stockholder litigation; •changes in the market valuations of similar companies; 52 •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 volume fluctuationsthat have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negativelyaffect 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 year ended December 31, 2018 and December 31, 2017 was approximately 1,500,000 and 950,000 shares per day,respectively. Moreover, in the days leading up to the FDA decision date for DSUVIA, our stock trading volume grew significantly with over 30 millionshares trading on October 10, 2018 alone. A more active market for our stock has only recently developed and may not be sustained. Our stockholdersmay be unable to sell their common stock at or near their asking prices, which may result in substantial losses to our investors. The market for our common stock may be characterized by significant price volatility when compared to seasoned issuers, and we expect that our shareprice will be more volatile than a seasoned issuer for the indefinite future. As noted above, our common stock may be sporadically and/or thinly traded. Asa consequence of this lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence the priceof those shares in either direction. The price for our shares could, for example, decline significantly in the event that a large number of our common stockare sold on the market without commensurate demand, as compared to a seasoned issuer that could better absorb those sales without adverse impact on itsshare price. 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 costlier. For example, these rules and regulations make it moredifficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain ourcurrent levels of such coverage. As a public company, we are subject to the requirements of Section 404 of the Sarbanes-Oxley Act. If we are unable to comply with Section 404 in atimely manner, it may affect the reliability of our internal control over financial reporting. Assessing our staffing and training procedures to improve ourinternal control over financial reporting is an ongoing process. We have been and will continue to be involved in a substantial effort to implement appropriate processes, document the system of internal control overkey processes, assess their design, remediate any deficiencies identified and test their operation. If we fail to comply with the requirements of Section 404,it may affect the reliability of our internal control over financial reporting and negatively impact the quality of disclosure to our stockholders. If we, or ourindependent registered public accounting firm, identify and report a material weakness, it could adversely affect our stock price. Sales of a substantial number of shares of our common stock in the public market by our existing stockholders could cause our stock price to fall. Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur, could depress the marketprice of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effectthat sales may have on the prevailing market price of our common stock. All of our shares of common stock outstanding are eligible for sale in the publicmarket, subject in some cases to the volume limitations and manner of sale requirements of Rule 144 under the Securities Act. Sales of stock by ourstockholders could have a material adverse effect on the trading price of our common stock. 53 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 Equity Incentive Plan, our management is authorized to grant stock options and other equity-based awards to our employees,directors and consultants. The number of shares available for future grant under our 2011 Equity Incentive Plan will automatically increase each year by4% of all shares of our capital stock outstanding as of December 31 of the prior calendar year, subject to the ability of our Board of Directors to take actionto reduce the size of the increase in any given year. Currently, we plan to register the increased number of shares available for issuance under our 2011Equity Incentive Plan each year. If our Board of Directors elects to increase the number of shares available for future grant by the maximum amount eachyear, our stockholders may experience 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 common stockof pharmaceutical companies. These broad market fluctuations may cause the market price of our common stock to decline. In addition, the market priceof our common stock may vary significantly based on AcelRx specific events, such as receipt of future complete response letters, negative clinical results,a negative vote or decision by the FDA advisory committee, or other negative feedback from the FDA, EMA, or other regulatory agencies. In the past,securities-related class action litigation has often been brought against a company following a decline in the market price of its securities. This risk isespecially relevant for us because biotechnology and biopharmaceutical companies often experience significant stock price volatility in connection withtheir 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. The recently passed comprehensive tax reform bill could adversely affect our business and financial condition. In December 2017, President Trump signed into law new legislation that significantly revises the Internal Revenue Code of 1986, as amended. The newlyenacted federal income tax law, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate froma 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 for certain smallbusinesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks,one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject tocertain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifyingor repealing many business deductions and credits (including reducing the business tax credit for certain clinical testing expenses incurred in the testingof certain drugs for rare diseases or conditions generally referred to as “orphan drugs”). Notwithstanding the reduction in the corporate income tax rate, theoverall impact of the new federal tax law is uncertain, and our business and financial condition could be adversely affected. In addition, it is uncertain ifand to what extent various states will conform to the newly enacted federal tax law. The impact of this tax reform on holders of our common stock is alsouncertain and could be adverse. Investors should consult with their legal and tax advisors with respect to this legislation and the potential taxconsequences 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 the July2013 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. 54 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. Theseprovisions include: •authorizing the issuance of “blank check” preferred stock, the terms of which may be established and shares of which may be issued withoutstockholder approval; •limiting the removal of directors by the stockholders; •a staggered Board of Directors; •prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders; •eliminating the ability of stockholders to call a special meeting of stockholders; and •establishing advance notice requirements for nominations for election to our Board of Directors or for proposing matters that can be actedupon at stockholder meetings. These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult forstockholders to replace members of our Board of Directors, which is responsible for appointing the members of our management. In addition, we aresubject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad rangeof business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interestedstockholder, unless such transactions are approved by our Board of Directors. This provision could have the effect of delaying or preventing a change ofcontrol, whether or not it is desired by or beneficial to our stockholders. Further, other provisions of Delaware law may also discourage, delay or preventsomeone from acquiring us or merging with us. Item 1B. Unresolved Staff Comments None. Item 2. Properties We lease approximately 25,893 square feet of office and laboratory space in Redwood City, California under an agreement that expires on January 31,2024, with an option to extend for an additional period of six years. On January 2, 2019, we entered into an agreement to sublease 12,106 square feet ofthis space commencing on February 16, 2019 and expiring on January 31, 2024. 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. 55 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Stock Price Performance Graph The following graph illustrates a comparison of the total cumulative stockholder return on our common stock since December 31, 2013, to two indices:the NASDAQ Composite Index and the NASDAQ Biotechnology Index. The stockholder return shown in the graph below is not necessarily indicative offuture performance, and we do not make or endorse any predictions as to future stockholder returns. The above Stock Price Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities andExchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or SecuritiesExchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing. Holders of Record As of February 7, 2019, 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. 56 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 selected financialdata is not intended to replace our audited financial statements and the accompanying notes. Our historical results are not necessarily indicative of ourfuture results. Year Ended December 31, 2018 2017 2016 2015 2014 (in thousands, except share and per share data) Consolidated Statements of Operations Data: Revenue: Collaboration agreement $1,313 $7,143 $6,440 $14,857 $5,217 Contract and other 838 852 10,917 4,406 — Total revenue 2,151 7,995 17,357 19,263 5,217 Costs and Operating Expenses: Cost of goods sold $3,976 $10,659 $12,315 $1,770 $— Research and development 13,137 19,409 21,402 22,488 24,520 General and administrative 20,765 16,609 15,597 14,203 18,346 Restructuring costs — — — 756 — Total costs and operating expenses 37,878 46,677 49,314 39,217 42,866 Loss from operations (35,727) (38,682) (31,957) (19,954) (37,649)Interest expense (2,217) (3,316) (2,770) (2,977) (2,639)Interest income and other income, net 1,138 510 918 1,720 6,935 Non-cash interest expense on liability related to sale of futureroyalties (10,341) (10,721) (9,382) (2,428) — Net loss before income taxes $(47,147) $(52,209) $(43,191) $(23,639) $(33,353)Provision (benefit) for income taxes 2 (701) (34) 760 — Net loss $(47,149) $(51,508) $(43,157) $(24,399) $(33,353) Net loss per share of common stock, basic $(0.81) $(1.10) $(0.95) $(0.55) $(0.77) Shares used in computing net loss per share of common stock,basic 58,408,548 46,883,535 45,313,118 44,300,099 43,427,111 Net loss per share of common stock, diluted $(0.81) $(1.10) $(0.95) $(0.60) $(0.91) Shares used in computing net loss per share of common stock,diluted 58,408,548 46,883,535 45,313,118 44,468,440 44,322,297 As of December 31, 2018 2017 2016 2015 2014 (in thousands) Balance Sheet Data: Cash, cash equivalents and short-term investments $105,715 $60,469 $80,310 $113,464 $75,350 Working capital 92,066 49,753 78,862 106,167 62,567 Total assets 120,533 75,552 99,993 127,785 86,416 Long-term debt 11,991 19,096 21,549 20,922 24,874 Liability related to sale of future royalties 93,679 83,588 72,987 63,612 — PIPE warrant liability — — 288 913 5,577 Accumulated deficit (345,019) (297,870) (246,362) (203,205) (178,806)Total stockholders’ equity (deficit) 4,253 (36,509) (5,337) 33,113 46,656 57 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. DSUVIA™ (known as DZUVEO in Europe) and Zalviso, are both focused on the treatment of acute pain, and each utilize sufentanil, deliveredvia a non-invasive route of sublingual administration, exclusively for use in medically supervised settings. On November 2, 2018, the U.S. Food and DrugAdministration, or FDA, approved our resubmitted NDA for DSUVIA for use in adults in certified medically supervised healthcare settings, such ashospitals, surgical centers, and emergency departments, for the management of acute pain severe enough to require an opioid analgesic and for whichalternative treatments are inadequate. In June 2018, the European Commission, or EC, granted marketing approval of DZUVEO for the treatment ofpatients with moderate-to-severe acute pain in medically monitored settings. We are developing a distribution capability and commercial organization tomarket and sell DSUVIA in the United States. The commercial launch of DSUVIA in the United States occurred in the first quarter of 2019. In geographieswhere we decide not to commercialize ourselves, including for DZUVEO in Europe, we may seek to out-license commercialization rights. We currentlyintend to commercialize and promote DSUVIA/DZUVEO outside the United States with one or more strategic partners, although we have not yet enteredinto any such arrangement. We are currently evaluating the timing of the resubmission of the NDA for Zalviso. If we are successful in obtaining approvalof Zalviso in the United States, we plan to potentially promote Zalviso either by ourselves or with strategic partners. Zalviso is approved in Europe and iscurrently being commercialized by Grünenthal GmbH, or Grünenthal. 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 DSUVIA and Zalviso. 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 begincommercialization activities to support the U.S. launch of DSUVIA, continue our research and development activities and support Grünenthal’s Europeansales of Zalviso. As a result, we expect to continue to incur operating losses and negative cash flows until such time as DSUVIA has gained marketacceptance and generated significant revenues. Although Zalviso has been approved for sale in Europe, we sold the majority of the royalty rights and certain commercial sales milestones we are entitledto receive under the Grünenthal Agreements to PDL in September 2015. We began the commercial launch of DSUVIA in the United States in the first quarter of 2019. As we transition to a commercial enterprise, we expect thebusiness aspects of our company to become more complex. We plan to continue to add personnel and incur additional costs related to the maturation ofour business and the commercialization of DSUVIA and potential commercialization of Zalviso in the United States, subject to FDA approval. In addition,in connection with the commercial launch, we will incur capital expenditures related to the installation of our high-volume automated packaging line forDSUVIA. We expect to have qualified product being packaged using this new equipment beginning in 2020. We anticipate that the high-volume line forDSUVIA will contribute to a significant decrease in costs of goods sold in 2020 and beyond. 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 theDepartment of Defense, or DoD. Our revenues since inception have consisted primarily of revenues from our Amended Agreements with Grünenthal and our research contracts with theDoD. There can be no assurance that our relationship with Grünenthal will continue beyond the initial term or that we will be able to meet the milestonesspecified in the Amended Agreements. Under the terms of the DoD Contract, the DoD has reimbursed us for certain costs incurred for development,manufacturing, regulatory and clinical costs outlined in the DoD Contract, including reimbursement for certain personnel and overhead expenses. 58 We received approval of DZUVEO in Europe in June 2018, but we have not yet entered into a collaboration agreement with a strategic partner for thecommercialization of DZUVEO in Europe. There can be no assurance that we will enter into a collaborative agreement for DZUVEO, or any othercollaborative agreements, or receive research-related contract awards in the future. Accordingly, we expect revenues to continue to fluctuate from period-to-period. Although we have received approval of DSUVIA in the U.S., and Zalviso and DZUVEO in Europe, we cannot provide assurance that we willgenerate revenue from those products in excess of our operating expenses, nor that we will obtain marketing approval for Zalviso in the United States andsubsequently generate revenue from those products in excess of our operating expenses. Our net losses were $47.1 million, $51.5 million and $43.2 million during the years ended December 31, 2018, 2017 and 2016, respectively. As ofDecember 31, 2018, we had an accumulated deficit of $345.0 million. As of December 31, 2018, we had cash, cash equivalents and short-term investmentstotaling $105.7 million compared to $60.5 million as of December 31, 2017. 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 Statements andthe related disclosures, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation ofthese 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 Beginning January 1, 2018, we have followed the provisions of ASC Topic 606, Revenue from Contracts with Customers. The guidance provides aunified model to determine how revenue is recognized. We generate revenue from collaboration agreements. These agreements typically include payments for upfront signing or license fees, costreimbursements for development and manufacturing services, milestone payments, product sales, and royalties on licensee’s future product sales. We have entered into award contracts with U.S. Department of Defense, or the DoD, to support the development of DSUVIA. These contracts provide forthe reimbursement of qualified expenses for research and development activities. Revenue under these arrangements is recognized when the relatedqualified research expenses are incurred. We are entitled to reimbursement of overhead costs associated with the study costs under the DoD arrangements.We estimate this overhead rate by utilizing forecasted expenditures. Final reimbursable overhead expenses are dependent on direct labor and directreimbursable expenses throughout the life of each contract, which may increase or decrease based on actual expenses incurred. 59 In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under our agreements, we perform the following steps:(i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performanceobligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint onvariable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition ofrevenue when (or as) we satisfy each performance obligation. Performance Obligations A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC Topic 606. Ourperformance obligations include commercialization license rights, development services, services associated with the regulatory approval process, jointsteering committee services, demo devices, manufacturing services, material rights for discounts on manufacturing services, and product supply. We have optional additional items in contracts, which are considered marketing offers and are accounted for as separate contracts when the customerelects such options. Arrangements that include a promise for future commercial product supply and optional research and development services at thecustomer’s or our discretion are generally considered as options. We assess if these options provide a material right to the licensee and if so, such materialrights are accounted for as separate performance obligations. If we are entitled to additional payments when the customer exercises these options, anyadditional payments are recorded in revenue when the customer obtains control of the goods or services. Transaction Price We have both fixed and variable consideration. Non-refundable upfront fees and product supply selling prices are considered fixed, while milestonepayments are identified as variable consideration when determining the transaction price. Funding of research and development activities is consideredvariable until such costs are reimbursed at which point they are considered fixed. We allocate the total transaction price to each performance obligationbased on the relative estimated standalone selling prices of the promised goods or services for each performance obligation. At the inception of each arrangement that includes milestone payments, we evaluate whether the milestones are considered probable of being achievedand estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversalwould not occur, the value of the associated milestone (such as a regulatory submission by us) is included in the transaction price. Milestone paymentsthat are not within our control, such as approvals from regulators, are not considered probable of being achieved until those approvals are received. For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be thepredominant item to which the royalties relate, we recognize revenue at the later of (a) when the related sales occur, or (b) when the performanceobligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). Allocation of Consideration As part of the accounting for these arrangements, we must develop assumptions that require judgment to determine the stand-alone selling price of eachperformance obligation identified in the contract. Estimated selling prices for license rights and material rights for discounts on manufacturing servicesare calculated using an income approach model and can include the following key assumptions: the development timeline, sales forecasts, costs ofproduct sales, commercialization expenses, discount rate, the time which the manufacturing services are expected to be performed, and probabilities oftechnical and regulatory success. For all other performance obligations, we use a cost-plus margin approach. Timing of Recognition Significant management judgment is required to determine the level of effort required under an arrangement and the period over which we expect tocomplete our performance obligations under the arrangement. We estimate the performance period or measure of progress at the inception of thearrangement and re-evaluate it each reporting period. This re-evaluation may shorten or lengthen the period over which revenue is recognized. Changes tothese estimates are recorded on a cumulative catch-up basis. If we cannot reasonably estimate when our performance obligations either are completed orbecome inconsequential, then revenue recognition is deferred until we can reasonably make such estimates. Revenue is then recognized over theremaining estimated period of performance using the cumulative catch-up method. Revenue is recognized for products at a point in time when control ofthe product is transferred to the customer in an amount that reflects the consideration we expect to be entitled to in exchange for those product sales,which is typically once the product physically arrives at the customer, and for licenses of functional intellectual property at the point in time the customercan use and benefit from the license. For performance obligations that are services, revenue is recognized over time proportionate to the costs that we haveincurred to perform the services using the cost-to-cost input method. 60 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 and inventoryin excess of expected requirements. We periodically evaluate the carrying value of inventory on hand for potential excess amount over demand using thesame lower of cost or market approach as that used to value the inventory. Because the predetermined, contractual transfer prices the Company isreceiving from Grünenthal are less than the direct costs of manufacturing, all Zalviso inventories are carried at net realizable value. Cost of Goods Sold Cost of goods sold for Zalviso shipped to Grünenthal includes the inventory costs of API, third-party contract manufacturing costs, packaging anddistribution costs, shipping, handling and storage costs, depreciation and costs of the employees involved with production. Research and Development Expenses We expense research and development expenses as incurred. Research and development expenses consist primarily of direct and research-relatedallocated overhead costs such as facilities costs, salaries and related personnel costs, and material and supply costs. In addition, research and developmentexpenses include costs related to clinical trials to validate our testing processes and procedures and related overhead expenses. Expenses resulting fromclinical trials are recorded when incurred based in part on factors such as estimates of work performed, patient enrollment, progress of patient studies andother events. We make good faith estimates that we believe to be accurate, but the actual costs and timing of clinical trials are highly uncertain, subject torisks and may change depending upon a number of factors, including our clinical development plan. Share-Based Compensation We measure and recognize compensation expense for all share-based payment awards made to our employees and directors, including employee stockoptions and employee stock purchases related to the Employee Share Purchase Plan, or ESPP, on estimated fair values. The fair value of equity-basedawards is amortized over the vesting period of the award using a straight-line method. 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 year ended December 31, 2016, were primarilydetermined using the simplified method in accordance with guidance provided by the SEC. Such method was utilized as we did not believe our historicaloption exercise experience, which was limited, provided a reasonable basis upon which to estimate expected term. During this period, volatility wasderived from historical volatilities of several public companies within our industry that were deemed to be comparable to our business because we hadinsufficient 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 regard to expected term and volatility, and as a result,began using our own historical option exercise experience and the volatility of our own common stock as the basis for these assumptions. The risk-freerate 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 year endedDecember 31, 2016, we estimated forfeitures at the time of grant and revised those estimates in subsequent periods if actual forfeitures differed from thoseestimates. Effective January 1, 2017, we adopted ASU 2016-09 and elected to recognize forfeitures when they occur using a modified retrospectiveapproach, 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 effective interest method over the life of the arrangement. Inorder to determine the amortization of the liability, we are required to estimate the total amount of future royalty and milestone payments to be receivedby ARPI LLC and paid to PDL, up to a capped amount of $195.0 million, over the life of the arrangement. The aggregate future estimated royalty andmilestone payments (subject to the capped amount), less the $61.2 million of net proceeds we received will be recorded as interest expense over the life ofthe liability. Consequently, we impute interest on the unamortized portion of the liability and record interest expense related to the Royalty Monetizationaccordingly. 