10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2018

or

☐ TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from              to             

Commission File Number: 001-35068

ACELRX PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Delaware	41-2193603
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

351 Galveston Drive

Redwood City, CA 94063

(650) 216-3500

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

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 of 1934 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 such filing 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 405 of 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 such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” 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 any new 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  ☒

As of October 30, 2018, the number of outstanding shares of the registrant’s common stock was 61,907,272.

1

ACELRX PHARMACEUTICALS, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2018

Table of Contents

			Page
Part I. Financial Information			3
	Item 1.	Financial Statements	3
		Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017	3
		Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2018 and 2017 (unaudited)	4
		Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 (unaudited)	5
		Notes to Condensed Consolidated Financial Statements (unaudited)	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
	Item 4.	Controls and Procedures	27
Part II. OTHER Information			27
	Item 1.	Legal Proceedings	27
	Item 1A.	Risk Factors	28
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59
	Item 3.	Defaults Upon Senior Securities	59
	Item 4.	Mine Safety Disclosures	59
	Item 5.	Other Information	59
	Item 6.	Exhibits	60

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AcelRx Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

	September 30, 2018 (Unaudited)			December 31, 2017(1)
Assets
Current Assets:
Cash and cash equivalents	$	57,566		$	52,902
Short-term investments		5,995			7,567
Accounts receivable, net		187			1,533
Tax receivable		352			—
Inventories		856			956
Prepaid expenses and other current assets		1,048			455
Total current assets		66,004			63,413
Property and equipment, net		11,004			11,051
Restricted cash		178			178
Long-term tax receivable		351			703
Other assets		207			207
Total Assets	$	77,744		$	75,552
Liabilities and Stockholders’ Deficit
Current Liabilities:
Accounts payable	$	1,775		$	1,424
Accrued liabilities		3,621			3,543
Long-term debt, current portion		8,372			7,727
Deferred revenue, current portion		326			362
Liability related to the sale of future royalties, current portion		377			604
Total current liabilities		14,471			13,660
Deferred rent, net of current portion		442			378
Long-term debt, net of current portion		5,502			11,369
Deferred revenue, net of current portion		3,227			3,463
Liability related to the sale of future royalties, net of current portion		91,745			82,984
Contingent put option liability		144			207
Total liabilities		115,531			112,061
Commitments and Contingencies
Stockholders’ Deficit:
Common stock, $0.001 par value—100,000,000 shares authorized as of September 30, 2018 and December 31, 2017; 61,790,346 and 50,899,154 shares issued and outstanding as of September 30, 2018 and December 31, 2017		61			51
Additional paid-in capital		294,613			261,310
Accumulated deficit		(332,461	)		(297,870	)
Total stockholders’ deficit		(37,787	)		(36,509	)
Total Liabilities and Stockholders’ Deficit	$	77,744		$	75,552

⁽¹⁾ The condensed consolidated balance sheet as of December 31, 2017 has been derived from the audited financial statements as of that date included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

See notes to condensed consolidated financial statements.

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AcelRx Pharmaceuticals, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(In thousands, except share and per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Revenue:
Collaboration agreement	$	177		$	1,225		$	802		$	6,444
Contract and other		200			262			736			811
Total revenue		377			1,487			1,538			7,255
Operating costs and expenses:
Cost of goods sold		875			2,029			2,738			9,697
Research and development		3,642			3,913			10,433			15,733
General and administrative		5,188			4,406			13,117			12,700
Total operating costs and expenses		9,705			10,348			26,288			38,130
Loss from operations		(9,328	)		(8,861	)		(24,750	)		(30,875	)
Other (expense) income:
Interest expense		(529	)		(919	)		(1,758	)		(2,596	)
Interest income and other income (expense), net		312			(465	)		643			(215	)
Non-cash interest expense on liability related to future sale of royalties		(2,913	)		(2,768	)		(8,724	)		(7,935	)
Total other expense		(3,130	)		(4,152	)		(9,839	)		(10,746	)
Net loss before income taxes		(12,458	)		(13,013	)		(34,589	)		(41,621	)
Provision for income taxes		—			—			(2	)		(2	)
Net loss		(12,458	)		(13,013	)		(34,591	)		(41,623	)
Other comprehensive loss:
Unrealized losses on available-for-sale securities		—			—			—			(3	)
Comprehensive loss	$	(12,458	)	$	(13,013	)	$	(34,591	)	$	(41,626	)
Net loss per share of common stock, basic and diluted	$	(0.21	)	$	(0.28	)	$	(0.64	)	$	(0.91	)
Shares used in computing net loss per share of common stock, basic and diluted		60,004,416			46,365,436			54,292,206			45,701,446

See notes to condensed consolidated financial statements.

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AcelRx Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	Nine Months Ended September 30,
	2018			2017
Cash flows from operating activities:
Net loss	$	(34,591	)	$	(41,623	)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash royalty revenue related to royalty monetization		(220	)		(89	)
Non-cash interest expense on liability related to royalty monetization		8,724			7,935
Depreciation and amortization		435			1,388
Non-cash interest expense related to debt financing		489			1,060
Stock-based compensation		3,936			3,240
Revaluation of put option and PIPE warrant liabilities		(63	)		435
Inventory impairment charge		—			369
Other		(84	)		(3	)
Changes in operating assets and liabilities:
Accounts receivable		1,346			4,490
Inventories		100			1,060
Prepaid expenses and other assets		(563	)		(224	)
Accounts payable		403			220
Accrued liabilities		236			(1,300	)
Deferred revenue		(272	)		(271	)
Deferred rent		39			224
Net cash used in operating activities		(20,085	)		(23,089	)
Cash flows from investing activities:
Purchase of property and equipment		(573	)		(2,495	)
Purchase of investments		(12,844	)		—
Proceeds from maturities of investments		14,500			—
Net cash provided by (used in) investing activities		1,083			(2,495	)
Cash flows from financing activities:
Principal payments on long-term debt		(5,711	)		—
Net proceeds from issuance of common stock in connection with equity financings		29,073			13,120
Payment of debt modification transaction costs		—			(204	)
Net proceeds from issuance of common stock through equity plans		304			294
Net cash provided by financing activities		23,666			13,210
Net increase (decrease) in cash, cash equivalents and restricted cash		4,664			(12,374	)
Cash, cash equivalents and restricted cash—Beginning of period		53,080			80,488
Cash, cash equivalents and restricted cash—End of period	$	57,744		$	68,114

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statement of cash flows (in thousands): 

	September 30,		September 30,
	2018		2017
Cash and cash equivalents		57,566		67,936
Restricted cash		178		178
Cash, cash equivalents and restricted cash shown in the statement of cash flows		57,744		68,114

Amounts included in restricted cash represent letters of credit required to be maintained under the Company’s facility lease and corporate credit card agreements as security for performance under these agreements. The letters of credit are secured by