61 There are a number of factors that could materially affect the amount and timing of royalty payments from Zalviso in Europe, most of which are not withinour control. Such factors include, but are not limited to, the success of Grünenthal’s sales and promotion of Zalviso, changing standards of care, theintroduction of competing products, manufacturing or other delays, intellectual property matters, adverse events that result in governmental healthauthority imposed restrictions on the use of Zalviso, significant changes in foreign exchange rates as the royalties remitted to ARPI are made in U.S.dollars (USD) while significant portions of the underlying European sales of Zalviso, as well as the royalty payments remitted by Grünenthal to ARPI onsuch sales, are made in currencies other than USD, and other events or circumstances that could result in reduced royalty payments from European sales ofZalviso, all of which would result in a reduction of non-cash royalty revenues and the non-cash interest expense over the life of the Royalty Monetization.Conversely, if sales of Zalviso in Europe are more than expected, the non-cash royalty revenues and the non-cash interest expense we record would begreater over the term of the Royalty Monetization. We periodically assess the expected royalty and milestone payments using a combination of historical results, internal projections and forecasts fromexternal sources. To the extent such payments are greater or less than our initial estimates or the timing of such payments is materially different than ouroriginal estimates, 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 theRoyalty Monetization. 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 commerciallaunch of DSUVIA, our research and development efforts and variations in the level of expenditures related to commercial launch and development effortsduring any given period. Results of operations for any period may be unrelated to results of operations for any other period. In addition, historical resultsshould not be viewed as indicative of future operating results. We are subject to risks common to companies in our industry and at our stage ofdevelopment, including risks inherent in our commercialization of DSUVIA, research and development efforts, reliance upon our collaborator,enforcement of our patent and proprietary rights, need for future capital, competition and uncertainty of clinical trial results or regulatory approvals orclearances. To obtain regulatory approval for Zalviso in the United States, we have conducted preclinical tests and clinical trials, and we will need todemonstrate the efficacy and safety of Zalviso to the FDA. To commercialize DSUVIA, and Zalviso, if approved, we must enter into manufacturing,distribution and marketing arrangements, as well as obtain market acceptance for our products. Years Ended December 31, 2018, 2017 and 2016 Revenue In September 2015, the EC granted marketing approval for Zalviso to our commercial partner, Grünenthal, and Grünenthal commercially launchedZalviso in Europe, with the first commercial sale occurring in April 2016. We estimate and recognize royalty revenue and non-cash royalty revenue on aquarterly basis. Adjustments to estimated revenue are recognized in the subsequent quarter based on actual revenue earned per the royalty reports receivedfrom Grünenthal. Revenue during the year ended December 31, 2018, was $2.1 million, including $1.3 million recognized under our Amended Agreements withGrünenthal. In addition, we recognized $0.8 million in revenue for services performed under the DoD Contract. Revenue during the year ended December 31, 2017, was $8.0 million, including $7.1 million recognized under our Amended Agreements 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 Agreements withGrünenthal. In addition, we recognized $10.9 million in revenue for services performed under the DoD Contract. 62 Collaboration Agreement Revenue Below is a summary of revenue recognized under the Amended Agreements during the years ended December 31, 2018, 2017 and 2016 (in thousands): Years Ended December 31, 2018 2017 2016 Product sales $825 $6,673 $5,742 Joint steering committee, research and development services 103 269 688 Non-cash royalty revenue related to Royalty Monetization (SeeNote 9) 289 151 7 Royalty revenue 96 50 3 Total $1,313 $7,143 $6,440 We recognized $1.3 million and $7.1 million in revenue under the Amended Agreements for the years ended December 31, 2018 and 2017, respectively,consisting primarily of product sales revenue. The decrease in collaboration agreement revenue for the year ended December 31, 2018, as compared to theyear ended December 31, 2017, was primarily the result of Grünenthal working down its existing inventories. While Grünenthal experienced slightlyincreased sales growth for Zalviso in fiscal year 2018, this trend did not closely align with the timing of our product sales revenue in 2018 as Grünenthalcontinued to work down its existing inventories. In 2019, we expect our collaboration agreement revenue related to product sales to increase slightly asGrünenthal’s existing inventories decrease and face expiration such that their order quantities begin to increase modestly. In addition, under the RoyaltyMonetization, we sold a portion of the expected royalty stream and commercial milestones from the European sales of Zalviso by Grünenthal to PDL. As aresult, collaboration agreement revenue is not expected to have a significant impact on our cash flows in the near-term since a significant portion of ourEuropean Zalviso royalties and milestones were already monetized with PDL in 2015. We anticipate that royalty revenues and non-cash royalty revenuesfrom European sales of Zalviso in 2019 will be minimal. The first commercial sale of Zalviso occurred in April 2016, and in the year ended December 31, 2016, we recognized $6.4 million in revenue under theAmended Agreements, consisting primarily of product sales revenue. As of December 31, 2018, we had current and non-current portions of the deferred revenue balance under the Amended Agreements of $0.3 million and$3.2 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, 2018, 2017 and 2016, we recognized revenue of $0.8 million, $0.9 million and $10.9 million, respectively, forservices performed under the DoD Contract for DSUVIA. Under the terms of the DoD Contract, the DoD reimburses us for costs incurred for development,manufacturing, regulatory and clinical costs as outlined in the DoD Contract, including reimbursement for certain personnel and overhead expenses. Theperiod of performance under the DoD Contract ended on February 28, 2019. Years Ended December 31, $ Change2018 vs.2017 $ Change2017 vs.2016 % Change2018 vs.2017 % Change2017 vs.2016 2018 2017 2016 Contract and other revenue $838 $852 $10,917 $(14) $(10,065) (2)% (92)% 63 Cost of goods sold In October 2015, we initiated commercial production of Zalviso for Grünenthal. Under the Amended Agreements, we sell Zalviso to Grünenthal at apredetermined transfer price. We do not recover internal indirect costs as part of the transfer price. In addition, at current low volume levels, our directcosts are in excess of the transfer prices we are receiving from Grünenthal. Furthermore, the Amended Agreements include declining maximum transferprices over the term of the contract with Grünenthal. These transfer prices were agreed to assuming economies of scale that would occur with increasingproduction volumes (from the potential approval of Zalviso in the U.S. and an increase in demand in Europe) and corresponding decreases inmanufacturing costs. We do not have long-term supply agreements with our contract manufacturers and prices are subject to periodic changes. However,we continue to look for additional cost saving opportunities. For example, we are currently consolidating the production of some of the components ofZalviso which we expect will result in lower manufacturing costs. To date, we have not yet resubmitted the NDA for Zalviso and sales by Grünenthal inEurope have not been substantial. If we do not timely resubmit the NDA for Zalviso and then receive timely approval and are unable to successfullylaunch Zalviso in the U.S., or the volume of Grünenthal sales does not increase significantly, we will not achieve the manufacturing cost reductionsrequired in order to accommodate these declining transfer prices without a corresponding decrease in our gross margin. Years Ended December 31, $ Change2018 vs.2017 $ Change2017 vs.2016 % Change2018 vs.2017 % Change2017 vs.2016 2018 2017 2016 Costs of goods sold $3,976 $10,659 $12,315 $(6,683) $(1,656) (63)% (13)% 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 $0.9 million, $6.5 million and $6.4 million in the years ended December 31, 2018, 2017 and 2016,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 $3.1 million, $4.2 million and $5.9 million in the years ended December 31, 2018, 2017 and 2016, respectively. For the foreseeable future,we anticipate negative gross margins on Zalviso product delivered to Grünenthal. Research and Development Expenses The majority of our operating expenses to date have been for research and development activities related to Zalviso and DSUVIA. Research anddevelopment 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. While we completed the Phase 3 clinical development programs for DSUVIAand Zalviso in fiscal year 2017, we expect to incur future research and development expenditures to support the FDA regulatory review of the ZalvisoNDA, once it is resubmitted. 64 We track external development expenses on a program-by-program basis. Our development resources are shared among all of our programs. Compensationand benefits, facilities, depreciation, stock-based compensation, and development support services are not allocated specifically to projects and areconsidered research and development overhead. Below is a summary of our research and development expenses during the years ended December 31,2018, 2017 and 2016 (in thousands, except percentages): Years Ended December 31, $ Change2018 vs.2017 $ Change2017 vs.2016 % Change2018 vs.2017 % Change2017 vs.2016 2018 2017 2016 DSUVIA 2,613 4,031 $8,764 $(1,418) $(4,733) (35)% (54)%Zalviso 732 6,188 4,076 (5,456) 2,112 (88)% 52%Overhead 9,792 9,190 8,562 602 628 7% 7%Total research and development expenses $13,137 $19,409 $21,402 $(6,272) $(1,993) (32)% (9)% Research and development expenses during the year ended December 31, 2018, as compared to the year ended December 31, 2017, decreased by $6.3million predominantly due to a $5.5 million decrease in Zalviso-related expenses and a $1.4 million decrease in DSUVIA-related development spending,offset by a $0.6 million net increase in other research and development expenses. The decrease in Zalviso-related spending in 2018 as compared to 2017is primarily due to the completion of the Phase 3 clinical development program in 2017, while the decrease in DSUVIA-related spending in 2018 ascompared to 2017 is primarily due to a decrease in development-related expenses. The increase in other research and development expenses in 2018 ascompared to 2017 is primarily the result of increased personnel expenses as we prepared for the commercial launch of DSUVIA. 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. 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 allocated facility costs and professional fees forgeneral legal, audit and consulting services. We expect general and administrative expenses in the fiscal year 2019 to increase as compared to fiscal year2018 expenses, as we focus our efforts on supporting the commercialization of DSUVIA in the United States. Total general and administrative expenses for the years ended December 31, 2018, 2017 and 2016, were as follows (in thousands, except percentages): Years Ended December 31, $ Change2018 vs.2017 $ Change2017 vs.2016 % Change2018 vs.2017 % Change2017 vs.2016 2018 2017 2016 General and administrative expenses $20,765 $16,609 $15,597 $4,156 $1,012 25% 6% General and administrative expenses during the year ended December 31, 2018 increased by $4.2 million, as compared to the year ended December 31,2017, primarily due to increased personnel-related expenses in preparation for the commercial launch of DSUVIA. 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. 65 Other Expense Total other expense for the years ended December 31, 2018, 2017 and 2016, was as follows (in thousands, except percentages): Years Ended December 31, $ Change $ Change % Change % Change 2018 2017 2016 2018 vs.2017 2017 vs.2016 2018 vs.2017 2017 vs.2016 Interest expense $(2,217) $(3,316) $(2,770) $1,099 $(546) (33)% 20%Interest income and other income, net 1,138 510 918 628 (408) 123% (44)%Non-cash interest expense on liabilityrelated to sale of future royalties (10,341) (10,721) (9,382) 380 (1,339) (4)% 14%Total other expense $(11,420) $(13,527) $(11,234) $2,107 $(2,293) (16)% 20% 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, 2018 and 2017 pertains to interest on the 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. Interest expense for the year endedDecember 31, 2016 pertains to interest on the Amended and Restated Loan and Security Agreement, or the Original Loan Agreement, with HerculesTechnology II, L.P. and Hercules Capital, Inc., formerly known as Hercules Technology Growth Capital, Inc., together, the Lenders. On March 2, 2017, werefinanced the Original Loan Agreement in its entirety into a 36-month term loan with an additional six-month interest only period. The scheduledmaturity date is now March 2020. Refer to Note 8 “Long-Term Debt” for additional information. As a result of the lower principal balance in the yearended December 31, 2018 as compared to the year ended December 31, 2017, the amount of interest expense incurred decreased. As a result of the higherinterest rate in the year ended December 31, 2017 as compared to the year ended December 31, 2016, the amount of interest expense incurred increased.As of December 31, 2018, the accrued balance due to Hercules was $12.0 million. Interest income and other income, net, for the year ended December 31, 2018 primarily related to interest earned on our investments, while for the yearended December 31, 2017 it consisted primarily of the change in the fair value of our warrants, or PIPE warrants, which were issued in connection with theJune 2012 private placement of our common stock and expired in November 2017, and the change in the fair value of the contingent put option related tothe Amended Loan Agreement with Hercules. The change in interest income and other income, net, during the years ended December 31, 2017 and 2016, was primarily attributable to the change in thefair value of our PIPE warrants, 512,456 of which expired unexercised on November 30, 2017. Refer to Note 10 “Warrants” for additional information. 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 byARPI LLC and paid to PDL over the life of the arrangement. There are a number of factors that could materially affect the effective interest rate and weassess this estimate on a periodic basis. As a result, future interest rates could differ significantly and any such change in the effective interest rate will beadjusted prospectively. From inception through December 31, 2018, our effective annual interest rate was approximately 13.0%; however, currently theprospective rate is estimated to be approximately 7.0% as a result of lower projected European royalties from sales of Zalviso over the life of the liabilitybecause the product launch has been slower than originally expected. The effective interest rate for the years ended December 31, 2018, 2017 and 2016was 11.6%, 13.6% and 13.7%, respectively. We anticipate that we will incur approximately $7 million in non-cash interest expense related to the RoyaltyMonetization in the year ended December 31, 2019. 66 Provision (Benefit) for Income Taxes Total provision (benefit) for income taxes for the years ended December 31, 2018, 2017 and 2016 was as follows (in thousands, except percentages): Years Ended December 31, $ Change2018 vs.2017 $ Change2017 vs.2016 % Change2018 vs.2017 % Change2017 vs.2016 2018 2017 2016 Provision (benefit) for income taxes $2 $(701) $(34) $703 $(667 ) (100)% 1,962% 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. 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 2019 andmay incur significant losses and negative cash flows from operations in the future. We have funded our operations primarily through issuance of equitysecurities, borrowings, payments from our commercial partner, Grünenthal, monetization of certain future royalties and commercial sales milestones fromthe European sales of Zalviso by Grünenthal, and our contracts with the DoD. As of December 31, 2018, we had cash, cash equivalents and investments totaling $105.7 million compared to $60.5 million as of December 31, 2017.The increase was primarily due to multiple equity offerings completed during 2018. We anticipate that our existing capital resources will permit us tomeet our capital and operational requirements through at least the end of the first quarter of 2020. While we believe we have sufficient capital to meet ouroperational requirements through at least the end of the first quarter of 2020, our expectations may change depending on a number of factors includingour expenditures related to the United States commercial launch of DSUVIA, any changes or delays in the NDA resubmission of Zalviso and the FDAapproval process for Zalviso. Our existing capital resources likely will not be sufficient to fund our operations until such time as we may be able togenerate sufficient revenues to sustain our operations. Additional capital may not be available on terms acceptable to us, or at all. If adequate funds arenot available, or if the terms underlying potential funding sources are unfavorable, our business and our ability to commercialize DSUVIA or completedevelopment of Zalviso would be harmed. On November 14, 2018, we completed an underwritten public offering of 12,698,412 shares of common stock, at a price of $3.15 per share to the public.On November 12, 2018, the underwriters exercised their option in full and purchased an additional 1,904,761 shares at the public offering price of $3.15per share. The total gross proceeds from this offering of an aggregate 14,603,173 shares were approximately $46.0 million with net proceeds to us of $43.1million after deducting the underwriting discounts and commissions and other offering expenses payable by us. On July 16, 2018, we completed an underwritten public offering of 7,272,727 shares of common stock, at a price of $2.75 per share to the public. OnAugust 7, 2018, the underwriters exercised in full their option to purchase an additional 1,090,909 shares of common stock at the public offering price of$2.75 per share, less underwriting discounts and commissions. The total gross proceeds from this offering of an aggregate 8,363,636 shares wereapproximately $23.0 million with net proceeds to us of $21.7 million after deducting the underwriting discounts and commissions and other offeringexpenses payable by us. 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, 2018, we issued and sold an aggregate of 4.4 million shares ofcommon stock pursuant to the Sales Agreement, for which we received net proceeds of approximately $16.8 million, after deducting commissions, feesand expenses of $0.4 million. During the year ended December 31, 2017, we issued and sold an aggregate of 5.4 million shares of common stock pursuantto the Sales Agreement, for which we received net proceeds of approximately $15.7 million, after deducting commissions, fees and expenses of $0.5million. 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 Agreements with Grünenthal, as well as 80% of the first four commercial milestones worth $35.6 million (or 80% of $44.5million), subject to the capped amount of $195.0 million. We are entitled to receive all remaining amounts under the Amended Agreements whichincludes 25% of the European royalties, 20% of the first four commercial milestones, 100% of the remaining commercial milestones and all developmentmilestones of $43.5 million, including the $15.0 million payment for the EC approval of the MAA for Zalviso, which we received in the fourth quarter of2015. The total liability related to sale of future royalties to PDL as of December 31, 2018 was $93.7 million. 67 Under the terms of the Amended Agreements with Grünenthal, we received an upfront cash payment of $30.0 million, a milestone payment of $5.0 millionrelated to the MAA submission in the third quarter of 2014 and an additional $15.0 million milestone payment related to the EC approval of the MAA forZalviso in September 2015. In addition, under the terms of the Amended Agreements, 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 level of sales achieved, on net sales of Zalviso in the Territory. A portion of the tiered royalty payment, exclusive of the supply andtrademark fee payments, will be paid to PDL in connection with the Royalty Monetization, as discussed above. Refer to Note 7 “CollaborationAgreement” and Note 9 “Liability Related to Sale of Future Royalties” for additional information. 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 8“Long-Term Debt” for additional information. As of December 31, 2018, the accrued balance due under the Amended Loan Agreement was $12.0 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, 2018 2017 2016 (in thousands) Net cash used in operating activities $(29,075) $(29,765) $(29,395)Net cash (used in) provided by investing activities (10,877) (9,970) 1,809 Net cash provided by (used in) financing activities 75,025 12,327 (26) Cash Flows from Operating Activities The primary use of cash for our operating activities during these periods was to fund the development and commercial readiness activities for ourapproved product, DSUVIA, and our product candidate, Zalviso, in addition to the support of Grünenthal’s European sales of Zalviso. Our cash used foroperating activities also reflected changes in our working capital, net of adjustments for non-cash charges, such as depreciation and amortization of ourfixed assets, stock-based compensation, non-cash interest expense related to the sale of future royalties, interest expense related to our debt financings andthe contingent put option liability. Cash used in operating activities of $29.1 million during the year ended December 31, 2018, reflected a net loss of $47.1 million, partially offset byaggregate non-cash charges of $16.2 million. Non-cash charges included $10.3 million in non-cash interest expense on the liability related to the royaltymonetization and $5.2 million for stock-based compensation expense. The net change in our operating assets and liabilities included a decrease inaccounts receivable of $1.5 million. 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 by anincrease in tax receivable of $0.7 million, related to the benefit for income taxes recorded in the year ended December 31, 2017. 68 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 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, 2018, cash used in investing activities of $10.9 million was the net result of $20.5 million in proceeds from maturityof investments, offset by $30.6 million for purchases of investments and purchases of property and equipment of $0.8 million. 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. Cash Flows from Financing Activities Cash flows from financing activities primarily reflect proceeds from the sale of our securities and payments made on debt financings. During the year ended December 31, 2018, cash provided by financing activities of $75.0 million was primarily due to $64.7 million in net proceeds fromour underwritten public offerings plus $16.8 million in net proceeds received under the Sales Agreement. In addition, we used $7.7 million during theyear ended December 31, 2018 to repay our long-term debt with Hercules. During the year ended December 31, 2017, cash provided by financing activities of $12.3 million was primarily due to $15.7 million in net proceeds fromthe sale of our common stock under the 2016 ATM Agreement, offset by $3.5 million in payments of long-term debt under the 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. Operating Capital and Capital Expenditure Requirements Our rate of cash usage may increase in the future, in particular to support activities undertaken to support the commercialization of DSUVIA, resubmit theZalviso NDA to the FDA, and support the anticipated FDA review of the resubmitted ZALVISO NDA. In the short-term, we anticipate that our existingcapital resources will permit us to meet our capital and operational requirements through at least the end of the first quarter of 2020. Our current operatingplan includes anticipated activities required to resubmit the NDA for Zalviso, to support the FDA review of the resubmitted Zalviso NDA, onceresubmitted, and expenditures related to the launch of DSUVIA in the United States. These assumptions may change as a result of many factors. We willcontinue to evaluate the work necessary to successfully launch DSUVIA and gain approval of Zalviso in the United States and intend to update our cashforecasts accordingly. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. Additional capital may not be available on termsacceptable to us, or at all. If adequate funds are not available, or if the terms underlying potential funding sources are unfavorable, our business and ourability to commercialize DSUVIA and complete development of Zalviso would be harmed. 69 Our future capital requirements may vary materially from our expectations based on numerous factors, including, but not limited to, the following: •expenditures related to the launch of DSUVIA and potential commercialization of Zalviso; •future manufacturing, selling and marketing costs related to DSUVIA and Zalviso, including our contractual obligations to Grünenthal forZalviso; •the outcome, timing and cost of the regulatory resubmission of Zalviso and any approval for Zalviso; •the initiation, progress, timing and completion of any post-approval clinical trials for DSUVIA, or Zalviso, if approved; •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 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 DSUVIA and Zalviso; •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: •successfully commercialize any products we market, including DSUVIA in the United States, and Zalviso, if approved in the United States; •manufacture and market our products, and; •conduct research and development programs. In the long-term, our existing capital resources likely will not be sufficient to fund our operations until such time as we may be able to generate sufficientrevenues to sustain our operations. To the extent that our capital resources are insufficient to meet our future capital requirements, we will have to raiseadditional funds through the sale of our equity securities, monetization of current and future assets, issuance of debt or debt-like securities or fromdevelopment and licensing arrangements to continue our development programs. We may be unable to raise such additional capital on favorable terms, orat all. If we raise additional capital by selling our equity or convertible debt securities, the issuance of such securities could result in dilution of ourshareholders’ equity positions. If adequate funds are not available, we may have to: •significantly curtail or put on hold commercialization efforts for DSUVIA or development efforts for Zalviso or other operations; •obtain funds through entering into collaboration agreements on unattractive terms; and/or •delay, postpone or terminate any planned clinical trials. 70 Contractual Obligations The following table summarizes our long-term contractual obligations at December 31, 2018: Payments Due by Period Contractual obligations Total 2019 2020–2022 2023–2024 Thereafter (in thousands) Operating leases(1) $6,650 $1,230 $3,918 $1,502 $— Purchase obligations(2) 634 34 600 — — Principal payments on long-term debt(3) 12,266 8,611 3,655 — — Interest payments on long-term debt 872 826 46 — — Repayment of liability related to the sale of futureroyalties(4) 156,470 392 10,882 35,047 110,149 Total contractual obligations $176,892 $11,093 $19,101 $36,549 $110,149 (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 Loan Agreement dated as of March 2, 2017 includes a $1.3 million end of term payment due on maturity of the loan, in March 2020,which is included in the table above. See Note 8 “Long-Term Debt” for additional information.(4) Liability related to sale of future royalties represents the carrying value at the latest balance sheet date of payments we would make to PDL underthe Royalty Monetization, based on estimated future European sales of Zalviso. Actual payments may be significantly higher or lower based on actualfuture European sales of Zalviso. For further discussion regarding the liability related to the sale of future royalties, see Note 9 “Liability Related to Saleof Future Royalties”. 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. 71 On January 2, 2019, we entered into an agreement to sublease 12,106 square feet of the Expansion Space commencing on February 16, 2019 and expiringon January 31, 2024. Rent installments from the sublessee are approximately $48,000 per month (subject to agreed nominal increases). Purchase obligations Patheon In January 2013, we entered into a Manufacturing Services Agreement, or the Services Agreement, with Patheon Pharmaceuticals, Inc., or Patheon, relatingto the manufacture of sufentanil sublingual tablets, for use with Zalviso. On August 22, 2017, we amended the Services Agreement with Patheon effectiveas of August 4, 2017, or the Amended Services Agreement, to include the manufacture of sufentanil sublingual tablets for use with DSUVIA. 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, Canadaand Mexico from Patheon. Also, under the terms of the Amended Services Agreement, Patheon will manufacture, supply, and provide certain validationand stability services for DSUVIA intended for marketing and sale in the United States, Canada and Mexico, and their respective territories, the EuropeanUnion, Switzerland, Liechtenstein, Norway, Iceland and Australia. The term of the Amended Services Agreement has been extended until December 31,2019 and will automatically renew thereafter for periods of two years, unless terminated by either party upon eighteen months’ prior written notice. We also entered into a Capital Expenditure and Equipment Agreement, or the Capital Agreement, with Patheon, as amended in January 2014, or theAmended Capital Agreement. The Amended Capital Agreement requires that we pay a maximum “overhead fee” of $200,000 annually during the term ofthe Services Agreement, which amount may be reduced to $0 based on the amount of annual revenues earned by Patheon under the Services Agreementand pre-existing development agreements with Patheon. No fee was due in 2016, 2017 or 2018 based on the amount of revenues earned by Patheon fromAcelRx in 2015, 2016, and 2017, respectively. Payment of $34,000 will be due to Patheon in 2019, as we did not meet the annual revenue threshold in2018. The potential minimum purchase obligation commitment in each of 2020, 2021 and 2022 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 18, 2015, concurrently with the closing of the Royalty Monetization, we entered into a Consent and Amendment No. 2, orAmendment No. 2, to the Original Loan Agreement with the Lenders. Amendment No. 2 included an interest only period from October 1, 2015 throughMarch 31, 2016, with the 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 periodfrom October 1, 2016 to April 1, 2017. On March 2, 2017, we refinanced the Original Loan Agreement in its entirety into a 36-month term note with anadditional six month interest only period, which is referred to as the Amended Loan Agreement. The scheduled maturity date is March 2020. Refer to Note8 “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 Agreements 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. Refer to Note 9 “Liability Related to Sale of Future Royalties” foradditional information. 72 Off-Balance Sheet Arrangements Through December 31, 2018, 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, 2018, 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. As of December31, 2018, we had cash, cash equivalents and short-term investments of $105.7 million. In general, money market funds are not subject to market riskbecause the interest paid on such funds fluctuates with the prevailing interest rate, although some of the securities that we invest in may be subject tomarket risk. This means that a change in prevailing interest rates may cause the value of the investment to fluctuate. For example, if we purchase a securitythat was issued with a fixed interest rate and the prevailing interest rate later rises, the value of our investment may decline. However, because ourinvestments are primarily short-term in duration and our holdings in U.S. government bonds and corporate debt securities mature prior to our expectedneed for liquidity, we believe that our exposure to interest rate risk is not significant and, as a consequence, a 1% movement in market interest rates wouldnot have a significant impact on the total value of our portfolio. We actively monitor changes in interest rates. Domestic and international equity markets have experienced and may continue to experience heightened volatility and turmoil based on domestic andinternational economic conditions and concerns. In the event these economic conditions and concerns continue, and the markets continue to remainvolatile, our results of operations could be adversely affected by those factors in many ways, including making it more difficult for us to raise funds ifnecessary and our stock price may further decline. In addition, we maintain significant amounts of cash and cash equivalents that are not federally insured.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 2019 Cash Bonus Plan On March 6, 2019, the Board of Directors of the Company approved a 2019 Cash Bonus Plan the (“Plan”) for the Company’s employees for the 2019fiscal year, under which the Company’s named executive officers are participants. A summary of the Plan is filed as Exhibit 10.21 to this Annual Reportand incorporated by reference herein. 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 officer andprincipal financial officer concluded that, subject to the limitations described below, our disclosure controls and procedures were effective as ofDecember 31, 2018. 73 Management’s Annual Report on Internal Control over Financial Reporting The following report is provided by management in respect of AcelRx Pharmaceuticals’ internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act): 1. AcelRx Pharmaceuticals’ management is responsible for establishing and maintaining adequate internal control over financial reporting. 2. AcelRx Pharmaceuticals management has used the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, framework(2013 framework) to evaluate the effectiveness of internal control over financial reporting. Management believes that the COSO framework is asuitable framework for its evaluation of financial reporting because it is free from bias, permits reasonably consistent qualitative and quantitativemeasurements of AcelRx Pharmaceuticals’ internal control over financial reporting, is sufficiently complete so that those relevant factors that wouldalter a conclusion about the effectiveness of AcelRx Pharmaceuticals’ internal control over financial reporting are not omitted and is relevant to anevaluation of internal control over financial reporting. 3. Management has assessed the effectiveness of AcelRx Pharmaceuticals’ internal control over financial reporting as of December 31, 2018 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 endedDecember 31, 2018. 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. 74 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, 2018, 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 31,2018, 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, 2018 and 2017, the related consolidated statements of comprehensive loss, stockholders’ equity(deficit), and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and our report dated March 7, 2019expressed 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. 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 7, 2019 Item 9B. Other Information None. 75 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 2019 Annual Meeting of Stockholders. The information required by Section 16(a) is incorporated by reference from the information underthe caption "Security Ownership of Certain Beneficial Owners and Management—Section 16(a) Beneficial Ownership Reporting Compliance" in theProxy Statement. The Company has adopted a code of ethics that applies to its Chief Executive Officer, Chief Financial Officer, and to all of its other officers, directors,employees and agents. The code of ethics is available at the Corporate Governance section of the Investor Relations page on the Company's website atwww.acelrx.com. The Company intends to disclose future amendments to, or waivers from, certain provisions of its code of ethics on the above websitewithin five business days following the date of such amendment or waiver. Item 11. Executive Compensation The information required by this item is incorporated by reference from the information under the caption "Board of Directors Meetings and Committees—Compensation Committee Interlocks and Insider Participation," "Executive Compensation" and "Executive Compensation—Compensation CommitteeReport" in the Company's Proxy Statement referred to in Item 10 above. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Equity Compensation Plan Information The 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, currentlyin effect. 8-K 001-35068 3.1 2/28/2011 3.2 Amended and Restated Bylaws of the Registrant, currently in effect. S-1 333-170594 3.4 1/7/2011 4.1 Reference is made to Exhibits 3.1 through 3.2. 4.2 Specimen Common Stock Certificate of the Registrant. S-1 333-170594 4.2 1/31/2011 76 Incorporation By ReferenceExhibitNumber Exhibit Description Form SECFile No. Exhibit Filing Date 10.1+ Form of Indemnification Agreement between the Registrant and each of itsdirectors and executive officers. S-1 333-170594 10.1 1/7/2011 10.2+ 2006 Stock Plan, as amended. S-1 333-170594 10.2 11/12/2010 10.3+ Forms of Notice of Grant of Stock Option, Stock Option Agreement and StockOption Exercise Notice under 2006 Stock Plan. 10-K 001-35068 10.3 3/30/2011 10.4+ 2011 Equity Incentive Plan. S-8 333-172409 99.3 2/24/2011 10.5+ Forms of Stock Option Grant Notice, Notice of Exercise and Option Agreementunder 2011 Equity Incentive Plan. 10-K 001-35068 10.5 3/30/2011 10.6+ Forms of Restricted Stock Unit Grant Notice and Restricted Stock UnitAgreement under 2011 Equity Incentive Plan. 10-K 001-35068 10.6 3/30/2011 10.7+ 2011 Employee Stock Purchase Plan. S-8 333-172409 99.6 2/24/2011 10.8 Lease between Metropolitan Life Insurance Company and the Registrant, datedDecember 15, 2011. 10-K 001-35068 10.9 3/23/2012 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 77 Incorporation By ReferenceExhibitNumber Exhibit Description Form SECFile No. Exhibit Filing Date 10.11+ Amended and Restated Offer Letter between the Registrant and Larry Hamel,dated December 31, 2010. S-1 333-170594 10.14 1/7/2011 10.12+ 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 10.13+ Amended and Restated Offer Letter between the Registrant and Pamela Palmer,dated December 29, 2010. S-1 333-170594 10.16 1/7/2011 10.14+ Offer Letter between the Registrant and Vincent J. Angotti, effective as of March6, 2017. 10-Q 001-35068 10.4 5/8/2017 10.15+ Separation Agreement and General Release of Claims between Timothy E.Morris and the Registrant, effective as of June 5, 2017. 10-Q 001-35068 10.1 8/2/2017 10.16+ Offer Letter between the Registrant and Raffi Asadorian, dated July 18, 2017. 8-K 001-35068 10.1 7/19/2017 10.17+ Non-Employee Director Compensation Policy. 10-K 001-35068 10.20 3/9/2018 10.18+ 2019 Cash Bonus Plan Summary. 10.19+ Amended and Restated Severance Benefit Plan effective as of February 7, 2017. 8-K 001-35068 10.2 2/9/2017 10.20 Supply Agreement between the Registrant and Mallinckrodt LLC, effective as ofMay 31, 2013. 10-Q 001-35068 10.1 11/5/2013 10.21# Manufacture and Supply Agreement between the Registrant and GrünenthalGmbH, effective as of December 16, 2013. 10-K 001-35068 10.28 3/17/2014 10.22# Collaboration and License Agreement between the Registrant and GrünenthalGmbH, effective as of December 16, 2013. 10-K 001-35068 10.29 3/17/2014 10.23# 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 10.24# 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 10.25 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 10.26 Manufacturing Services Agreement between Registrant and PatheonPharmaceuticals, Inc., dated as of January 18, 2013 10-Q 001-35068 10.1 5/8/2013 10.27 Amended and Restated Capital Expenditure Agreement between Registrant andPatheon Pharmaceuticals, Inc., dated as of January 18, 2013 10-Q 001-35068 10.2 5/8/2013 10.28 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 78 Incorporation By ReferenceExhibitNumber Exhibit Description Form SECFile No. Exhibit Filing Date10.29# Amendment #1 to Manufacturing Services Agreement between the Registrantand Patheon Pharmaceuticals, Inc., effective as of January 19, 2016. 10-Q 001-35068 10.6 5/2/2016 10.30# Amendment #2 to Manufacturing Services Agreement between the Registrantand Patheon Pharmaceuticals, Inc., effective as of August 4, 2017. 10-Q 001-35068 10.1 11/9/2017 10.31# 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 10.32 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 10.33 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 10.34 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 10.35# 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 10.36 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 10.37 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 10.38# Purchase and Sale Agreement between Registrant and ARPI LLC, dated as ofSeptember 18, 2015. 10-Q 001-35068 10.6 11/3/2015 10.39# 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 10.40 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 10.41 Amended and Restated Loan and Security Agreement among the Registrant,Hercules Technology II, L.P., Hercules Capital Funding Trust 2014-1 andHercules Technology II, L.P., dated as of March 2, 2017. 10-K 001-35068 10.43 3/3/2017 10.42+ Offer letter dated March 16, 2018 with John Saia. 8-K 001-35068 10.1 3/27/2018 10.43+ Form of Performance-Based Stock Option Award under 2011 Equity IncentivePlan. 10-Q 001-35068 10.2 5/10/2018 10.44 Sublease by and between Registrant and Genomic Health, Inc. dated as ofNovember 30, 2018. 21.2 Subsidiaries of the Registrant. 79 Incorporation By ReferenceExhibitNumber Exhibit Description Form SECFile No. Exhibit Filing Date23.1 Consent of OUM & Co. LLP, Independent Registered Public Accounting Firm. 24.1 Power of Attorney (included in signature page). 31.1 Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended. 31.2 Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended. 32.1 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document +Indicates management contract or compensatory plan.#Material in the exhibit marked with a “ ” has been omitted pursuant to a request for confidential treatment filed with the SEC. Omitted portions havebeen 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 pursuant toSection 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. 80 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized. Date: March 7, 2019AcelRx 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 Title Date /s/ Vincent J. Angotti Chief Executive Officer and Director March 7, 2019Vincent J. Angotti (Principal Executive Officer) /s/ Raffi M. Asadorian Chief Financial Officer March 7, 2019Raffi M. Asadorian (Principal Financial and Accounting Officer) /s/ Adrian Adams Chairman March 7, 2019Adrian Adams /s/ Pamela P. Palmer, M.D., Ph.D. Director March 7, 2019Pamela P. Palmer, M.D., Ph.D. /s/ Mark G. Edwards Director March 7, 2019Mark G. Edwards /s/ Stephen J. Hoffman, Ph.D., M.D. Director March 7, 2019Stephen J. Hoffman, Ph.D., M.D. /s/ Richard Afable, M.D. Director March 7, 2019Richard Afable, M.D. /s/ Howard B. Rosen Director March 7, 2019Howard B. Rosen /s/ Mark Wan Director March 7, 2019Mark Wan 81 ACELRX PHARMACEUTICALS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Reports of Independent Registered Public Accounting FirmsF-2Consolidated Balance Sheets at December 31, 2018 and 2017F-3Consolidated Statements of Comprehensive Loss for each of the three years in the period ended December 31, 2018F-4Consolidated Statements of Stockholders’ Equity (Deficit) for each of the three years in the period ended December 31, 2018F-5Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2018F-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, 2018 and 2017, therelated consolidated statements of comprehensive loss, stockholders’ equity (deficit), and cash flows for each of the three years in the period endedDecember 31, 2018, 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, 2018 and 2017, and the results of their operationsand their cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in theUnited 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, 2018, 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 7, 2019 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 made bymanagement, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basisfor our opinion. /s/ OUM & CO. LLP San Francisco, CaliforniaMarch 7, 2019We have served as the Company's auditor since 2015. F-2 AcelRx Pharmaceuticals, Inc. Consolidated Balance Sheets(in thousands, except share data) December 31,2018 December 31,2017 Assets Current Assets: Cash and cash equivalents $87,975 $52,902 Short-term investments 17,740 7,567 Accounts receivable, net 49 1,533 Tax receivable 352 — Inventories 854 956 Prepaid expenses and other current assets 1,024 455 Total current assets 107,994 63,413 Property and equipment, net 11,483 11,051 Restricted cash 178 178 Long-term tax receivable 351 703 Other assets 527 207 Total Assets $120,533 $75,552 Liabilities and Stockholders’ Equity (Deficit) Current Liabilities: Accounts payable $2,070 $1,424 Accrued liabilities 4,540 3,543 Long-term debt, current portion 8,611 7,727 Deferred revenue, current portion 315 362 Liability related to the sale of future royalties, current portion 392 604 Total current liabilities 15,928 13,660 Deferred rent, net of current portion 416 378 Long-term debt, net of current portion 3,380 11,369 Deferred revenue, net of current portion 3,148 3,463 Liability related to the sale of future royalties, net of current portion 93,287 82,984 Contingent put option liability 121 207 Total liabilities 116,280 112,061 Commitments and Contingencies Stockholders’ Equity (Deficit): Common stock, $0.001 par value—100,000,000 shares authorized as of December 31, 2018 andDecember 31, 2017; 78,757,930 and 50,899,154 shares issued and outstanding as of December 31,2018 and December 31, 2017 78 51 Additional paid-in capital 349,194 261,310 Accumulated deficit (345,019) (297,870)Total stockholders’ equity (deficit) 4,253 (36,509)Total Liabilities and Stockholders’ Equity (Deficit) $120,533 $75,552 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, 2018 2017 2016 Revenue: Collaboration agreement $1,313 $7,143 $6,440 Contract and other 838 852 10,917 Total revenue 2,151 7,995 17,357 Operating costs and expenses: Cost of goods sold 3,976 10,659 12,315 Research and development 13,137 19,409 21,402 General and administrative 20,765 16,609 15,597 Total operating costs and expenses 37,878 46,677 49,314 Loss from operations (35,727) (38,682) (31,957)Other expense: Interest expense (2,217) (3,316) (2,770)Interest income and other income, net 1,138 510 918 Non-cash interest expense on liability related to sale of future royalties (10,341) (10,721) (9,382)Total other expense (11,420) (13,527) (11,234)Net loss before income taxes (47,147) (52,209) (43,191)Provision (benefit) for income taxes 2 (701) (34)Net loss (47,149) (51,508) (43,157)Other comprehensive (loss) income: Unrealized (losses) gains on available for sale securities — (3) 4 Comprehensive loss $(47,149) $(51,511) $(43,153) Net loss per share of common stock, basic and diluted $(0.81) $(1.10) $(0.95) Shares used in computing net loss per share of common stock, basic and diluted –seeNote 14 58,408,548 46,883,535 45,313,118 See notes to consolidated financial statements. F-4 AcelRx Pharmaceuticals, Inc. Consolidated Statements of Stockholders’ Equity (Deficit)(in thousands, except share data) Common Stock AdditionalPaid-inCapital AccumulatedDeficit OtherComprehensiveIncome (loss) TotalStockholders’Equity(Deficit) Shares Amount Balance as of December 31, 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)Stock-based compensation — — 5,168 — — 5,168 Net proceeds from issuance of commonstock in connection with equityfinancings 27,364,301 27 81,498 — — 81,525 Issuance of common stock uponexercise of stock options 135,385 — 401 — — 401 Issuance of common stock uponexercise of warrants 176,730 — 542 — — 542 Issuance of common stock upon ESPPpurchase 182,360 — 275 — — 275 Net loss — — — (47,149) — (47,149) Balance as of December 31, 2018 78,757,930 $78 $349,194 $(345,019) $— $4,253 See notes to consolidated financial statements. F-5 AcelRx Pharmaceuticals, Inc. Consolidated Statements of Cash Flows(in thousands) Year Ended December 31, 2018 2017 2016 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(47,149) $(51,508) $(43,157)Adjustments to reconcile net loss to net cash used in operating activities: Non-cash royalty revenue related to royalty monetization (289) (151) (7)Non-cash interest expense on liability related to royalty monetization 10,341 10,721 9,382 Depreciation and amortization 575 1,744 2,052 Non-cash interest expense related to debt financing 613 1,265 877 Stock-based compensation 5,168 4,294 4,479 Revaluation of put option and PIPE warrant liabilities (86) (205) (767)Loss on disposal and impairment of property and equipment — 12 — Inventory impairment charge — 369 — Other (115) (5) 17 Changes in operating assets and liabilities: Accounts receivable 1,484 4,300 (2,547)Inventories 102 920 (1,688)Prepaid expenses and other assets (850) 175 975 Tax receivable — (703) — Accounts payable 458 309 (437)Accrued liabilities 922 (1,301) 639 Deferred revenue (362) (361) 989 Deferred rent 113 360 (202)Net cash used in operating activities (29,075) (29,765) (29,395)CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (819) (2,405) (3,720)Purchase of investments (30,558) (7,565) (996)Proceeds from maturities of investments 20,500 — 6,525 Net cash (used in) provided by investing activities (10,877) (9,970) 1,809 CASH FLOWS FROM FINANCING ACTIVITIES: Payment of long-term debt (7,718) (3,514) — Payment of debt modification transaction costs — (204) (205)Net proceeds from issuance of common stock in connection with equityfinancings 81,525 15,694 — Net proceeds from issuance of common stock through equity plans 1,218 351 179 Net cash provided by (used in) financing activities 75,025 12,327 (26)NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS ANDRESTRICTED CASH 35,073 (27,408) (27,612)CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of period 53,080 80,488 108,100 CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of period $88,153 $53,080 $80,488 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $1,667 $2,043 $1,893 Income taxes paid (refunded) $2 $2 $(55)NONCASH INVESTING AND FINANCING ACTIVITIES: Modification of warrants for common stock $— $— $45 Purchases of property and equipment in Accounts payable $410 $222 $532 The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to thetotal of the same such amounts shown in the consolidated statement of cash flows (in thousands): Year Ended December 31, 2018 2017 2016 CASH AND CASH EQUIVALENTS 87,975 52,902 80,310 RESTRICTED CASH 178 178 178 CASH, CASH EQUIVALENTS AND RESTRICTED CASH SHOWN INSTATEMENT OF CASH FLOWS $88,153 $53,080 $80,488 Amounts included in restricted cash represent letters of credit required to be maintained under the Company’s facility lease and corporate credit cardagreements as security for performance under these agreements. The letters of credit are secured by certificates of deposit in amounts equal to the letters ofcredit. 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 use in medicallysupervised settings. DSUVIA (known as DZUVEO in Europe) and Zalviso, are both focused on the treatment of acute pain, and each utilize sufentanil,delivered via a non-invasive route of sublingual administration, exclusively for use in medically supervised settings. On November 2, 2018, the U.S. Foodand Drug Administration, or FDA, approved DSUVIA for use in adults in a certified medically supervised healthcare setting, such as hospitals, surgicalcenters, and emergency departments, for the management of acute pain severe enough to require an opioid analgesic and for which alternative treatmentsare inadequate. In June 2018, the European Commission, or EC, granted marketing approval of DZUVEO for the treatment of patients with moderate-to-severe acute pain in medically monitored settings. AcelRx is developing a distribution capability and commercial organization to market and sellDSUVIA in the United States. The commercial launch of DSUVIA in the United States occurred in the first quarter of 2019. In geographies where AcelRxdecides not to commercialize products by itself, including for DZUVEO in Europe, the Company may seek to out-license commercialization rights. TheCompany currently intends to commercialize and promote DSUVIA/DZUVEO outside the United States with one or more strategic partners, although ithas not yet entered into any such arrangement. The Company is currently evaluating the timing of the resubmission of the NDA for Zalviso. AcelRxintends to seek regulatory approval for Zalviso in the United States and, if successful, potentially promote Zalviso either by itself or with strategicpartners. Zalviso is approved in Europe and is currently being commercialized by Grünenthal GmbH, or Grünenthal. DSUVIA DSUVIA, known as DZUVEO in Europe, approved by the FDA in November 2018, is indicated for use in adults in a certified medically supervisedhealthcare setting, such as hospitals, surgical centers, and emergency departments, for the management of acute pain severe enough to require an opioidanalgesic and for which alternative treatments are inadequate. DSUVIA was designed to provide rapid analgesia via a non-invasive route and to eliminatedosing errors associated with IV administration. DSUVIA is a single-strength solid dosage form administered sublingually via a single-dose applicator, orSDA, by healthcare professionals. Sufentanil is an opioid analgesic currently marketed for intravenous, or IV, and epidural anesthesia and analgesia. Thesufentanil pharmacokinetic profile when delivered sublingually avoids the high peak plasma levels and short duration of action observed with IVadministration. The EC approved DZUVEO for marketing in Europe in June 2018. DSUVIA was approved with a Risk Evaluation and Mitigation Strategy, or REMS, which restricts distribution to certified medically supervised healthcaresettings in order to prevent respiratory depression resulting from accidental exposure. DSUVIA will only be distributed to facilities certified in theDSUVIA REMS program following attestation by an authorized representative to comply with appropriate dispensing and use restrictions of DSUVIA. Tobecome certified, a healthcare setting will need to train their healthcare professionals on the proper use of DSUVIA and have the ability to managerespiratory depression. DSUVIA will not be available in retail pharmacies or for outpatient use. As part of the REMS program, the Company will monitordistribution and audit wholesalers’ data, evaluate proper usage within the healthcare settings and monitor for any diversion and abuse. Additionally,AcelRx will de-certify healthcare settings that are non-compliant with the REMS program. 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 Europe and is in late-stage development in the U.S. The Company had initially submitted to the FDA an NDA seekingapproval for Zalviso in September 2013 but received a CRL on July 25, 2014. Subsequently, the FDA requested an additional clinical study, IAP312,designed to evaluate the effectiveness of changes made to the functionality and usability of the Zalviso device and to take into account comments fromthe FDA on the study protocol. In the IAP312 study, for which top-line results were announced in August 2017, Zalviso met safety, satisfaction and deviceusability expectations. These results will supplement the three Phase 3 trials already completed in the Zalviso NDA resubmission. The Company iscurrently evaluating the timing of the NDA resubmission for Zalviso. On December 16, 2013, AcelRx and Grünenthal entered into a Collaboration and License Agreement, or the License Agreement, which was amendedeffective July 17, 2015 and September 20, 2016, or the Amended License Agreement, which grants Grünenthal rights to commercialize Zalviso PCAsystem, or the Product, in the countries of the EU, Switzerland, Liechtenstein, Iceland, Norway and Australia (collectively, the Territory) for human use inpain treatment within, or dispensed by, hospitals, hospices, nursing homes and other medically supervised settings, or the Field. In September 2015, theEC approved the MAA, previously submitted to the EMA, for Zalviso for the management of acute moderate-to-severe post-operative pain in adultpatients. On December 16, 2013, AcelRx and Grünenthal, entered into a related Manufacture and Supply Agreement, or the MSA, and together with theLicense Agreement, the Agreements. Under the MSA, the Company will exclusively manufacture and supply the Product to Grünenthal for the Field in theTerritory. On July 22, 2015, the Company and Grünenthal amended the MSA, or the Amended MSA, effective as of July 17, 2015. The Amended MSAand the Amended License Agreement are referred to as the Amended Agreements. F-7 The Company has incurred recurring operating losses and negative cash flows from operating activities since inception. Although Zalviso has beenapproved for sale in Europe, on September 18, 2015, the Company sold the majority of the royalty rights and certain commercial sales milestones it isentitled to receive under the Amended License Agreement with Grünenthal to PDL BioPharma, Inc., or PDL, in a transaction referred to as the RoyaltyMonetization. The FDA approved DSUVIA in November 2018 and the Company began its commercial launch of DSUVIA in the first quarter of 2019. As aresult, the Company expects to continue to incur operating losses and negative cash flows until such time as DSUVIA has gained market acceptance andgenerated significant revenues. Except as the context otherwise requires, when we refer to "we," "our," "us," the "Company" or "AcelRx" in this document, we mean AcelRxPharmaceuticals, Inc., and its consolidated subsidiary. “DSUVIA” and “DZUVEO” are trademarks, and “ACELRX” and “Zalviso” are registeredtrademarks, all owned by AcelRx Pharmaceuticals, Inc. This report also contains trademarks and trade names that are the property of their respectiveowners. 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 from thoseestimates. Reclassifications Certain prior year amounts in the Consolidated Financial Statements have been reclassified to conform to the current year's presentation. In particular, theamount reported in the Consolidated Statements of Cash Flows as “Noncash Investing and Financing Activities – Purchases of property and equipment inAccrued liabilities” has been reclassified to “Noncash Investing and Financing Activities – Purchases of property and equipment in Accounts payable” forthe year ended December 31, 2017, and the amount reported in the Consolidated Statements of Cash Flows as “Amortization of premium/discount oninvestments, net” has been reclassified to “Other” for the year ended December 31, 2016. 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 Royalty Monetization with PDL of the expected royalty stream and milestone payments due fromthe sales of Zalviso in the European Union by its commercial partner, Grünenthal, pursuant to the Amended License Agreement. All intercompanyaccounts and transactions have been eliminated in consolidation. Refer to Note 9 “Liability Related to Sale of Future Royalties” for additionalinformation. 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 and commercial paper.These securities are carried at estimated fair value, which is based on quoted market prices or observable market inputs of almost identical assets, withunrealized gains and losses included in accumulated other comprehensive income (loss). The amortized cost of securities is adjusted for amortization ofpremiums and accretion of discounts to maturity. Such amortization and accretion is included in interest income or expense. The cost of securities sold isbased on specific identification. The Company’s investments are subject to a periodic impairment review for other-than-temporary declines in fair value.The Company’s review includes the consideration of the cause of the impairment including the creditworthiness of the security issuers, the number ofsecurities in an unrealized loss position, the severity and duration of the unrealized losses and the Company’s intent and ability to hold the investment fora 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 loss inthe 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 the cashequivalents 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 DSUVIA and Zalviso, and varioussole-source third-party contract manufacturer organizations to manufacture the DSUVIA SDA and Zalviso drug cartridge and device components,including the controller, the dispenser 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, 2018, 2017and 2016. One of these customers accounted for 100% and 79% of the accounts receivable balance as of December 31, 2018, and 2017, respectively,while the other customer accounted for 71% of the accounts receivable balance as of December 31, 2016. 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, 2018 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. Because the predetermined, contractual transferprices the Company is receiving from Grünenthal are less than the direct costs of manufacturing, all Zalviso inventories are carried at net realizable value. 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 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, if the Company is not successful in its commercialization of DSUVIA, and ifapproved, Zalviso, purchased equipment and manufacturing-related facility improvements the Company has made at its contract manufacturers couldbecome impaired. The Company may determine that it is no longer probable that the Company will realize the future economic benefit associated withthe costs of these assets through future manufacturing activities, and if so, the Company would record an impairment charge associated with these assets.As of September 30, 2015, the Company remeasured on a non-recurring basis a portion of its leasehold improvements in its corporate offices using LevelIII valuation techniques. The write down to fair value of these long-lived assets resulted in an impairment charge of $0.5 million in the year endedDecember 31, 2015, which was recorded in interest income and other income, net in the Consolidated Statements of Comprehensive Loss. As ofDecember 31, 2018, 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 the relatedcredit 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 are recognizedas interest income and other income, net in the Consolidated Statements of Comprehensive Loss. For additional information regarding the contingent putoption, see Note 8 “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 10 “Warrants”). Changes in the fair value of the warrantsare recognized as interest income and other income, net in the Consolidated Statements of Comprehensive Loss. As of December 31, 2018, all outstandingwarrants of the Company had either been exercised or had expired. Revenue Recognition Beginning January 1, 2018, the Company has followed the provisions of ASC Topic 606, Revenue from Contracts with Customers. The guidanceprovides a unified model to determine how revenue is recognized. The Company generates revenue from collaboration agreements. These agreements typically include payments for upfront signing or license fees, costreimbursements for development and manufacturing services, milestone payments, product sales, and royalties on licensee’s future product sales. The Company has entered into award contracts with U.S. Department of Defense, or the DoD, to support the development of DSUVIA. These contractsprovide for the reimbursement of qualified expenses for research and development activities. Revenue under these arrangements is recognized when therelated qualified research expenses are incurred. The Company is entitled to reimbursement of overhead costs associated with the study costs under theDoD arrangements. The Company estimates this overhead rate by utilizing forecasted expenditures. Final reimbursable overhead expenses are dependenton direct labor and direct reimbursable expenses throughout the life of each contract, which may increase or decrease based on actual expenses incurred. In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under its agreements, the Company performs the followingsteps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performanceobligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint onvariable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition ofrevenue when (or as) the Company satisfies each performance obligation. Performance Obligations A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC Topic 606. TheCompany’s performance obligations include commercialization license rights, development services, services associated with the regulatory approvalprocess, joint steering committee services, demo devices, manufacturing services, material rights for discounts on manufacturing services, and productsupply. The Company has optional additional items in contracts, which are considered marketing offers and are accounted for as separate contracts when thecustomer elects such options. Arrangements that include a promise for future commercial product supply and optional research and development servicesat the customer’s or the Company’s discretion are generally considered as options. The Company assesses if these options provide a material right to thelicensee and if so, such material rights are accounted for as separate performance obligations. If the Company is entitled to additional payments when thecustomer exercises these options, any additional payments are recorded in revenue when the customer obtains control of the goods or services. Transaction Price The Company has both fixed and variable consideration. Non-refundable upfront fees and product supply selling prices are considered fixed, whilemilestone payments are identified as variable consideration when determining the transaction price. Funding of research and development activities isconsidered variable until such costs are reimbursed at which point they are considered fixed. The Company allocates the total transaction price to eachperformance obligation based on the relative estimated standalone selling prices of the promised goods or services for each performance obligation. At the inception of each arrangement that includes milestone payments, the Company evaluates whether the milestones are considered probable of beingachieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenuereversal would not occur, the value of the associated milestone (such as a regulatory submission by the Company) is included in the transaction price.Milestone payments that are not within the control of the Company, such as approvals from regulators, are not considered probable of being achieveduntil those approvals are received. For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be thepredominant item to which the royalties relate, the Company recognizes revenue at the later of (a) when the related sales occur, or (b) when theperformance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). F-11 Allocation of Consideration As part of the accounting for these arrangements, the Company must develop assumptions that require judgment to determine the stand-alone selling priceof each performance obligation identified in the contract. Estimated selling prices for license rights and material rights for discounts on manufacturingservices are calculated using an income approach model and can include the following key assumptions: the development timeline, sales forecasts, costsof product sales, commercialization expenses, discount rate, the time which the manufacturing services are expected to be performed, and probabilities oftechnical and regulatory success. For all other performance obligations, the Company uses a cost-plus margin approach. Timing of Recognition Significant management judgment is required to determine the level of effort required under an arrangement and the period over which the Companyexpects to complete its performance obligations under the arrangement. The Company estimates the performance period or measure of progress at theinception of the arrangement and re-evaluates it each reporting period. This re-evaluation may shorten or lengthen the period over which revenue isrecognized. Changes to these estimates are recorded on a cumulative catch up basis. If the Company cannot reasonably estimate when its performanceobligations either are completed or become inconsequential, then revenue recognition is deferred until the Company can reasonably make such estimates.Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method. Revenue is recognized forproducts at a point in time when control of the product is transferred to the customer in an amount that reflects the consideration the Company expects tobe entitled to in exchange for those product sales, which is typically once the product physically arrives at the customer, and for licenses of functionalintellectual property at the point in time the customer can use and benefit from the license. For performance obligations that are services, revenue isrecognized over time proportionate to the costs that the Company has incurred to perform the services using the cost-to-cost input method. Cost of Goods Sold Under the Amended Agreements with Grünenthal, the Company sells Zalviso to Grünenthal at predetermined, contractual transfer prices that are less thanthe direct costs of manufacturing and recognizes indirect costs as period costs where they are in excess of normal capacity and not realizable on a lower ofcost or market basis. Cost of goods sold for Zalviso 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 year ended December 31, 2016, was primarilydetermined using the simplified method in accordance with guidance provided by the SEC. Such method was utilized as the Company did not believe itshistorical 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 AcelRx’s industry that were deemed to be comparable to AcelRx’s businessbecause AcelRx had insufficient history on the volatility of its common stock relative to the expected life assumptions used by the Company. During theyear ended December 31, 2017, the Company determined that its historical data provided a reasonable basis for estimating future behavior in regard toexpected term and volatility, and as a result, began using its historical option exercise experience and the volatility of its common stock as the basis forthese 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 lifeassumption. Further, during the year ended December 31, 2016, the Company estimated forfeitures at the time of grant and revised those estimates insubsequent periods if actual forfeitures differed from those estimates. Effective January 1, 2017, the Company adopted ASU 2016-09 and elected torecognize forfeitures when they occur using a modified retrospective approach, which did not have a material impact on its Consolidated FinancialStatements. 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 effective interest method over the life of the arrangement. In order to determine the amortization of the liability, the Company isrequired to estimate the total amount of future royalty and milestone payments to be received by ARPI LLC and payments paid to PDL, up to a cappedamount of $195.0 million, over the life of the arrangement. The aggregate future estimated royalty and milestone payments (subject to the cappedamount), less the $61.2 million of net proceeds the Company received will be recorded as interest expense over the life of the liability. Consequently, theCompany imputes interest on the unamortized portion of the liability and records interest expense related to the Royalty Monetization accordingly. There are a number of factors that could materially affect the amount and timing of royalty payments from Zalviso in Europe, most of which are not withinthe Company’s control. Such factors include, but are not limited to, the success of Grünenthal’s sales and promotion of Zalviso, changing standards ofcare, the introduction of competing products, manufacturing or other delays, intellectual property matters, adverse events that result in governmentalhealth authority imposed restrictions on the use of Zalviso, significant changes in foreign exchange rates as the royalties remitted to ARPI are made inU.S. dollars (USD) while significant portions of the underlying European sales of Zalviso, as well as the royalty payments remitted by Grünenthal to ARPIon such sales, are made in currencies other than USD, and other events or circumstances that could result in reduced royalty payments from European salesof Zalviso, all of which would result in a reduction of non-cash royalty revenues and the non-cash interest expense over the life of the RoyaltyMonetization. Conversely, if sales of Zalviso in Europe are more than expected, the non-cash royalty revenues and the non-cash interest expense recordedby the Company would be greater over the term of the Royalty Monetization. The Company periodically assesses the expected royalty and milestonepayments using a combination of historical results, internal projections and forecasts from external sources. To the extent such payments are greater or lessthan the Company’s initial estimates or the timing of such payments is materially different than its original estimates, the Company will prospectivelyadjust 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 Royalty Monetization. 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”. F-13 Recently Adopted Accounting Pronouncement In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), to provide guidance on revenue recognition. InAugust 2015 and March, April, May and December 2016, the FASB issued additional amendments to the new revenue guidance relating to reportingrevenue on a gross versus net basis, identifying performance obligations, licensing arrangements, collectability, noncash consideration, presentation ofsales tax, transition, and clarifying examples. Collectively these are referred to as ASC Topic 606, which replaces all legacy GAAP guidance on revenuerecognition and eliminates all industry-specific guidance. The new revenue recognition guidance provides a unified model to determine how revenue isrecognized. The core principal of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in anamount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In applying ASC Topic 606,companies need to use more judgment and make more estimates than under legacy guidance. This includes identifying performance obligations in thecontract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each distinctperformance obligation. ASC Topic 606 is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoptionpermitted one year earlier. The Company adopted the new standard effective January 1, 2018 under the modified retrospective transition method, applying the new guidance in thefirst quarter of 2018 to those contracts which were not completed as of January 1, 2018. For contracts which were modified before the adoption date, theCompany has elected to treat the contracts and their modifications as combined contracts. Upon adoption, there was no change to the units of accountingpreviously identified under legacy GAAP, which are now considered performance obligations under the new guidance, and there was no change to therevenue recognition pattern for each performance obligation. Therefore, the adoption of the new standard resulted in no cumulative effect to the openingaccumulated deficit balance. 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 adoption of ASU 2017-09 effective January 1, 2018 did nothave a material effect on the Company’s 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 consolidated statement of cash flows. The ASU requires thatthe consolidated statement of cash flows explain the change in total cash and equivalents and amounts generally described as restricted cash or restrictedcash equivalents when reconciling the beginning-of-period and end-of-period total amounts. The ASU also requires a reconciliation between the total ofcash and equivalents and restricted cash presented on the consolidated statement of cash flows and the cash and equivalents balance presented on theconsolidated balance sheet. The Company adopted ASU No. 2016-18, and the guidance has been retrospectively applied to all periods presented. Theadoption of the guidance did not have an impact on the Company’s consolidated balance sheets or statements of comprehensive loss. 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. The adoption of ASU 2016-15 effective January 1, 2018 did not have amaterial impact on the Company’s consolidated statements of cash flows. F-14 Recently Issued Accounting Pronouncements In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes a new lease accounting model for lessees. In January, Julyand December 2018, the FASB issued additional amendments to the new lease guidance relating to, transition, and clarification. The July 2018amendment, ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, provides an optional transition method that allows entities to elect to applythe standard prospectively at its effective date, versus recasting the prior periods presented. Pursuant to ASU No. 2018-11, the Company will elect to usethe effective date approach at transition. Unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new guidancewill require both types of leases (i.e. operating and capital leases) to be recognized on the balance sheet. The FASB lessee accounting model will continueto account for both types of leases. Capital leases will be accounted for in substantially the same manner as capital leases are accounted for under existingGAAP. Operating leases will be accounted for in a manner similar to operating leases under existing GAAP, except that lessees will recognize a leaseliability and a lease asset for all of those leases. The amended guidance is effective for fiscal years, and interim periods within those years, beginning afterDecember 15, 2018, with early adoption permitted. The Company plans to adopt this standard on the effective date of January 1, 2019. The Company is substantially complete with its evaluation of the new standard as it relates to its operating lease disclosed in Note 11 “Commitments andContingencies”. The remaining steps in the implementation process include finalizing lease liability and right of use asset schedules and the review andevaluation of disclosures and presentation in the Company’s financial statements. In addition, an evaluation of whether there are existing contracts thatmay contain embedded leases has been performed and the Company is evaluating the impact of its findings. However, it does not expect that theidentification of any embedded leases will result in a material impact to the consolidated financial statements and disclosures upon the adoption of thisstandard. The adoption of the new standard will not have a material impact on the Company’s consolidated statements of comprehensive loss; however, itwill materially impact the carrying value of the assets and liabilities in the consolidated balance sheets as a result of the requirement to record right-of-useassets and corresponding lease obligations for current operating leases. The Company will continue to monitor additional modifications, clarifications orinterpretations undertaken by the FASB that may impact its current conclusions and will expand its analysis to include any new lease arrangementsinitiated prior to adoption. 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, 2018 AmortizedCost Gross UnrealizedGains Gross UnrealizedLosses FairValue Cash and cash equivalents: Cash $2,037 $— $— $2,037 Money market funds 1,436 — — 1,436 U.S. government agency securities 10,181 — — 10,181 Commercial paper 74,321 — — 74,321 Total cash and cash equivalents 87,975 — — 87,975 Short-term investments: U.S. government agency securities $1,497 $— $— $1,497 Commercial paper 16,243 — — 16,243 Total marketable securities and commercial paper 17,740 — — 17,740 Total cash, cash equivalents and investments $105,715 $— $— $105,715 F-15 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 Short-term investments: 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 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, 2018 and 2017. There were no other-than-temporary impairments for these securities as of December 31, 2018 or 2017. 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, 2018 and 2017. As of December 31, 2018 and 2017, the contractual maturity of all investments held was less than one year. Fair Value Measurement The Company’s financial instruments consist of Level I and II assets and Level III liabilities. Money market funds are highly liquid investments and areactively traded. The pricing information on these investment instruments are readily available and can be independently validated as of the measurementdate. This approach results in the classification of these securities as Level 1 of the fair value hierarchy. For Level II instruments, the Company estimatesfair value by utilizing third party pricing services in developing fair value measurements where fair value is based on valuation methodologies such asmodels using observable market inputs, including benchmark yields, reported trades, broker/dealer quotes, bids, offers and other reference data. SuchLevel II instruments typically include U.S. treasury, U.S. government agency securities and commercial paper. As of December 31, 2018 and December 31,2017, the Company held, in addition to Level II assets, a contingent put option liability associated with the Amended and Restated Loan and SecurityAgreement, or the Amended Loan Agreement with Hercules Capital Funding Trust 2014-1 and Hercules Technology II, L.P., together, Hercules. See Note8 “Long-Term Debt” for further description. The Company’s estimate of fair value of the contingent put option liability was determined by using a risk-neutral valuation model, wherein the fair value of the underlying debt facility is estimated both with and without the presence of the default provisions,holding all other assumptions constant. The resulting difference between the two estimated fair values is the estimated fair value of the default provisions,or the contingent put option. Changes to the estimated fair value of these liabilities are recorded in Interest income and other income, net in theConsolidated Statements of Comprehensive Loss. The fair value of the underlying debt facility is estimated by calculating the expected cash flows inconsideration of an estimated probability of default and expected recovery rate in default and discounting such cash flows back to the reporting dateusing a risk-free rate. 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, 2018 Fair Value Level I Level II Level III Assets Money market funds $1,436 $1,436 $— $— U.S. government agency securities 11,678 — 11,678 — Commercial paper 90,564 — 90,564 — Total assets measured at fair value $103,678 $1,436 $102,242 $— Liabilities Contingent put option liability $121 $— $— $121 Total liabilities measured at fair value $121 $— $— $121 As of December 31, 2017 Fair Value Level I Level II Level III Assets U.S. government agency securities $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 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 31,2018 and 2017 (in thousands): Year EndedDecember 31,2018 Fair value—beginning of period $207 Change in fair value of contingent put option associated with Amended Loan Agreement (86)Fair value—end of period $121 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 Amended Loan Agreement 83 Fair value—end of period $207 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, 2018 2017 Raw materials $694 $702 Work-in-process 160 254 Inventories $854 $956 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 charge of$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, 2018 2017 Laboratory equipment $3,972 $3,920 Leasehold improvements 4,469 4,469 Computer equipment and software 237 241 Construction in process 10,593 9,703 Tooling 1,109 1,109 Furniture and fixtures 47 47 20,427 19,489 Less accumulated depreciation and amortization (8,944) (8,438)Property and equipment, net $11,483 $11,051 Depreciation and amortization expense was $0.5 million, $1.7 million and $2.1 million during the years ended December 31, 2018, 2017 and 2016,respectively. 5. Adoption of ASC Topic 606, Revenue from Contracts with Customers On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as ofJanuary 1, 2018. Results for reporting periods beginning after January 1, 2018, are presented under Topic 606, while prior period amounts are not adjustedand continue to be reported in accordance with the Company’s historical accounting under Topic 605. The adoption of the new revenue recognitionguidance resulted in no changes to deferred revenue or the accumulated deficit as of January 1, 2018. Revenue Recognition As described in Note 1 “Organization and Summary of Significant Accounting Policies,” the Company has entered into the Amended Agreements withGrünenthal related to Zalviso. At December 31, 2018, approximately $3.5 million of the transaction price under the Amended Agreements is allocated tothe discount on future manufacturing services, which the Company expects to be recognized through 2029. For additional detail on the Company’s accounting policy regarding revenue recognition, refer to Note 1 “Organization and Summary of SignificantAccounting Policies - Revenue Recognition.” The following table presents changes in the Company’s contract liabilities for the year ended December 31, 2018: Balance atBeginningof the Period Additions Deductions Balance atthe endof the Period (in thousands) Contract liability: Deferred revenue $3,825 $- $(362) $3,463 F-18 During the year ended December 31, 2018, the Company recognized the following revenue (in thousands): Year endedDecember 31, 2018 Amounts included in contract liabilities at the beginning of the period: Performance obligations satisfied – Amended Agreements $362 New activities in the period from performance obligations satisfied: Performance obligations satisfied – Amended Agreements 566 Total revenue from performance obligations satisfied 928 Royalty revenue 385 Contract and other 838 Total revenue $2,151 6. 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. The DoD has the option to purchase a certain number of units of commercial product pursuant to the terms of the DoD Contract. Revenue is recognized based on expenses incurred by the Company in conducting research and development activities, including overhead, as set forthin the agreement. Revenue attributable to the work performed under the DoD Contract, recorded as Contract and other revenue in the ConsolidatedStatements of Comprehensive Loss, was $0.8 million, $0.9 million and $10.9 million for the years ended December 31, 2018, 2017 and 2016,respectively. 7. Collaboration Agreement As described in Note 1 “Organization and Summary of Significant Accounting Policies,” as of January 1, 2018, the Company follows the guidance of ASC606, Revenue from Contracts with Customers to account for revenue from its Agreements with Grünenthal related to Zalviso. In the Amended Agreements,the parties amended the Product supply configurations and packaging of Product components and accessories, and associated pricing therefor, which theCompany will manufacture and supply to Grünenthal for the Territory. The parties agreed to increase the pricing of the Product components andaccessories in exchange for a reduction of $5.5 million in the total milestone payments due from Grünenthal contingent upon achieving specified netsales targets from a total of $171.5 million to $166.0 million. The parties also updated the development plan for the Product in the Territory, providing foradditional near-term development services to be rendered by AcelRx in exchange for payments by Grünenthal of $0.7 million. In accordance with theterms of the Amended MSA, AcelRx also received a binding Product forecast from Grünenthal for approximately $3.7 million, which was fully deliveredby the end of 2016. F-19 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 which specifiesAcelRx as the device design authority and manufacturer. In September 2015, the European Commission approved the MAA for Zalviso for the 28 EUmember 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 Note9 “Liability Related to Sale of Future Royalties”. Unless earlier terminated, the Amended License Agreement continues in effect until the expiration of theobligation of Grünenthal to make royalty and supply and trademark fee payments, which supply and trademark fee continues for so long as the Companycontinues to supply the Product to Grünenthal. The Amended License Agreement is subject to earlier termination in the event the parties mutually agree,by a party in the event of an uncured material breach by the other party, upon the bankruptcy or insolvency of either party, or by Grünenthal forconvenience. 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 a predetermined transfer price, subject to certain caps, as defined in the Amended MSA. The Company will notrecover internal indirect costs as part of this predetermined transfer price. In addition, the Amended MSA includes declining maximum transfer prices overthe term of the contract with Grünenthal. The Amended MSA requires the Company to use commercially reasonable efforts to enter stand-by contractswith third parties providing significant supply and manufacturing services and, under certain specified conditions, permits Grünenthal to use a third partyback-up manufacturer to manufacture 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. Prior to the adoption of ASC Topic 606 on January 1, 2018, the Company followed the provisions of ASC Topic 605. However, as described in Note 1, theadoption of the new guidance did not have a material impact on the Company’s consolidated financial statements and did not result in any change to theinitial allocation that was performed under Topic 605. The Company identified four significant performance obligations under the original Agreements: 1) intellectual property (license), 2) the obligation toprovide research and development services, 3) the significant and incremental discount on the manufacturing of Zalviso for commercial purposes, and 4)the obligation to participate in the joint steering committee. At the time the Amended Agreements were executed, with the exception of the intellectual property license, these obligations remained partiallyunsatisfied. Additionally, the Company identified the following three additional performance obligations under the Amended Agreements: 1) theobligation to provide additional research and development services, 2) the obligation to provide Zalviso demonstration device systems, and 3) theobligation to manufacture and deliver Product under the binding forecast. The Company determined that the amendments under the AmendedAgreements were modifications to the original Agreements. F-20 The Company determined that the performance obligations outlined above are considered distinct and thus should be treated as separate units ofaccounting. The Company’s management determined that the license under the original License Agreement was distinct and represented a separate unit ofaccounting because it is considered functional intellectual property and the rights conveyed permitted Grünenthal to perform all efforts necessary tocommercialize and begin selling the product upon regulatory approval. In addition, Grünenthal has the appropriate development, regulatory andcommercial expertise with products similar to the product licensed under the agreement and has the ability to engage third parties to manufacture theproduct allowing Grünenthal to realize the value of the license on its own 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, and theobligation to manufacture and deliver Products each represent individual units of accounting. Each of the obligations meet the criteria to be considereddistinct as Grünenthal could perform such services and/or could acquire these on a separate basis and none of the obligations are contractually dependenton other obligations within the contract. The Company believes that none of the performance obligations have an observable price, vendor-specific objective evidence, or VSOE, or sufficientthird-party evidence, or TPE, of selling price, as none of them have been sold separately by the Company, and as there is only limited information aboutthird party pricing for similar deliverables. Accordingly, the Company developed the stand alone selling price for each performance obligation in order toallocate the fixed arrangement consideration to each performance obligation, based on current information available as of the modification date. The Company’s management determined the standalone selling price for the license based on Grünenthal’s estimated future cash flows arising from thearrangement. Embedded in the estimate were significant assumptions regarding regulatory expenses, revenue, including potential customer market for theproduct and product price, costs to manufacture the product and the discount rate. The Company’s management determined the standalone selling price ofthe research and development services and committee participation based on the nature and timing of the services to be performed and in consideration ofpersonnel and other costs incurred in the delivery of the services. For the discount on manufacturing services, the Company’s management estimated theselling price based on the market level of contract manufacturing margin it could have received if it were engaged to supply products to a customer in aseparate transaction, the estimated cost of manufacturing, and the anticipated volume of Grünenthal’s orders over the course of the agreement, to whichthe discount would apply. For the Zalviso demonstration devices and the obligation to manufacture and deliver Product, the Company’s managementestimated the selling price based on the binding volume of such devices and Products, the estimated cost of manufacturing, and the market level ofcontract manufacturing margin. The standalone selling price of the license, research and development and committee participation services and thediscount on manufacturing services were updated at the time the Amended Agreements were executed for purposes of allocating the amended arrangementconsideration. The original Agreements included two milestones associated with the regulatory developments for Zalviso in Europe. 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. As of the date of adoption ofTopic 606 on January 1, 2018, the $20.0 million in development milestones are considered fixed consideration and included in the transaction price.Amounts received for these milestones were allocated to performance obligations based on their standalone selling prices and recognized as appropriatefor each obligation. As of December 31, 2018, the Company has excluded the remaining milestone payment of $1.0 million related to the Australia sub-license from the transaction price due to the constraint on variable consideration. The Amended Agreements entitle the Company to receive additional payments upon the achievement of certain development milestones which relate topost approval product enhancements, expanded market opportunities and manufacturing efficiencies for Zalviso and require future research, developmentand regulatory activities. These payments are excluded from the transaction price as they are considered payments for optional additional services thatGrünenthal may elect in the future. When these services are elected, they will be considered as a new contract under Topic 606 and will not impact therevenue recognition of the performance obligations identified under Amended Agreements. The Amended Agreements also include milestone payments related to specified net sales targets, totaling $166.0 million. These payments are consideredsales-based license royalties under Topic 606 and will be recognized apart from the other contract consideration when the related sales occur. F-21 The Company recognizes revenue from license rights when the customer can use and benefit from the license rights. The Company recognizes revenuefrom its services performance obligations over time using a cost-to-cost input method which best represents the incremental benefit that the customerreceives as control is transferred. Below is a summary of revenue recognized under the Amended Agreements during the years ended December 31, 2018, 2017 and 2016 (in thousands): Years Ended December 31, 2018 2017 2016 Product sales $825 $6,673 $5,742 Joint steering committee, research and development services anddemonstration devices 103 269 688 Non-cash royalty revenue related to Royalty Monetization (See Note 9) 289 151 7 Royalty revenue 96 50 3 Total $1,313 $7,143 $6,440 As of December 31, 2018, the Company has deferred current and noncurrent portions of the transaction price that is allocated to the performanceobligations that are unsatisfied (or partially unsatisfied) under the Amended Agreements of $0.3 million and $3.2 million, respectively. 8. 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, did nothave 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. F-22 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 2% if the prepayment occurs after March 2, 2018, but prior to March 2, 2019, or 1% if theprepayment 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 declare alloutstanding obligations immediately due and payable and take such other actions as set forth in the Amended Loan Agreement. Upon an event of default, including a change of control, 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 thousand at the time of theamendment, was written off as a part of the loss on extinguishment, and a new contingent put option liability was established. As of December 31, 2018and 2017, the estimated fair value of the contingent put option liability was $0.1 million and $0.2 million, respectively, which was determined by using arisk-neutral valuation model, wherein the fair value of the underlying debt facility is estimated both with and without the presence of the defaultprovisions, holding all other assumptions constant. The resulting difference between the two estimated fair values is the estimated fair value of the defaultprovisions, or the contingent put option. The fair value of the underlying debt facility is estimated by calculating the expected cash flows inconsideration of an estimated probability of default and expected recovery rate in default and discounting such cash flows back to the reporting dateusing a risk-free rate. The contingent put option liability is revalued at the end of each reporting period and any change in the fair value is recognized ininterest income and other income, 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 $12.0 million and $19.1 million at December 31, 2018 and 2017, respectively. Interestexpense related to the Amended Loan Agreement was $2.2 million, $3.3 million and $2.8 million for the years ended December 31, 2018, 2017 and 2016,respectively. F-23 Future Payments on Long-Term Debt The following table summarizes the outstanding future payments associated with the Company’s long-term debt as of December 31, 2018 (in thousands): 2019 $9,437 2020 3,701 Total payments 13,138 Less amount representing interest (872) Notes payable, gross 12,266 Unamortized portion of final payment (229)Unamortized discount on notes payable (46) Long-term debt 11,991 Less current portion of notes payable, including unamortized discount (8,611) Long-term debt, current portion $3,380 9. 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 and milestonepayment rights to PDL for an upfront cash purchase price of $65.0 million, subject to a capped amount of $195.0 million pursuant to the SubsequentPurchase and Sale Agreement, or SPSA. Under the SPSA, PDL will receive 75% of the European royalties under the Amended License Agreement as wellas 80% of the first four commercial milestones, worth $35.6 million (or 80% of $44.5 million), subject to the capped amount. The Company is entitled toreceive 25% of the royalties, 20% of the first four commercial milestones, 100% of the remaining commercial milestones and all remaining developmentmilestones of $43.5 million, including the $15.0 million payment for the EC approval of the MAA for Zalviso. The Company and ARPI LLC continue to retain certain duties and obligations under the Amended License Agreement. These include the collection ofthe royalty and milestones amounts due and enforcement of related provisions under the Amended License Agreement, among others. In addition, theCompany must prepare a quarterly distribution report relating to the Amended License Agreement, containing among other items, the amount of royaltyand milestone payments received, reimbursable expenses and set-offs. The Company and ARPI LLC must also provide PDL with notice of certaincommunications, events or actions with respect to the Amended License Agreement and infringement of any underlying intellectual property. The Company has significant continuing involvement in the Royalty Monetization primarily due to an obligation to act as the intermediary for thesupply of Zalviso to Grünenthal. Under the relevant accounting guidance, because of its significant continuing involvement, the Royalty Monetizationhas been accounted for as a liability that will be amortized using the effective interest method over the life of the arrangement. In order to determine theamortization of the liability, the Company is required to estimate the total amount of future royalty and milestone payments to be received by ARPI LLCand paid to PDL, up to a capped amount of $195.0 million, over the life of the arrangement. The aggregate future estimated royalty and milestonepayments (subject to the capped amount), less the $61.2 million of net proceeds the Company received will be recorded as interest expense over the life ofthe liability. Consequently, the Company imputes interest on the unamortized portion of the liability and records interest expense relating to the RoyaltyMonetization accordingly. The Company periodically assesses 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 the Company’s initial estimates or the timing of such payments ismaterially different than its original estimates, the Company will prospectively adjust the amortization of the liability and the effective interest rate. Frominception through December 31, 2018, the Company’s effective annual interest rate was approximately 13.0%; however, currently the prospective rate isestimated to be approximately 7.0% as a result of lower projected European royalties from sales of Zalviso over the life of the liability because the productlaunch has been slower than originally anticipated. The effective interest rate for the years ended December 31, 2018, 2017 and 2016, was 11.6%, 13.6%,and 13.7%, respectively. F-24 There are a number of factors that could materially affect the amount and timing of royalty payments from Zalviso in Europe, most of which are not withinthe Company’s control. Such factors include, but are not limited to, the success of Grünenthal’s sales and promotion of Zalviso, changing standards ofcare, the introduction of competing products, manufacturing or other delays, intellectual property matters, adverse events that result in governmentalhealth authority imposed restrictions on the use of Zalviso, significant changes in foreign exchange rates as the royalties remitted to ARPI are made inU.S. dollars (USD) while significant portions of the underlying European sales of Zalviso, as well as the royalty payments remitted by Grünenthal to ARPIon such sales, are made in currencies other than USD, and other events or circumstances that could result in reduced royalty payments from European salesof Zalviso, all of which would result in a reduction of non-cash royalty revenues and the non-cash interest expense over the life of the RoyaltyMonetization. Conversely, if sales of Zalviso in Europe are more than expected, the non-cash royalty revenues and the non-cash interest expense recordedby the Company would be greater over the term of the Royalty Monetization. The following table shows the activity within the liability account during the year ended December 31, 2018 (in thousands): Year endedDecember 31,2018 Period frominception toDecember 31,2018 Liability related to sale of future royalties — beginning balance $83,588 $— Proceeds from sale of future royalties — 61,184 Non-cash royalty revenue (250) (377)Non-cash interest expense recognized 10,341 32,872 Liability related to sale of future royalties as of December 31, 2018 93,679 93,679 Less: current portion (392) (392)Liability related to sale of future royalties — net of current portion $93,287 $93,287 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. 10. 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. In December 2018, all of the outstanding warrants were exercised to purchase 176,730 shares of common stock which were issued to the Lenders. 2012 Private Placement Warrants In connection with the Private Placement, completed in June 2012, the Company issued PIPE warrants to purchase up to 2,630,103 shares of commonstock. The per share exercise price of the PIPE warrants was $3.40 which equals the closing consolidated bid price of the Company’s common stock onMay 29, 2012, the effective date of the Purchase Agreement. The PIPE warrants issued in the Private Placement became exercisable six months after theissuance date and expire on the five year anniversary of the initial exercisability date. Under the terms of the PIPE warrants, upon certain transactions,including a merger, tender offer, sale of all or substantially all of the assets of the Company or if a person or group shall become the owner of 50% of theCompany’s issued and outstanding common stock, which is outside of the Company’s control, each PIPE warrant holder may elect to receive a cashpayment in exchange for the warrant, in an amount determined by application of the Black-Scholes option-pricing model. Accordingly, the PIPE warrantswere recorded as a liability at fair value, as determined by the Black-Scholes option-pricing model, and then marked to fair value each reporting period,with changes in estimated fair value recorded through the Consolidated Statements of Comprehensive Loss in interest income and other income(expense), net. The Black-Scholes assumptions used to value the PIPE warrants are disclosed in Note 2 “Investments and Fair Value Measurement.” F-25 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 and 2016, which was recorded as other income, was $0.3 million and $0.6 million,respectively. During the year ended December 31, 2017, 512,456 warrants expired unexercised. 11. 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 lease for the Expansion Space had a term of 42 months which commenced on August 1, 2014 and expired 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$25.0 thousand and $0.3 million for the years ended December 31, 2018 and 2017, respectively. 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. On January 2, 2019, the Company entered into an agreement to sublease 12,106 square feet of the Expansion Space commencing on February 16, 2019and expiring on January 31, 2024. Rent installments from the sublessee are approximately $48,000 per month (subject to agreed nominal increases). 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 $1.1 million, $0.6 million and $0.3 million for the Premises during the years ended December 31, 2018, 2017 and 2016, respectively. F-26 Future minimum payments under the Lease as of December 31, 2018, are as follows (in thousands): Year Ending December 31: 2019 $1,230 2020 1,268 2021 1,305 2022 1,345 2023 1,386 Thereafter 116 Total minimum payments $6,650 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. 12. Stockholders’ Equity Common Stock 2018 Underwritten Public Offerings On November 14, 2018, the Company completed an underwritten public offering of 12,698,412 shares of common stock, at a price of $3.15 per share tothe public. On November 12, 2018, the underwriters exercised their option in full and purchased an additional 1,904,761 shares at the public offeringprice of $3.15 per share. The total gross proceeds from this offering of an aggregate 14,603,173 shares were approximately $46.0 million with net proceedsto the Company of $43.1 million after deducting the underwriting discounts and commissions and other offering expenses payable by us. On July 16, 2018, the Company completed an underwritten public offering of 7,272,727 shares of common stock, at a price of $2.75 per share to thepublic. On August 7, 2018, the underwriters exercised in full their option to purchase an additional 1,090,909 shares of common stock at the publicoffering price of $2.75 per share, less underwriting discounts and commissions. The total gross proceeds from this offering of an aggregate 8,363,636shares were approximately $23.0 million with net proceeds to the Company of $21.7 million after deducting the underwriting discounts and commissionsand other offering expenses payable by the Company. 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 year endedDecember 31, 2018, the Company issued and sold an aggregate of 4.4 million shares of common stock pursuant to the Sales Agreement, for which theCompany received net proceeds of approximately $16.8 million, after deducting commissions, fees and expenses of $0.4 million. During the year endedDecember 31, 2017, the Company issued and sold 5.4 million shares of common stock pursuant to the 2016 ATM Agreement, for which the Companyreceived 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 incentive stockoptions, or ISOs, and nonstatutory stock options, or NSOs, to employees, directors or consultants of the Company. In February 2008, an additional 375shares 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-27 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 Incentive Plan. The initial aggregate number of shares of the Company’s common stock that may be issued pursuant to stock awards under the 2011 Incentive Plan 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, 2018, there are 858,889 shares available for issuance under the ESPP. In the year ended December 31, 2018, there were 182,360 sharesissued under the ESPP. The weighted average fair value of shares issued under the ESPP in 2018, 2017 and 2016 was $1.51, $2.59 and $2.98 per share,respectively. 13. Stock-Based Compensation The Company recorded total stock-based compensation expense for stock options, stock awards and the ESPP as follows(in thousands): December 31,2018 December 31,2017 December 31,2016 Cost of goods sold $358 $324 $302 Research and development 1,970 1,901 2,308 General and administrative 2,840 2,069 1,869 Total $5,168 $4,294 $4,479 F-28 The following table summarizes option activity under the 2011 Incentive Plan and 2006 Plan: Numberof StockOptionsOutstanding Weighted-AverageExercisePrice Weighted-AverageRemainingContractualLife (Years) AggregateIntrinsicValue (in thousands) December 31, 2017 8,455,098 $4.25 Granted 3,553,713 2.28 Forfeited (217,816) 2.87 Expired (232,905) 6.36 Exercised (135,385) 2.96 December 31, 2018 11,422,705 $3.64 7.1 $659 Vested and exercisable options—December 31, 2018 6,468,788 $4.44 5.8 $46 Vested and expected to vest—December 31, 2018 11,422,705 $3.64 7.1 $659 As of December 31, 2018, there were 1,217,341 shares available for future grant under the 2011 Incentive Plan. In January 2019, an additional 3,150,317shares were 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, 2018 is summarized below: Options Outstanding Options Vested and Exercisable Exercise Prices Number ofStock OptionsOutstanding Weighted-AverageRemainingContractualLife(Years) Weighted-AverageExercisePrice perShare Shares Subjectto StockOptions Weighted-AverageExercisePrice perShare $1.20-$2.00 1,856,170 9.0 $2.00 6,900 $1.20 $2.225-$3.35 5,406,951 7.8 $2.82 2,698,203 $2.82 $3.37-$5.31 2,855,022 5.2 $4.13 2,459,123 $4.19 $5.45-$8.18 688,562 5.0 $6.47 688,562 $6.47 $10.22-$10.55 616,000 5.1 $10.34 616,000 $10.34 11,422,705 7.1 $3.64 6,468,788 $4.44 The weighted average grant-date fair value of options granted during the years ended December 31, 2018, 2017 and 2016 was $1.62, $1.91 and $2.24 pershare, respectively. As of December 31, 2018, total stock-based compensation expense related to unvested options to be recognized in future periods was$7.5 million which is expected to be recognized over a weighted-average period of 2.4 years. The grant date fair value of shares vested during the yearsended December 31, 2018, 2017 and 2016 was $4.9 million, $3.5 million and $3.9 million, respectively. The total intrinsic value of options exercisedduring the years ended December 31, 2018 and 2017 was $0.2 million and $40 thousand, respectively. There were no option exercises during the yearended December 31, 2016. The Company used the following assumptions to calculate the fair value of each employee stock option: Year Ended December 31, 2018 2017 2016 Expected term (in years) 5.89 5.70 5.25-6.25 Risk-free interest rate 2.5%-3.1% 1.82%-2.09% 1.24%-1.47% Expected volatility 83% 73% 80% Expected dividend rate 0% 0% 0% 14. Net Loss per Share of Common Stock The Company’s basic net loss per share of common stock is calculated by dividing the net loss by the weighted average number of shares of commonstock outstanding for the period. The diluted net loss per share of common stock is computed by giving effect to all potential common stock equivalentsoutstanding for the period determined using the treasury stock method. For purposes of this calculation, options to purchase common stock and warrantsto purchase common stock were considered to be common stock equivalents. In periods with a reported net loss, common stock equivalents are excludedfrom the calculation of diluted net loss per share of common stock if their effect is antidilutive. F-29 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. As a result, the PIPE warrants were anti-dilutive during the year ended December 31, 2016. 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, 2018 2017 2016 ESPP and stock options to purchase common stock 11,797,960 8,767,783 6,395,879 Convertible debt into common stock — — 553,763 Common stock warrants — 176,730 692,611 15. Accrued Liabilities Accrued liabilities consist of the following (in thousands): December 31, 2018 2017 Accrued compensation and employee benefits $3,611 $2,190 Inventory and other contract manufacturing accruals 234 511 Other accrued liabilities 695 842 Total accrued liabilities $4,540 $3,543 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 for each of the years ended December 31, 2018, 2017 and 2016. 17. Income Taxes The Company recorded a provision for income taxes of $2.0 thousand during the year ended December 31, 2018, a benefit for income taxes of $0.7million during the year ended December 31, 2017, and a benefit for income taxes of $34.0 thousand during the year ended December 31, 2016. The provision (benefit) for income taxes consisted of the following (in thousands): December 31,2018 December 31,2017 Current: Federal $— $(702)State 2 1 Total Current 2 (701)Deferred: Federal — — State — — Total Deferred — — Provision (benefit) for income taxes $2 $(701) F-30 Net deferred tax assets as of December 31, 2018 and 2017 consist of the following (in thousands): December 31,2018 December 31,2017 Deferred tax assets: Accruals and other $3,263 $2,717 Research credits 7,275 6,530 Net operating loss carryforward 39,082 31,064 Section 59(e) R&D expenditures 10,387 12,156 Deferred revenue 20,689 18,384 Total deferred tax assets 80,696 70,851 Valuation allowance (80,696) (70,851)Net deferred tax assets $— $— Reconciliations of the statutory federal income tax to the Company’s effective tax during the years ended December 31, 2018, 2017 and 2016 are asfollows (in thousands): Year Ended December 31, 2018 2017 2016 Tax at statutory federal rate $(9,901) $(17,751) $(14,685)State tax—net of federal benefit (792) 350 (73)PIPE warrant liability (18) (70) (260)General business credits (500) (316) (360)Stock options 1,048 42 1,115 Other 313 51 33 Change in valuation allowance 9,852 (17,110) 14,196 Tax reform – tax rate change — 34,103 — Provision (benefit) for income taxes $2 $(701) $(34) ASC 740 requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent thatmanagement assesses that realization is “more likely than not.” Realization of deferred tax assets is dependent on future taxable income, if any, the timingand the amount of which are uncertain. Accordingly, the deferred tax assets have been fully offset by a valuation allowance. The valuation allowanceincreased by $9.9 million, decreased by $17.1 million and increased by $14.2 million during the years ended December 31, 2018, 2017 and 2016,respectively. As of December 31, 2018, the Company had federal net operating loss carryforwards of $153.2 million, of which $114.9 million federal net operatinglosses generated before January 1, 2018 will begin to expire in 2029. Federal net operating losses of $38.3 million generated in 2018 will carryforwardindefinitely but are subject to the 80% taxable income limitation. As of December 31, 2018, 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, of which $0.4 million is classified as Tax receivable on the Company’s balance sheet and $0.3 million is classifiedas a Long-term tax receivable. As of December 31, 2018, the Company had federal research credit carryovers of $6.5 million, which begin to expire in 2026. As of December 31, 2018,the Company had state research credit carryovers of $4.0 million, which will carryforward indefinitely. The Company adopted ASU 2016-09 in the year end December 31, 2017. The impact of this adoption resulted in gross increases of $2.9 million and $2.0million to federal and state net operating losses, respectively, during the year ended December 31, 2017. The Company has recorded a full valuationallowance 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. 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 reduced 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 included provisions for the elimination of the Alternative Minimum Tax, among other changes. TheCompany calculated its best estimate of the impact of the Act in its December 31, 2017 year end income tax provision in accordance with itsunderstanding of the Act and guidance available and, as a result, 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 are now refundable creditsunder the provisions of the Act. The Company remeasured the deferred tax assets and liabilities based on the rate at which they were expected to reverse inthe future. No provision or benefit was recorded as the Company had recorded a full valuation allowance against its deferred tax assets. The effects ofother provisions of the Act did not 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, 2018, 2017 and 2016 is asfollows (in thousands): Year Ended December 31, 2018 2017 2016 Unrecognized benefit—beginning of period $2,365 $2,162 $1,939 Gross increases—prior period tax positions 57 — — Gross increases—current period tax positions 213 203 223 Unrecognized benefit—end of period $2,635 $2,365 $2,162 The entire amount of the unrecognized tax benefits would not impact the Company’s effective tax rate if recognized. There were no accrued interest or penalties related to unrecognized tax benefits in the years ended December 31, 2018, 2017 and 2016. The Companyfiles income tax returns in the United States and in California. The tax years 2005 through 2018 remain open in both jurisdictions. The Company is notcurrently under examination by income tax authorities in federal, state or other foreign jurisdictions. The Company does not anticipate any significantchanges within 12 months of this reporting date of its uncertain tax positions. 18. Subsequent Event On January 2, 2019, the Company entered into an agreement to sublease 12,106 square feet of the Expansion Space commencing on February 16, 2019and expiring on January 31, 2024. Rent installments from the sublessee are approximately $48,000 per month (subject to agreed nominal increases). 19. Unaudited Quarterly Financial Data The following table sets forth certain unaudited quarterly financial data for the eight quarters ended December 31, 2018. 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. 2018 2017 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Revenues $343 $818 $377 $613 $3,109 $2,659 $1,487 $740 Operating costs and expenses $8,612 $7,971 $9,705 $11,590 $15,182 $12,600 $10,348 $8,547 Net loss $(11,592) $(10,541) $(12,458) $(12,558) $(15,551) $(13,059) $(13,013) $(9,885)Net loss per share (basic anddiluted) $(0.23) $(0.20) $(0.21) $(0.18) $(0.34) $(0.29) $(0.28) $(0.20) F-32Exhibit 10.18 2019 Cash Bonus Plan Summary Target bonuses for named executive officers of AcelRx Pharmaceuticals, Inc. (the “Company”) under the 2019 Cash Bonus Plan (the “Plan”) willrange from 35% to 55% of such executive’s 2019 base salary. The amount of cash bonus, if any, for each named executive officer will be based on boththe named executive officer achieving his or her individual performance goals and on the Company meeting the 2019 corporate objectives approved bythe Board. The 2019 corporate objectives are primarily related to: the commercialization of DSUVIA™; successful REMS compliance; commercialsupport for Grunenthal sales efforts of Zalviso® in Europe; advancement of Zalviso for potential approval by the United States Food and DrugAdministration; business development, including potential partnering for sales of DZUVEO outside the United States; and other financial objectives tosupport the Company’s corporate goals. The target bonuses for the Company’s named executive officers for 2019 are as follows: Name Position Bonus % Vincent Angotti Chief Executive Officer 55% Pamela Palmer, M.D., Ph.D. Chief Medical Officer 40% Raffi Asadorian Chief Financial Officer 40% Badri Dasu Chief Engineering Officer 35% Lawrence Hamel Chief Development Officer 35% Mr. Angotti’s cash bonus under the Plan shall be based 100% on the achievement of the 2019 corporate objectives. The cash bonuses under the Plan forall other named executive officers shall be based 40% on the achievement of his or her individual performance goals, as determined by the Board, and60% on the achievement of the 2019 corporate objectives. The named executive officers’ actual bonuses may exceed 100% of target in the eventperformance exceeds the predetermined goals. Exhibit 10.44 SUBLEASE THIS SUBLEASE (this “Sublease”), dated for reference purposes only as of November 30, 2018 (the “Execution Date”), is made by and betweenACELRX PHARMACEUTICALS, INC., a Delaware corporation (“Sublandlord”), and GENOMIC HEALTH, INC., a Delaware corporation(“Subtenant”). RECITALS Whereas, Sublandlord and Metropolitan Life Insurance Company, a New York corporation (“Master Landlord”), are parties to that certainLease dated as of December 21, 2011 (“Original Lease”), as amended by that certain First Amendment to Lease dated May 2, 2014, and that certainSecond Amendment to Lease dated June 14, 2017 (“Second Amendment”) (collectively, the “Master Lease”), pursuant to which Master Landlord leasesto Sublandlord 25,893 square feet of Rentable Area (the “Master Premises”) located in the building commonly known as 301-351 Galveston Drive,Redwood City, CA (the “Building”). The parties acknowledge that a copy of the Master Lease has been delivered by Sublandlord to Subtenant. Whereas, the parties hereto desire that, subject to the terms and conditions of this Sublease, Sublandlord sublet to Subtenant and Subtenantsublet from Sublandlord that certain portion of the Master Premises comprising approximately 12,106 rentable square feet, as depicted in Exhibit Aattached hereto (the “Subleased Premises”). Now, Therefore, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree asfollows: 1. Sublease; Parking. Sublandlord does hereby sublet to Subtenant and Subtenant does hereby sublet from Sublandlord, the Subleased Premises,subject to the terms and conditions of this Sublease, together with the non-exclusive use of the Common Areas (as defined in the Master Lease) to theextent of Sublandlord’s right to use the same pursuant to the Master Lease. Subtenant shall have the right to use twenty-one (21) parking spaces pursuantto Section 2.06(c) of the Master Lease.  2. Term. (a) Master Landlord’s Consent. Sublandlord and Subtenant expressly acknowledge and agree that this Sublease is subject to MasterLandlord’s prior written consent, on a form to be provided by Master Landlord that is reasonably acceptable to Sublandlord and Subtenant (“MasterLandlord’s Consent”), and Sublandlord shall use commercially reasonable efforts to ensure that the Master Landlord Consent includes the followingprovisions: (i) Master Landlord waives its right to recapture the Subleased Premises in connection with Sublandlord’s desire to sublet the SubleasedPremises to Subtenant, (ii) Master Landlord agrees to make a portion of the Allowance referred to in Paragraph 4 of Exhibit A attached to the SecondAmendment (which portion shall be in the amount of $242,120.00) available to Subtenant to pay or reimburse Subtenant for costs that Subtenant intendsto incur in connection with the design, permitting and construction or installation of certain tenant improvements that Subtenant desires to undertake, orcause to be undertaken, in connection with the Subleased Premises, which portion of such Allowance shall be made available to Subtenant in accordancewith the terms and conditions set forth in Paragraphs 3 through 7 of Exhibit A attached to the Second Amendment, except that Master Landlord shall haveconsented that the January 31, 2019 date referred to in the last sentence of Paragraph 4 of Exhibit A attached to the Second Amendment shall be extendedto June 30, 2020, (iii) Subtenant shall have the right to occupy and use the Subleased Premises during the term of this Sublease for biotechnical andpharmaceutical research and development, assembly, biotechnical or pharmaceutical manufacturing, and warehousing, and any other uses permitted underthe Master Lease, (iv) in connection with the conduct of Subtenant’s business operations in the Premises, Subtenant shall have the right, without paymentby Subtenant of any processing fee or fees and expenses of any consultants retained by Master Landlord in connection with review of Exhibit D attachedhereto, to use and store in, and transport to and from, the Subleased Premises, the types and amounts of Hazardous Material as specified on Exhibit Dattached hereto, and (v) Subtenant may remove from the Subleased Premises any specialized tenant improvements installed by and paid for by Subtenantso long as Subtenant repairs any damage resulting from such removal. Sublandlord shall use commercially reasonable and diligent efforts to obtain MasterLandlord’s Consent, and Subtenant agrees to cooperate in all reasonable respects in connection therewith. In the event that Master Landlord’s Consent(with the provisions substantially similar to the clauses (i) through (v) above included in such Master Landlord’s Consent unless waived in writing bySubtenant) is not obtained within forty-five (45) days following the submittal of this Sublease by Sublandlord to Master Landlord, Sublandlord andSubtenant shall have the right to terminate this Sublease by providing written notice thereof to the other party unless Master Landlord’s consent isobtained prior to the giving of any such notice, in which event such notice shall be of no force or effect. In the event such written notice of termination isgiven following the lapse of such forty-five (45) day period and prior to Master Landlord’s Consent being obtained, this Sublease shall be deemed nulland void, and neither Sublandlord nor Subtenant shall have any liability or obligations to the other hereunder (excepting those provisions of thisSublease that are deemed to survive the expiration or earlier termination hereof and except that Sublandlord shall immediately return to Subtenant anyprepaid Rent and Security Deposit paid or delivered to Sublandlord by Subtenant). (b) Sublease Term. This Sublease shall be for a term (the “Sublease Term”) commencing on the date that is forty-five (45) days followingSublandlord’s and Subtenant’s receipt of the fully-executed Master Landlord’s Consent (the “Start Date”), and ending on January 31, 2024 (the “EndDate”), unless terminated earlier in accordance with the terms of this Sublease. Upon Sublandlord’s delivery of the Subleased Premises to Subtenant,Sublandlord and Subtenant shall complete and execute the Delivery Agreement attached hereto as Exhibit B, confirming the Start Date and the End Date. (c) Early Access. Subtenant shall have reasonable early access to the Subleased Premises beginning on the date a fully executed MasterLandlord Consent has been received (the “Early Access Date”) until the Start Date for the purpose of installing its cabling, telephone equipment,furniture, fixtures and improvements approved by Master Landlord in accordance with the Master Lease and approved by Sublandlord is accordance withthe terms of this Sublease; provided that the Start Date shall occur as provided in Section 2(b) above.. Subtenant’s early access shall be subject to all theterms and conditions of this Sublease, including, without limitation, all insurance and maintenance obligations, except for the obligation to pay Rent;provided, however, Subtenant shall pay for charges for gas, electricity, sewer, heat, light, power, telephone, trash pick-up and all other utilities provided tothe Subleased Premises in accordance with the Master Lease during the early access period prior to the Start Date, within thirty (30) days of demand bySublandlord, which demand shall include a copy of the relevant utility bill or equivalent information.  3. Condition. Sublandlord represents and warrants that (a) the existing heating, ventilating and air conditioning system (“HVAC”), electrical andmechanical systems and plumbing in or serving the Subleased Premises (and not those of the Building) shall be in good operating condition on the StartDate, (b) to Sublandlord’s knowledge, Subleased Premises are free of Hazardous Materials, and (c) as of the Start Date, the Subleased Premises shall bevacant and available for occupancy by Subtenant, and no other party shall have any right to occupy the Subleased Premises. If a non-compliance with anywarranty set forth above exists as of the Start Date or if one of the above stated building systems or elements thereof, or any of them, should malfunction,fail or require repair, and Subtenant notifies Sublandlord in writing of such malfunction, failure or need for repair within ninety (90) days following theStart Date (provided that such non-compliance, malfunction or need for repair is not caused by the negligence or willful misconduct of Subtenant and/orany of Subtenant’s affiliates, partners, employees, agents or invitees, or breach of this Sublease by Subtenant), Sublandlord shall, at Sublandlord’s solecost and expense, promptly after receipt of written notice from Subtenant setting forth with specificity the nature and extent of such non-compliance,malfunction, failure or need for repair, rectify the same, or, if responsibility for a particular item is the responsibility of the Master Landlord, Sublandlordshall use commercially reasonable efforts to cause Master Landlord to rectify the same, at no cost or charge to Subtenant. Except for the foregoing,Sublandlord shall deliver the Subleased Premises in “AS IS, WHERE IS” condition. 4. FF&E. During the Term of this Sublease, Sublandlord grants to Subtenant, free of charge and at no extra rental, the right to use all office furniture,cubicles and other related furniture, fixtures and equipment owned by Sublandlord and listed in Exhibit C (the “FF&E”), conditioned upon (a)Subtenant’s agreement that Sublandlord has not made and does not make any express or implied warranty or representation with respect to themerchantability thereof or its fitness for any particular purpose; the design or condition thereof; the quality or capacity thereof; workmanship orcompliance thereof with the requirements of any Law, rule, specification or contract pertaining thereto; patent infringement or latent defects, and (b)Subtenant’s acceptance thereof on an “AS IS, WHERE IS” basis. Subtenant shall be responsible for the repair and maintenance of the FF&E, in as good acondition as when received (normal wear and tear and damage by fire or other casualty excepted) throughout the Sublease Term. Sublandlord herebygrants to Subtenant an option to purchase the FF&E for $1.00 at the end of the Term of this Sublease by providing written notice to Sublandlord at leastten (10) business days prior to the expiration of the Sublease Term. If Subtenant exercises its option to purchase the FF&E in a timely manner, thenSublandlord shall transfer title to the FF&E to Subtenant, without representation or warranty, effective as of the End Date, and Subtenant shall beresponsible for the costs and expenses of removing the FF&E. If Subtenant does not elect to purchase the FF&E, then Subtenant shall leave the FF&E inthe Subleased Premises at the expiration of the Sublease Term in the condition required under this Sublease (except that, if Subtenant does not elect topurchase the FF&E, Sublandlord shall have the right to remove the FF&E from the Subleased Premises during the ten (10) business day period prior to theexpiration of the Sublease Term). The preceding to the contrary notwithstanding, Subtenant hereby discloses to Sublandlord that some of the FF&E is atthe end of its useful life and has no value to Subtenant. Sublandlord hereby agrees that Subtenant shall have the right, but not the obligation, atSubtenant’s sole cost and expense, at any time during the Sublease Term, to remove and dispose of any or all of the FF&E identified on Exhibit Cattached hereto as Subtenant shall elect in its sole discretion and, in such event, Subtenant shall have no obligation to replace such items of FF&E soremoved from the Subleased Premises nor shall Subtenant have any obligation to compensate Sublandlord monetarily or otherwise for such items soremoved and disposed.  5. Security Deposit. Concurrently with Subtenant’s execution of this Sublease, Subtenant shall provide to Sublandlord a cash Security Deposit(“Security Deposit”) in the amount of Fifty Two Thousand Five Hundred Forty and 4/100 U.S. Dollars ($52,540.04), but in no event shall Subtenant enterthe Subleased Premises until the Security Deposit has been delivered. If Subtenant fails to pay Rent or any other sums as and when due hereunder, orotherwise defaults with respect to any provision of this Sublease, in each case beyond the applicable notice and cure period, Sublandlord may (but shallnot be obligated to) use, apply or retain all or any portion of the Security Deposit for payment of any sum for which Subtenant is obligated or which willcompensate Sublandlord for any costs, loss or damage which Sublandlord may suffer thereby. Any draw or partial draw of the Security Deposit shall notconstitute a waiver by Sublandlord of its right to enforce its other remedies hereunder, at law or in equity. If any portion of the Security Deposit is so usedor applied, Subtenant shall, within five (5) business days after written demand therefor, deposit cash with Sublandlord in an amount sufficient to restorethe Security Deposit to its original amount. Subtenant’s failure to do so shall be a default of this Sublease. Sublandlord shall not be required to keep theSecurity Deposit separate from its general funds, and Subtenant shall not be entitled to interest thereon. The Security Deposit or any remaining balancethereof shall be returned to Subtenant, or, at Sublandlord’s discretion, Subtenant’s last assignee, if applicable, within forty-five (45) days after theexpiration of the Sublease Term and Subtenant’s vacation and surrender of the Subleased Premises in the condition required by the terms of this Sublease.Subtenant hereby waives the provisions of California Civil Code Section 1950.7, other than Paragraph 1950.7(b), and 1951.7 and agrees that the SecurityDeposit shall be governed by the provisions of this Sublease. 6. Rent. (a) Base Rent. Subtenant shall pay to Sublandlord monthly base rent (the “Base Rent”) for the Subleased Premises as follows: TermSFMonthly Base RentStart Date-1/31/19*12,106$46,6082/1/19-1/31/20*12,106$48,0612/1/20-1/31/2112,106$49,5132/1/21-1/31/2212,106$50,9662/1/22-1/31/2312,106$52,5402/1/23-1/31/2412,106$54,114 * Anything herein to the contrary notwithstanding, Base Rent and Additional Rent shall be abated for the period commencing on the Early Access Dateand expiring on the Start Date; provided, however, Subtenant shall pay for charges for gas, electricity, sewer, heat, light, power, telephone, trash pick-upand all other utilities provided to the Subleased Premises in accordance with the Master Lease during the early access period prior to the Start Date, withinthirty (30) days of demand by Sublandlord, which demand shall include a copy of the relevant utility bill or equivalent information.  Base Rent for the first full month in which Base Rent is due shall be paid on or before the date that is ten (10) days following the Early Access Date. Onthe first day of each month during the Sublease Term, Base Rent shall be due and payable, in advance, at the address specified for Sublandlord below, orat such other place as Sublandlord designates in writing, without any prior notice or demand and without any deductions or setoff whatsoever. If the dateupon which Subtenant’s obligation to pay Base Rent commences, or End Date occurs on a day other than the first or last day, respectively, of a calendarmonth, then the Base Rent for such fractional month will be prorated on the basis of the actual number of days in such month. (b) Additional Rent; Subtenant’s Share; Operating Expenses. During the Sublease Term, if Sublandlord shall be charged for additional rent orother sums pursuant to any of the provisions of this Sublease and/or the Master Lease, Subtenant shall pay, as “Additional Rent,” 46.75% (“Subtenant’sShare”) of Sublandlord’s share of Operating Expenses (as defined in Section 1.03 of the Original Lease) and taxes payable pursuant to Sections 4.01 and4.05, respectively, of the Original Lease; provided, however, that Subtenant shall be entitled to a proportional share of any refund of such sums, if any,received by Sublandlord from Master Landlord in accordance with the Master Lease. Sublandlord shall deliver to Subtenant, a copy of Landlord’sStatement (as defined in Section 4.03 of the Original Lease) promptly following Sublandlord’s receipt thereof. If Subtenant shall procure any additionalservices from Master Landlord, or if additional rent or other sums are incurred for Subtenant’s sole benefit, Subtenant shall promptly make such paymentto Sublandlord or Master Landlord, as Sublandlord shall direct, and such charges shall not be prorated between Sublandlord and Subtenant. Any otherrent or other sums payable by Subtenant under this Sublease shall constitute and be due as Additional Rent. All Additional Rent that is payable toSublandlord shall be paid at the time and place that Base Rent is paid, except as otherwise provided in this Sublease. Sublandlord will have the sameremedies for a default in the payment of any Additional Rent as for a default in the payment of Base Rent. Together, Base Rent, Additional Rent and anyother sums due hereunder from Subtenant are sometimes referred to in this Sublease as “Rent”. (i) Notwithstanding the foregoing or anything else to the contrary in the Master Lease or this Sublease, as between Sublandlord andSubtenant, the following shall be excluded from Operating Expenses for purposes of determining Subtenant’s Share of Operating Expenses under thisSublease: (x) costs due to, or arising out of, the negligence or willful misconduct of Sublandlord or any of its agents, employees, affiliates, contractors,licensees, other sublessees or other representatives, (y) costs due to, or arising out of, any breach of the Master Lease by Sublandlord that is not caused orcontributed to by Subtenant and (z) costs due to, or arising out of, any special services exclusively provided to Sublandlord in the Remaining Premises, orany special use or requirements of Sublandlord that solely benefits Sublandlord in the Remaining Premises.  (c) Late Charge; Interest. Subtenant acknowledges that Subtenant’s late payment of Rent will cause Sublandlord to incur costs notcontemplated by this Sublease, the exact amount of such costs being difficult and impractical to fix. Such other costs include, without limitation,processing, administrative and accounting charges and late charges that may be imposed on Sublandlord. Accordingly, if Subtenant fails to pay any Rentwithin three (3) days of the date when due, Subtenant shall pay a late charge and interest thereon equal to 5% of the delinquent installment of Rent.Sublandlord and Subtenant agree that this late charge represents a fair and reasonable estimate of the costs that Sublandlord will incur due to Subtenant’slate payment of Rent. Sublandlord’s acceptance of a late charge will not constitute a waiver of Subtenant’s default with respect to the delinquent amountor prevent Sublandlord from exercising any of the other rights and remedies available to Sublandlord under this Sublease or under applicable law. Noendorsement or statement on a check or letter accompanying a check or payment shall be considered an accord and satisfaction of past due Rent.Subtenant’s covenant to pay Rent is independent of every other covenant in this Sublease. 7. Master Lease. Subtenant covenants that it will occupy the Subleased Premises in accordance with all of the terms and conditions of the MasterLease as they apply to the Subleased Premises, and will not suffer to be done or omit to do any act which may result in a violation of or a default underany of the terms and conditions of the Master Lease, or render Sublandlord liable for any damage, charge or expense thereunder. Subtenant furthercovenants and agrees to indemnify Sublandlord against and hold Sublandlord harmless from any claim, demand, action, proceeding, suit, liability, loss,judgment, expense (including reasonable attorneys’ fees) and damages of any kind or nature whatsoever arising out of, by reason of, or resulting from, (a)Subtenant’s breach or default in the performance of any terms, conditions, covenant or agreement of the Master Lease applicable to the SubleasedPremises or this Sublease, (b) Subtenant’s occupancy of the Subleased Premises, the undertaking of any alterations, additions or improvements or repairsby Subtenant to the Subleased Premises or the conduct of Subtenant’s business on the Subleased Premises (including, without limitation, any use ofHazardous Materials by Subtenant or any person claiming by, through or under Subtenant, or any of the contractors, agents, servants, employees, licenseesor invitees of Subtenant), and (c) any negligence or willful act of Subtenant or of any person claiming by, through or under Subtenant, or of thecontractors, agents, servants, employees, licensees or invitees of Subtenant or any such person, in, on or about the Subleased Premises. Sublandlordcovenants that it will maintain the Master Lease during the entire Sublease Term, subject, however, to any earlier termination of the Master Lease notcaused by the fault of Sublandlord under the Master Lease, and to comply with or perform or cause to be performed Sublandlord’s obligations under theMaster Lease to the extent not the responsibility of Subtenant hereunder. Sublandlord shall not agree to, or take any actions giving rise to, anyamendment, modification or termination of the Master Lease, that materially increases the financial obligation of Subtenant under this Sublease orotherwise materially and adversely impacts the rights of Subtenant hereunder or Subtenant’s use of the Subleased Premises (except Sublandlord mayexercise its express termination rights in accordance with the terms of the Master Lease but shall not otherwise voluntarily terminate the Master Leaseand/or surrender possession of the Subleased Premises to Master Landlord prior to the expiration of the Sublease Term). With respect to any obligation ofSubtenant to be performed under this Sublease, unless otherwise expressly stated in this Sublease, wherever the Master Lease grants to Sublandlord aspecified number of days after notice or other time condition to perform its corresponding obligation under the Master Lease (excluding the payment ofRent), Subtenant shall have two (2) fewer business days to perform the obligation, including, without limitation, curing any defaults. Any default noticeor other notice of any obligations (including any billing or invoice for any Rent or any other expense or charge due under the Master Lease) from MasterLandlord which is received by Subtenant (whether directly or as a result of being forwarded by Sublandlord) shall constitute such notice from Sublandlordto Subtenant under this Sublease without the need for any additional notice from Sublandlord.  (a) Limitations on Obligations of Sublandlord. Sublandlord shall not be deemed to have made any representation made by Master Landlordin the Master Lease. Moreover, Sublandlord shall not be obligated: (i) to provide any of the services or utilities that Master Landlord has agreed in the Master Lease to provide; (ii) to make any of the repairs or restorations that Master Landlord has agreed in the Master Lease to make; or (iii) to comply with any Laws or requirements of public authorities with which Master Landlord has agreed in the Master Lease tocomply; and Sublandlord shall have no liability to Subtenant on account of any failure of Master Landlord to do so, or on account of any failure byMaster Landlord to observe or perform any of the terms, covenants or conditions of the Master Lease required to be observed or performed by MasterLandlord; provided Sublandlord agrees to use commercially reasonable and diligent efforts to enforce Master Landlord’s obligations under the MasterLease on Subtenant’s behalf. If, after Sublandlord’s commercially reasonable and diligent efforts to cause Master Landlord’s performance (as describedabove), Master Landlord shall remain in breach or default under the Master Lease in any of its obligations to Sublandlord (beyond any applicable noticeand cure period), Sublandlord may, upon Subtenant’s written request, but shall not be obligated to, elect to (x) take action for the enforcement ofSublandlord’s rights against Master Landlord with respect to such breach or default at Subtenant’s sole cost and expense (except that to the extent MasterLandlord’s breach or default is applicable not only to the Subleased Premises but also any portion of the Remaining Premises, then Subtenant shall onlybe obligated to pay or reimburse to Sublandlord such enforcement costs applicable to the Subleased Premises only), or (y) cure any such breach or defaultto the extent permitted pursuant to the provisions of the Master Lease at Subtenant’s sole cost and expense (except that to the extent Master Landlord’sbreach or default is applicable to not only the Subleased Premises but also any portion of the balance of the Master Premises, then Subtenant shall only beobligated to pay or reimburse to Sublandlord such cure costs applicable to the Subleased Premises only). If Sublandlord does not elect to commence totake the action in clause (x) or (y) above within ten (10) business days after Sublandlord’s receipt of written notice from Subtenant asserting such breachor default by Master Landlord, to the extent not prohibited or precluded under the Master Lease, Sublandlord shall assign the enforcement right toSubtenant with respect to such breach or default by Master Landlord, Subtenant shall have the right to take enforcement action against Master Landlordin its own name and, solely for that purpose, and only to such extent, all of the rights of Sublandlord to enforce any such obligations of Master Landlordunder the Master Lease are hereby conferred upon and are conditionally assigned to Subtenant and Subtenant is hereby subrogated to such rights toenforce such obligations (including the benefit of any recovery or relief). Notwithstanding the provisions of the immediately preceding sentence, in noevent shall Subtenant be entitled to take such action in its own name if such action would constitute a breach or default under the Master Lease. IfSubtenant takes such enforcement action against Master Landlord as provided above, then Subtenant shall indemnify, defend and hold Sublandlordharmless from and against all loss, cost, liability, claims, damages and expenses (including, without limitation, reasonable attorneys' fees), penalties andfines incurred in connection with or arising from the taking of any such action. Subtenant’s obligations under the immediately preceding sentence shallsurvive the expiration or earlier termination of this Sublease.  (b) Right to Receive Services From Master Landlord; Abatement. Sublandlord grants to Subtenant the right to receive all of the services andbenefits with respect to the Subleased Premises that are to be provided by Master Landlord under the Master Lease. To the extent that rent is abated underthe Master Lease with respect to any portion of the Subleased Premises, Subtenant shall be entitled to an abatement of rent under this Sublease, inproportion to the degree to which Subtenant’s use is impaired by the occurrence which led to the abatement of rent under the Master Lease. (c) Sublandlord’s Right to Perform. If (i) Subtenant shall fail to perform any of its obligations hereunder and such failure shall continuebeyond any cure period provided for herein, or (ii) Master Landlord shall give any notice of failure or default under the Master Lease arising out of anyfailure by Subtenant to perform any of its obligations hereunder beyond any cure period provided for herein then, in either case, Sublandlord shall havethe right (but not the obligation), to perform or endeavor to perform such obligation, at Subtenant’s expense, and Subtenant shall, within thirty (30) daysof Sublandlord’s written demand, reimburse Sublandlord for all costs and expenses incurred by Sublandlord in doing so as Rent. (d) Subordination of Sublease. This Sublease is subject and subordinate to the Master Lease in all respects. If the Master Lease is terminatedfor any reason whatsoever, then this Sublease shall automatically terminate as if it expired by its terms (unless assumed by Master Landlord) and in suchevent neither Sublandlord nor Master Landlord shall have any liability whatsoever to Subtenant as a result of such termination, except that Sublandlordshall be liable to Subtenant for any such termination arising as a result of Sublandlord’s default under the Master Lease. Under no circumstance shallSublandlord be obligated to, or be responsible or liable in any way for, Master Landlord’s failure to, (a) perform any acts required to be completed byMaster Landlord under the Master Lease, (b) supply any item, including, but not limited to, any utility or service to the Subleased Premises required to besupplied by Master Landlord under the Master Lease, or (c) complete any work or maintenance in the Subleased Premises, the Building or the MasterPremises required to be completed by Master Landlord under the Master Lease; and no such failure will in any way excuse Subtenant’s performance underthis Sublease or entitle Subtenant to any abatement of Rent.  (e) Incorporation of Terms; Definitions. Except as otherwise expressly set forth in this Sublease, Subtenant hereby assumes and agrees toperform each and every obligation of Sublandlord under the Master Lease with respect to the Subleased Premises. Notwithstanding the foregoing, (i) tothe extent of any inconsistencies between the express terms of this Sublease and the terms of the Master Lease incorporated herein by reference, theexpress terms of this Sublease shall control, and (ii) Subtenant shall have no renewal or extension rights set forth in the Master Lease. Any capitalized termused but not defined in this Sublease shall have the meaning assigned in the Master Lease. In each instance where a provision of the Master Lease isincorporated herein, except as otherwise expressly stated: (i) all references in the incorporated provisions to words “this Lease”, shall mean “this Sublease”; (ii) all references in the incorporated provisions to words “Premises” shall mean “Subleased Premises” and, for the avoidance of doubt,the Subleased Premises is a part of “Building”, “Phase”, “Project”, “Real Property” or “Property” as those terms are used in the Master Lease; (iii) all references in the incorporated provisions to word “Landlord”, shall mean “Sublandlord”; and (iv) all references in the incorporated provisions to word “Tenant”, shall mean “Subtenant”. The following provisions of the Master Lease expressly are not incorporated into the terms of this Sublease: (a) the following provisions of theOriginal Lease: Section 1.01 to the extent inconsistent with the provisions of this Sublease, including, without limitation, the provisions of subsections(2), (3), (4), (5), (6), (7), (8), (9), (10), (11), (12), (13), (14), (16), (17), (18) and (19) thereof; Article Five; 27.08, Exhibit B; Exhibit D; Exhibit E; Exhibit F;Rider 1 (Commencement Date Agreement); Sections 2, 3 and 5 of Rider 2; (b) the provisions of the First Amendment (excepting therefrom the leasing ofthe Expansion Space); and (c) and the provisions of the Second Amendment (excepting therefrom the provisions of Sections 9, 11, 12, 13 (subject to theprovisions of Section 27 below), 14, 16, 17, 18 and 19). For avoidance of doubt, the parties hereto agree that the Workletter Agreement attached asExhibit A to the Second Amendment is incorporated by reference into this Sublease, as amended by the provisions of Section 2(a) and 21of this Sublease). 8. Utilities. (a) Utility Cost. If the Subleased Premises are not separately metered for a given Utility (as defined below), and to the extent the charge for suchUtility is not already included as an “Operating Expense”, within thirty (30) days of written demand by Sublandlord, Subtenant shall pay each month, asAdditional Rent, Subtenant’s Share of the cost of such utility.  (b) Allocation Based on Excess Consumption. If Subtenant consumes gas, electricity, sewer, trash pick-up, heat, light, power or telephoneservices or any other utilities provided to the Subleased Premises under the Master Lease (individually, a “Utility”, and collectively, “Utilities”) in theSubleased Premises and is not paying for such Utilities directly to the provider, in the event that Sublandlord has reason to believe Subtenant’s paymentfor Utilities based on Subtenant’s Share is inequitable because Subtenant is consuming more than Subtenant’s Share of Utilities, then Sublandlord shall, atSublandlord’s sole cost (except as expressly provided in the immediately following sentence), engage a competent and experienced licensed contractor toperform a measurement of Utilities consumption by all occupants of the Building. If such measurement reflects that Subtenant is consuming more thanSubtenant’s Share of Utilities, Subtenant shall reimburse Sublandlord, within thirty (30) days following Subtenant’s receipt of an invoice therefor andsupporting documentation evidencing the cost incurred by Sublandlord, for the entire cost of such measurement and the cost of such excess consumption,and Sublandlord shall modify the amount of the Utilities billed to Subtenant to allocate such charges on a commercially reasonable basis other than theapplication of the Subtenant’s Share, taking into account the results of such measurement. If Sublandlord or its successor, assign or sublessee consumes any Utilities in that portion of the Master Premises that does not include theSubleased Premises (referred to herein as the “Remaining Premises”) and is not paying for such Utilities directly to the provider, then, in the event thatSubtenant has reason to believe Subtenant’s payment for Utilities based on Subtenant’s Share is inequitable because Sublandlord (and/or its successor,assign or other sublessees) is consuming more Utilities than Sublandlord’s share (approx. 53.25%), then Subtenant shall have the right, not more oftenthan one (1) time per calendar year, to engage a competent and experienced licensed contractor to perform a measurement of Utilities consumption by alloccupants of the Master Premises at Subtenant’s sole cost and expense. If such measurement reflects that Sublandlord (and/or its successors, assigns and/orother sublessees) is consuming more than Sublandlord’s Share of Utilities, Sublandlord shall reimburse Subtenant, within thirty (30) days followingSublandlord’s receipt of an invoice therefor and supporting documentation evidencing the cost incurred by Subtenant, for the entire cost of suchmeasurement, and Sublandlord shall be responsible and liable for such excess Utilities consumption. In addition to Subtenant’s rights under the immediately preceding paragraph, Subtenant also shall have the right, at its sole cost, subject toMaster Landlord’s consent if required, to install an Emon-Demon meter to measure Subtenant’s actual electrical consumption in the Subleased Premises.The readings of such E-mon D-Mon meter or similar Subtenant installed electrical meter then shall be used to determine the actual electrical usage bySubtenant in the Subleased Premises and shall be binding on Subtenant and Sublandlord for purposes of determining whether Subtenant is using morethan Subtenant’s Share of electricity consumed in the Master Premises. To the extent required to be removed by Master Landlord, Subtenant shall, at itssole cost, remove such meter and restore any damage caused by such removal upon surrender of the Subleased Premises. (c) Failure or Interruption of Utility or Service. The provisions of Section 6.04 of the Original Lease are incorporated herein by reference,provided that “Landlord” shall refer to Master Landlord only, and Subtenant shall receive its proportionate share of rent abatement applicable to theSubleased Premises only to the extent Sublandlord receives the same from Master Landlord.  9. Compliance with Laws; Use. The Subleased Premises shall be used only for such legal uses as are permitted under the Master Lease and permittedunder the Master Landlord’s Consent, and, if required by applicable Laws, approved by any governmental entity having jurisdiction over the SubleasedPremises. Subtenant and its employees, agents, contractors and invitees (the “Subtenant Controlled Parties”) shall comply with all statutes, codes,ordinances, orders, rules and regulations of any municipal or governmental entity, including, without limitation, all applicable federal, state and localLaws or regulations governing protection of, or damage to the environment, or the treatment, storage or disposal of hazardous substances (collectivelyreferred to as “Laws”), regarding the operation of Subtenant’s business and Subtenant’s particular use of the Subleased Premises, to the same extent as ifSubtenant were the Tenant under the Master Lease. In addition to the foregoing, Subtenant shall comply with (i) the terms of Article 7 of the OriginalLease, which is incorporated herein by this reference, and (ii) any other rules and regulations of the Master Premises adopted by Master Landlord fromtime to time. 10. Hazardous Material. (a) Subtenant shall obtain the prior consent of both Master Landlord and Sublandlord in connection with any use, generation, manufacture,production, storage, handling, release, discharge or disposal of any Hazardous Material (as defined in the Master Lease) on, under or about the SubleasedPremises. To the extent that Sections 7.02 and 7.03 of the Original Lease grant to Master Landlord any rights of entry, inspection, review, approval, orrights, Sublandlord shall have the same rights under this Sublease. (b) Subtenant shall not be liable or responsible for the clean-up, remediation, monitoring or removal of (i) any Hazardous Materials existing on,in or under the Subleased Premises (or Master Premises) prior to Subtenant’s access to the Subleased Premises, or (ii) any Hazardous Materials existing on,in or under the Subleased Premises (or Master Premises) or any other part of the Property caused, generated, released, spilled, transported or used bySublandlord or any of its agents, employees, affiliates, contractors, consultants, licensees, other sublessees or other representatives. Subtenant shall onlybe liable or responsible for the clean-up, remediation, monitoring or removal of any Hazardous Materials existing on, in or under the Subleased Premises(or Master Premises) or any other part of the Property caused, generated, released, spilled, transported or used by Subtenant or any of its agents, employees,affiliates, contractors, consultants, licensees, sub-sublessees or other representatives. 11. Maintenance. Notwithstanding anything to the contrary contained in this Sublease, in no event shall Sublandlord be obligated to undertake anymaintenance and repair obligations that are otherwise the responsibility of Master Landlord under the Master Lease. Except as such maintenance andrepairs are the responsibility of Master Landlord pursuant to the terms of the Master Lease, and subject to the provisions of Section 3 above, Subtenantshall, at its sole cost, keep and maintain in good condition and repair the Subleased Premises to the same extent that Sublandlord is obligated as Tenantunder Section 8.02 the Original Lease, which is incorporated herein by reference.  12. Alterations and Improvements. Any alterations, additions or improvements to the Subleased Premises by or for Subtenant (collectively referredto as “Alterations”) shall require the prior written consent of both Sublandlord and Master Landlord, to the extent required under Article 9 of the OriginalLease, as incorporated herein, and be made in accordance with Article 9 of the Original Lease. Sublandlord may condition its consent upon Subtenant’sagreeing to pay all Sublandlord’s and Master Landlord’s costs and expenses incurred in connection with approving such Alterations. Subtenant shall besolely responsible for (a) the planning, construction and completion of any Alterations by or on behalf of Subtenant and (b) removal of such Alterationsand restoration of the Subleased Premises at the end of the Sublease Term as required under the Master Lease at Subtenant’s sole cost and expense.Notwithstanding the foregoing, subject to Master Landlord’s consent, Subtenant may remove from the Subleased Premises any specialized tenantimprovements installed by and paid for by Subtenant so long as Subtenant repairs any damage resulting from such removal. Subtenant shall not berequired to remove or restore any alterations, additions or other improvements installed by or on behalf of Sublandlord. 13. No Assignment or Subletting Without Consent. Subject to Section 10.01(e) of the Original Lease, Subtenant shall not assign, sublease, transferor encumber any interest in this Sublease or allow any third party to use any portion of the Subleased Premises (collectively or individually, a“Transfer”), without the prior written consent of Sublandlord and Master Landlord, which may be granted or withheld in accordance with Section 10.01of the Original Lease; provided, it shall be deemed reasonable for Sublandlord to withhold it’s consent if Master Landlord has declined to grant the same.Any Transfer or attempted Transfer without the consent of Sublandlord and Master Landlord (which such consent is required pursuant to this Section 13)shall be a default by Subtenant and, in addition to any other rights and remedies, shall entitle Sublandlord to terminate this Sublease. To the extent thatrent paid by such assignee or sub-sublessee of Subtenant is in excess of Rent paid by Subtenant hereunder (prorated in the event of any sub-sublease) afterdeduction of the costs and expenses permitted to be deducted under Section 10.03 of the Original Lease (“Bonus Subrent”), such Bonus Subrent shall besplit between Sublandlord and Subtenant 50/50, to be paid and distributed to Sublandlord within five (5) days of actual receipt by Subtenant.Notwithstanding anything to the contrary contained in this Sublease, Sublandlord may condition its consent to any request for consent to any Transferupon Subtenant paying (i) all reasonable attorney’s fees charged by Master Landlord in connection with such request and (ii) for all reasonable attorneys’fees incurred by Sublandlord in connection with such request. To the extent that Section 10.02 gives Master Landlord a recapture right in connection withany request for consent to assignment or subletting, Sublandlord shall have the same right to recapture, even if Master Landlord elects not to exercise itsright to recapture. 14. Defaults and Remedies. For the avoidance of doubt, the provisions of Article 11 of the Original Lease are hereby incorporated herein by thisreference. 15. Surrender. The provisions of Article 12 of the Original Lease are hereby incorporated herein by this reference; it being understood and agreedthat Subtenant shall have no obligation to remove from the Subleased Premises any alterations, additions or improvements undertaken by or on behalf ofSublandlord, as Tenant.  16. Holding Over. The provisions of Article 13 of the Original Lease are hereby incorporated herein by this reference. 17. Insurance. Subtenant shall obtain and maintain all insurance required to be carried by Sublandlord, as Tenant, with respect to the SubleasedPremises, under Article 16 of the Original Lease, and shall provide evidence of having done so to both Master Landlord and Sublandlord, at the timesrequired by Article 16. 18. Rules and Regulations. Article 18 of the Original Lease is hereby incorporated, except Sublandlord shall not impose any rules and regulationsupon Subtenant beyond those that Master Landlord adopts or promulgates with respect to the Premises, the Building, the Phase and/or the Project. 19. Intentionally Omitted. 20. Limitation of Liability. Notwithstanding anything set forth herein, in no event shall any personal liability be asserted against Sublandlord’s orSubtenant’s officers, directors, employees, agents or contractors or to the property or assets of any of them. Under no circumstances shall Sublandlord’s orSubtenant’s officers, directors, employees, agents or contractors be liable for any injury or damage to, or interference with, Subtenant’s or Sublandlord’sbusiness, including loss of profits, loss of rents or other revenues, loss of business opportunity, loss of goodwill or loss of use, or for any form of special orconsequential damage. Subtenant agrees, on its behalf and on behalf of its successors and assigns, that Sublandlord’s liability in connection with thisSublease shall not exceed Five Million Dollars ($5,000,000.00) and shall not have recourse for any liability of Sublandlord under this Sublease againstany of Sublandlord’s officers, directors or partners, and Subtenant shall not be entitled to any judgment against Sublandlord in excess of such FiveMillion Dollars ($5,000,000.00). 21. Tenant Improvement Allowance. To the extent permitted by Master Landlord and subject to all the terms and conditions set forth in theWorkletter Agreement attached to the Second Amendment (the “Workletter”), as modified herein, Sublandlord shall provide to Subtenant a tenantimprovement allowance (“Allowance”) in the amount of Twenty Dollars ($20.00) per rentable square feet (12,106 sq. ft), and such Allowance shall beapplied and disbursed in accordance with Section 6 of the Workletter. Notwithstanding anything to the contrary, as between Sublandlord and Subtenant,the parties hereto agree that the reference to the rate of the Allowance of Fifteen Dollars ($15.00) per square foot of rentable area in the Workletter ismodified to the rate established by the preceding sentence of this Section.  22. Right of First Refusal. Subject to Master Landlord’s consent required under the Master Lease, during the Sublease Term, provided there is (i) noSubtenant Default under this Sublease more than one (1) time during the immediately preceding 12 calendar months, and (ii) no Subtenant Default underthis Sublease at the time of exercising the right of first refusal below, Subtenant shall have an ongoing or continuing right of first refusal to sublease anyremaining portion of the Master Premises that Sublandlord decides to sublet (the “First Refusal Space”), subject to the following provisions: If, at any time during the Sublease Term, Sublandlord receives a bona fide offer or proposal from a third party (which offer or proposal is acceptable toSublandlord) to sublease any First Refusal Space or a third party indicates to Sublandlord its acceptance or approval of a bona fide offer or proposal fromSublandlord to sublet any available First Refusal Space, Sublandlord shall give Subtenant written notice of the basic business terms and conditions uponwhich such third party is willing to sublease such available First Refusal Space (“First Refusal Notice”) and such First Refusal Notice shall describe oridentify the applicable First Refusal Space and set forth the proposed term of sublease and the proposed rent payable for the First Refusal Space (whichproposed base rent for the First Refusal Space shall be the same per square foot base rent as is payable by Subtenant under this Sublease with respect to theSubleased Premises). Subtenant shall have a right of first refusal to lease such available First Refusal Space which is the subject of the First Refusal Noticeon the same terms and conditions as set forth in the First Refusal Notice (except that the proposed base rent for the First Refusal Space shall be the sameper square foot base rent as is payable by Subtenant under this Sublease with respect to the Subleased Premises) and otherwise on the terms and conditionsset forth in this Sublease to the extent not inconsistent with the terms of the First Refusal Notice. Subtenant shall have ten (10) days upon receipt of theFirst Refusal Notice to give Sublandlord written notice of whether or not Subtenant desires to sublease such applicable First Refusal Space on the termsand conditions set forth in the First Refusal Notice. Subtenant’s failure to give such written notice within the ten (10) day period shall be deemedSubtenant’s waiver of this right of first refusal with respect to the First Refusal Space described or identified in the First Refusal Notice, and Sublandlordshall thereafter have the right to lease the First Refusal Space described in the First Refusal Notice, free and clear of any rights of Subtenant hereunder toanyone for a base rental rate per square foot which is not less than ninety percent (90%) of the base rental rate per square foot set forth in the First RefusalNotice delivered to Subtenant without first re-offering such applicable First Refusal Space to Subtenant. If, after Subtenant fails to timely exercise its rightof first refusal hereunder with respect to any available First Refusal Space described in a First Refusal Notice, Sublandlord desires to lease such applicableFirst Refusal Space at a base rental rate per square foot that is less than ninety percent (90%) of the base rental rate per square foot set forth in the FirstRefusal Notice delivered to Subtenant, then such applicable First Refusal Space shall again be offered to Subtenant by a new First Refusal Noticehereunder at such lower base rental rate per square foot and/or such other terms and conditions. Moreover, if Sublandlord is unable to enter into a lease orsublease of the applicable First Refusal Space with another tenant at a base rental rate which is not less than ninety percent (90%) of the base rental rateper square foot set forth in the First Refusal Notice delivered to Subtenant within twelve (12) months following Sublandlord’s final communication withSubtenant concerning Subtenant’s subleasing of the First Refusal Space pursuant to Sublandlord’s First Refusal Notice, then the applicable First RefusalSpace shall again be offered to Subtenant by a new First Refusal Notice to be given by Sublandlord to Subtenant. If, within the aforesaid ten (10) dayperiod, Subtenant gives Sublandlord written notice of Subtenant’s desire to sublease such applicable First Refusal Space on the terms and conditions setforth in the First Refusal Notice given by Sublandlord to Subtenant, then Sublandlord shall prepare and deliver to Subtenant for execution bySublandlord and Subtenant an amendment to this Sublease that incorporates the First Refusal Terms accepted by Subtenant and such other terms andconditions as the parties hereto may agree upon.  Anything in this Section 22 to the contrary notwithstanding, Subtenant’s exercise of any right of first refusal above with respect to any First Refusal Spaceshall be void and of no force or effect if Subtenant is in default under this Sublease (beyond any applicable cure period) at the time Subtenant’s sublettingof the applicable First Refusal Space (that is the subject of Subtenant’s exercise of such right of first refusal referred to in this paragraph) commences. 23. Notice. Notices for Subtenant shall be sent to Subtenant at 301 Penobscot Drive, Redwood City, CA 94063, Attn: Senior Director WorkplaceServices and separately to the Attn: Office of the General Counsel. Copies of all notices sent to Subtenant pursuant to the terms of the immediatelypreceding sentence also shall be sent concurrently therewith to Genomic Health, Inc., 301 Penobscot Drive, Redwood City, CA 94063, Attn: ChiefFinancial Officer. All notices sent to Subtenant by hand-delivery also should be sent to Genomic Health, Inc. 101 Galveston Drive, Redwood City,California. Notices for Sublandlord shall be sent to Sublandlord as follows: ACELRX PHARMACEUTICALS, INC., 351 Galveston Drive, Redwood City,California 94063 ATTN: Chief Legal Officer (each, a “Notice Address”). All demands, approvals, consents or notices shall be in writing and delivered byhand or sent by registered or certified mail with return receipt requested, or sent by overnight or same day courier service at the party’s respective NoticeAddress(es) set forth above. Each notice shall be deemed to have been received or given on the earlier to occur of actual delivery or the date on whichdelivery is refused, or, if Subtenant has vacated the Subleased Premises or other Notice Address without providing a new Notice Address, three (3)business days after notice is deposited in the U.S. mail or one day after being deposited with a courier service in the manner described above. Any partymay, at any time, change its Notice Address (other than to a post office box address) by giving the other parties written notice of the new address. 24. Force Majeure. The term “Force Majeure Delay” as used in the Sublease shall mean any delay by either party in fulfilling its obligationshereunder which is attributable to any: (i) actual delay or failure to perform attributable to any strike, lockout or other labor or industrial disturbance(whether or not on the part of the employees of either party hereto), civil disturbance, future order claiming jurisdiction, act of a public enemy, war, riot,sabotage, blockade, embargo, inability to secure customary materials, supplies or labor through ordinary sources by reason of regulation or order of anygovernment or regulatory body; or (ii) actual delay or failure to perform attributable to lightening, earthquake, fire, storm, hurricane, tornado, flood,washout, explosion, or any other similar industry-wide or Building-wide cause beyond the reasonable control of the party from whom performance isrequired, or any of its contractors or other representatives. Any prevention, delay or stoppage due to any Force Majeure Delay shall excuse theperformance of the party affected for a period of time equal to any such prevention, delay or stoppage (except the obligations of Subtenant to pay Rentand other charges pursuant to this Sublease). 25. Governing Law. This Sublease shall be interpreted and enforced in accordance with the Laws of the state in which the Subleased Premises islocated. 26. Brokers. Each of Subtenant and Sublandlord represents and warrants that it has not dealt with any broker in connection with this Sublease, otherthan Kidder Matthews on behalf of Subtenant and Jones Lang LaSalle on behalf of Sublandlord, and each party hereto agrees to indemnify and hold theother party harmless from any commissions due to any broker with whom such party has dealt, other than the brokers named in this paragraph, whosecommission shall be paid by Sublandlord pursuant to a separate agreement.  27. Entire Agreement. This Sublease constitutes the entire agreement between the parties and supersedes all prior agreements and understandingsrelated to the Subleased Premises. This Sublease may be modified only by a written agreement signed by Sublandlord and Subtenant. 28. Authority. Each party represents to the other that the execution, delivery, and performance by it of its respective obligations under this Subleasehave been duly authorized and will not violate any provision of Law, any order of any court or other agency of government, or any indenture, agreementor other instrument to which it is a party or by which it is bound. 29. Counterparts. This Sublease may be executed in multiple counterparts, and by each party on separate counterparts, each of which shall bedeemed to be an original but all of which shall together constitute one agreement. The parties contemplate that they may be executing counterparts of theSublease transmitted by facsimile or email in PDF format and agree and intend that a signature by such means shall bind the party so signing with thesame effect as though the signature were an original signature. 30. Signage. Conditioned upon the approval of Master Landlord, and Sublandlord’s approval, in its reasonable discretion, of Subtenant’s proposedsignage specifications, Sublandlord shall permit Subtenant to install, at Subtenant’s expense, signage for Subtenant on the Project Monument and at theentrance to the Subleased Premises. 31. Right of Entry. If Sublandlord desires to enter the Subleased Premises for any purpose as permitted by this Sublease or any of the provisions ofthe Master Lease incorporated herein by reference, except in the event of emergency, Sublandlord shall comply with the reasonable security requirementsimposed by Subtenant with respect to such right of entry. 32. Damage and Destruction. The provisions of Section 14.02 of the Original Lease as it pertains to Tenant’s right to terminate the Lease shall bedeemed incorporated into this Sublease by reference. The provisions of Section 14.03 of the Original Lease shall be deemed incorporated into thisSublease by reference. Subtenant shall have the right to terminate this Sublease only to the extent Tenant has the right to terminate the Master Lease, andSubtenant shall have no right to abatement of Rent under this Sublease unless Sublandlord is entitled to abatement of rent under the Master Lease withrespect to the Subleased Premises. 33. Eminent Domain. The provisions of Article Fifteen of the Original Lease as they pertain to the apportionment or adjustment of Monthly BaseRent and Rent Adjustments as well as the provisions of Section 15.03 of the Original Lease are incorporated into this Sublease by reference. Subtenantshall have the right to terminate this Sublease only to the extent Tenant has the right to terminate the Master Lease, and Subtenant shall have no right toabatement of Rent under this Sublease unless Sublandlord is entitled to abatement of rent under the Master Lease with respect to the Subleased Premises. [Signature Page Follows]  In Witness Whereof, Sublandlord and Subtenant have executed this Sublease as of the day and year first above written. Sublandlord: Subtenant: ACELRX PHARMACEUTICALS, INC., GENOMIC HEALTH, INC.,a Delaware corporation a Delaware corporation By:/s/Raffi Asadorian By:/s/G. Bradley ColeName:Raffi Asadorian Name:G. Bradley ColeTitle:CFO Title:CFO  EXHIBIT A Subleased Premises  EXHIBIT BDELIVERY AGREEMENT Re:Sublease dated November 30, 2018 (“Sublease”), between ACELRX PHARMACEUTICALS, INC., a Delaware corporation (“Sublandlord”),and GENOMIC HEALTH, INC., a Delaware corporation (“Subtenant”), concerning 12,106 rentable square feet (the “Subleased Premises”) inthe Building located at 301 Galveston Drive, Redwood City, CA (the “Building”) Ladies and Gentlemen: In accordance with the subject Sublease (to which reference is made for any undefined capitalized terms used herein), we wish to advise and/orconfirm as follows: The Start Date of the Sublease Term for the Subleased Premises is February 15, 2019 (the “Start Date”), and the Sublease Term for the SubleasedPremises expires on January 31, 2024 (the “End Date”), unless sooner terminated according to the terms of the Sublease. Sublandlord deliveredpossession of the Subleased Premises to Subtenant on the Start Date, in the condition required under the Sublease and Subtenant accepted possession ofthe Subleased Premises on the Start Date. That in accordance with the Sublease, monthly Base Rent in the amount of $46,608.00 and Subtenant’s percentage share of Operating Expensesfor the Subleased Premises is 46.75% and shall commence to accrue on February 16, 2019. Sublandlord: Subtenant: ACELRX PHARMACEUTICALS, INC., GENOMIC HEALTH, INC.,a Delaware corporation a Delaware corporation By:/s/Raffi Asadorian By:/s/G. Bradley ColeName:Raffi Asadorian Name:G. Bradley ColeTitle:CFO Title:CFO  EXHIBIT CFF&E ItemQuantityTall chair2basket1bench2big core board2bike1Chair104coffee machine1coreboard8cubical desk20dartboard1Drawers with shelf13dresser1fan2File cabinet20foosball table1glass round table5high chair4high round tall table1industrial size frige1IT rack1L table14lifefitness1long table2microwave1pinpong table1projector4reception desk1round playroom seat6round table2Samsung TV2shelf3smartcut cutting board1sofa chair4table1tall file cabinet1tall table2toshiba TV1treadmill1TV5water machine1weight bench1whiteboard20  EXHIBIT DPERMITTED HAZARDOUS MATERIALS Permitted Hazardous Material includes insignificant amounts of substances listed below so long as (i) such substances are maintained only in suchquantities as are reasonably necessary for Tenant's operations in the Premises, or such other specific quantity limit as specified below, (ii) such substancesare used, stored and handled strictly in accordance with the manufacturers' instructions, industry standards and all applicable laws, (iii) such substancesare not disposed of in or about the Building or the Project in a manner which would constitute a release or discharge thereof, and (iv) all such substancesare removed from the Building and the Project by Tenant no later than the Termination Date. Tenant/Company Name:Genomic HealthAddress:501 Galveston Drive, Redwood City, CA 94063Contact Name: David QuinnTelephone:650-569-2212 (o); 650-207-2812 (c) PLEASE CHECK BELOW:1. No: ☐☐ or Yes : ( if ‘No’, do not proceed further )Do you use and/or store hazardous materials beyond typical household cleaning products? 2. No: ☐☐ or Yes :Have you, or do you plan to submit a ‘Hazardous Materials Business Plan? (San Mateo OES Form 2370) to the San Mateo County Environmental HealthServices Division? 3. Please fill out the following for your list of chemicals (See OES Form 2731 for definitions and number references): Common Name*(207) Chemical Name*(205)PhysicalState(Sol/Liq/Gas) *(214)SingleLargestContainer*(215) AverageDailyAmount*(217) MaxStorageAmount*(218) Location(s)Stored:(Interior,Exterior-existing shed,Exterior-proposedshed, Other) Acetic Acid Acetic AcidLiq1 L 2 L 4 L Interior Americlear Clearing Solvent (+/-)-LimoneneLiq1 L 6 gal 10 gal Interior BIOstic Paraffin RemovalAgent Paraffin Removal AgentLiq1 gal 1 gal 2 gal Interior Decane DecaneLiq1 gal 5 gal 10 gal Interior Diesel Fuel Diesel FuelLiq300 gal 280 gal 300 gal Exterior Envirene IsoalkeneLiq1 gal 1 gal 2 gal Interior Isoamyl Alcohol Isoamyl AlcoholLiq1 L 1 L 1 L Interior Mineral Spirits Aliphatic & alicyclichydrocarbonsLiq4 L 30 L 40 L Interior Paraclear Xylene Substitute Petroleum NapthaLiq4 L 4 L 4 L Interior Shandon Xylene Substitute Stoddard SolventLiq1 gal 15 gal 20 gal Interior Soltrol 100 IsoparaffinLiq4 L 20 L 40 L Interior Soltrol 250 IsoparaffinLiq4 L 20 L 40 L Interior 1, 3-Diaminopropane 1, 3-DiaminopropaneLiq1 L 1 L 2 L Interior  Common Name*(207) Chemical Name*(205)PhysicalState(Sol/Liq/Gas) *(214)SingleLargestContainer*(215) AverageDailyAmount*(217) MaxStorageAmount*(218) Location(s)Stored:(Interior,Exterior-existing shed,Exterior-proposedshed, Other) Ethylenediamine EthylenediamineLiq1 L 1 L 1 L Interior Diethyl pyrocarbonate Diethyl pyrocarbonateLiq0.5 L 0.5 L 0.5 L Interior Dimethylsulfoxide DimethylsulfoxideLiq1 L 1 L 2 L Interior RNaseZap RNaseZapLiq0.5 L 2 L 3.5 L Interior Slidebrite SlidebriteLiq4 L 4 L 4 L Interior Soltrol 130 IsoparaffinLiq4 L 20 L 40 L Interior Triethylamine Acetate Buffer TriethylammoniumacetateLiq0.5 L 0.5 L 0.5 L Interior Accustain Xylene Substitute Accustain XyleneSubstituteLiq1 gal 1 gal 2 gal Interior Tridecane TridecaneLiq4 L 4 L 4 L Interior Ammonium HydroxideSolution Ammonium HydroxideLiq0.5 L 0.5 L 0.5 L Interior Bradford Reagent Phosphoric Acid SolutionLiq0.5 L 0.5 L 0.5 L Interior Formic Acid Formic AcidLiq1 L 1 L 1 L Interior Hydrochloric Acid Hydrochloric AcidLiq4 L 4 L 6 L Interior N,N’-Dimethylethylenediamine N,N’-DimethylethylenediamineLiq0.025 kg 0.025 kg 0.025 kg Interior Perchloric Acid Solution Perchloric Acid SolutionLiq0.5 L 1 L 1 L Interior Phosphoric Acid Solution Phosphoric Acid SolutionLiq1 L 2 gal 2 gal Interior RNaseZap Wipes RNaseZapLiq0.25 kg 1 kg 1 kg Interior Sodium Hydroxide Solution Sodium HydroxideLiq1 L 1.5 gal 2 gal Interior Spermidine 4-AzaoctamethylenediamineLiq0.05 kg 0.2 kg 0.5 kg Interior Trifluoroacetic Acid Trifluoroacetic AcidLiq1 L 1 L 1 L Interior Monoethanolamine MonoethanolamineLiq1 L 2 L 4 L Interior Chloroform/ Phenol/ AdipoylChloride Solution Chloroform, Phenol andAdipoyl ChlorideLiq0.4 L 2 gal 3 gal Interior Phenol/ Chloroform Solution Phenol and ChloroformLiq0.4 L 2 gal 3 gal Interior Phenol PhenolLiq1 L 2 L 4 L Interior Sodium Hydroxide, Pellets Sodium HydroxideSol1 kg 1 kg 2 kg Interior Tris(2-carboxyethyl) –phosphine Hydrochloride Tris(2-carboxyethyl)–phosphine HydrochlorideSol0.01 kg 0.01 kg 0.01 kg Interior Dry Ice Carbon DioxideSol250 lb 200 lb 250 lb Interior Liquid Nitrogen NitrogenLiq400 L 720 L 720 L Interior Acetone AcetoneLiq1 L 4 L 4 L Interior Acetonitrile AcetonitrileLiq2 L 12 L 16 L Interior Mounting Medium Xylene or ButylMethacrylateLiq1 L 2 gal 2 gal Interior (+/-) 2-Butanol ButanolLiq0.5 L 1 L 2 L Interior 2,2,4-Trimethyl pentane 2,2,4-Trimethyl pentaneLiq1 L 2 L 4 L Interior Wash Buffer, RW1 EthanolLiq1 L 1 L 1 L Interior  Common Name*(207) Chemical Name*(205)PhysicalState(Sol/Liq/Gas) *(214)SingleLargestContainer*(215) AverageDailyAmount*(217) MaxStorageAmount*(218) Location(s)Stored:(Interior,Exterior-existing shed,Exterior-proposedshed, Other) Clear Advantage XyleneSubstitute Napthenic HydrocarbonBlendLiq4 L 4 L 4 L Interior Cytoseal XYL, MountingMedium XylenesLiq0.1 L 3 L 5 L Interior Eosin Y 2′,4′,5′,7′-TetrabromofluoresceinLiq0.05 kg 0.05 kg 0.05 kg Interior Eosin Y, 1% AlcoholicSolution Eosin YLiq1 gal 3 gal 7 gal Interior Ethyl Alcohol, 70-100%,Blends Ethyl AlcoholLiq0.25 gal 120 gal 240 gal Interior EZ-DeWax, TissueDeparaffinization Solution,Ready-to-Use IsoparaffinichydrocarbonsLiq1 L 1 L 1 L Interior Harris Hematoxylin Ethylene GlycolLiq1 gal 5 gal 10 gal Interior Isopropyl Alcohol Isopropyl AlcoholLiq1 gal 75 gal 150 gal Interior Methyl Alcohol Methyl AlcoholLiq1 L 4 L 8 L Interior Soltrol 10 Isoparaffin IsoparaffinLiq1 L 20 L 40 L Interior Triethylamine TriethylamineLiq1 L 1 L 2.5 L Interior Xylenes o- m- and p-XyleneLiq1 gal 45 gal 90 gal Interior Isoamyl Acetate Isoamyl AcetateLiq500 mL 1 L 1 L Interior n-Butanol n-ButanolLiq500 mL 1 L 2 L Interior Xylene Substitute, Neo-Clear IsoalkanesLiq1 L 20 L 40 L Interior Chloroform ChloroformLiq1 L 3 L 6 L Interior Chloroform/Isoamyl Alcohol Chloroform/IsoamylAlcoholLiq500 mL 1 L 1 L Interior Ethidium Bromide Solution Ethidium BromideLiq100 mL 0.1 L 0.1 L Interior TetramethylammoniumChloride Solution TetramethylammoniumChloride SolutionLiq500 mL 1 L 2.5 L Interior cis-Platinum (II) DiammineDichloride cis-Platinum (II)Diammine DichlorideSol1 g 2 g 5 g Interior Sodium Azide Sodium AzideSol0.05 kg 0.1 kg 0.1 kg Interior Air, Compressed Gas AirGas300 ft3 1000 ft3 2000 ft3 Interior Carbon Dioxide, CompressedGas Carbon DioxideGas300 ft3 1800 ft3 3700 ft3 Interior Helium, Compressed Gas HeliumGas300 ft3 600 ft3 900 ft3 Interior Nitrogen, Compressed Gas NitrogenGas300 ft3 600 ft3 1800 ft3 Interior Hydrogen Peroxide, <30% Hydrogen PeroxideLiq0.1 L 0.1 L 0.1 L Interior Bleach, Household Sodium HypochloriteLiq500 mL 10 L 20 L Interior Nitric Acid Nitric AcidLiq1 L 2 L 4 L Interior Sodium Perchlorate Sodium PerchlorateSol500 g 1 kg 2.5 kg Interior 1,4-Dithiothreitol 1,4-DithiothreitolLiq0.025 L 0.05 L 0.1 L Interior  Common Name*(207) Chemical Name*(205)PhysicalState(Sol/Liq/Gas) *(214)SingleLargestContainer*(215) AverageDailyAmount*(217) MaxStorageAmount*(218) Location(s)Stored:(Interior,Exterior-existing shed,Exterior-proposedshed, Other) 2-Mercaptoethanol 2-MercaptoethanolLiq0.25 L 0.5 L 1 L Interior DAB Chromagen DiaminobenzidineLiq0.25 L 0.5 L 1 L Interior Formaldehyde Solutions(<12% formaldehyde) FormaldehydeLiq1 gal 12 gal 24 gal Interior Formamide FormamideLiq500 g 1 kg 2 L Interior Glutaraldehyde Solutions Glutaraldehyde SolutionsLiq1 gal 5 gal 10 gal Interior N,N-Dimethylformamide N,N-DimethylformamideLiq0.25 kg 0.5 kg 1 kg Interior Zenker’s Fixative Solution Mercuric ChlorideLiq1 gal 1 gal 2 gal Interior 5-Fluorouracil 5-FluorouracilSol5 g 10 g 25 g Interior Actinomycin D-Mannitol Actinomycin D-MannitolSol0.25 g 0.5 g 1 g Interior Carboplatin CarboplatinSol0.25 g 0.5 g 1 g Interior DiethylenetriaminepentaaceticAcid DiethylenetriaminepentaaceticAcidSol2.5 g 5 g 0.01 kg Interior Finasteride FinasterideSol0.25 g 0.5 g 1 g Interior HexadecyltrimethylammoniumBromide HexadecyltrimethylammoniumBromideSol0.25 kg 0.5 kg 1 kg Interior Lithium Chloride Lithium ChlorideSol0.25 kg 0.25 kg 0.5 kg Interior o-Phenylenediamine o-PhenylenediamineSol100 mL 100 mL 0.25 L Interior Oxaliplatin OxaliplatinSol100 mg 100 mg 250 mg Interior Picoplatin PicoplatinSol100 mg 100 mg 250 mg Interior Potassium Dichromate Potassium DichromateSol0.25 kg 0.5 kg 1 kg Interior PhenylmethanesulfonylFluoride PhenylmethanesulfonylFluorideSol1 g 10 g 10 g Interior Clear bath algicide Alkyl dimethyl benzylammonium chlorideLiq250 mL 1 L 2 L Interior Western Blot Stripping Buffer Organo phosphineLiq1 L 2 L 3 L Interior 1,1,1,3,3,3,-Hexafluoro-2-propanol 1,1,1,3,3,3,-Hexafluoro-2-propanolLiq100 mL 500 mL 1 L Interior DNA Zap Hydrogen peroxide solutionLiq250 mL 10 L 20 L Interior 2'-Nitroacetanilide, 98% 2'-NitroacetanilideSol25 gm 25 gm 250 gm Interior Leica DAP Part 1 Diaminobenzidinetetrahydrochloride hydrateLiq10 mL 100 mL 1 L Interior Buffer AW1 Guanidinium chlorideLiq25 mL 100 mL 1 L Interior Binding Buffer AM 11 Guanidinium chlorideLiq10 mL 100 mL 1 L Interior Buffer RLT Lysis Buffer 1 Guanadine thiocyanateLiq50 mL 100 mL 1 L Interior  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 23.1CONSENT 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. 333-223535, 333-216492, 333-202709, 333-194634 and 333-187206) pertaining to the 2011Equity 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 7, 2019 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, 2018. /s/ OUM & CO. LLP San Francisco, CaliforniaMarch 7, 2019 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 7, 2019 /s/ Vincent J. AngottiVincent J. AngottiChief Executive Officer(Principal Executive 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 7, 2019 /s/ Raffi M. AsadorianRaffi M. AsadorianChief Financial Officer(Principal Financial Officer) Exhibit 32.1 CERTIFICATION Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 ofChapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), 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, 2018, 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 7th day of March 2019. /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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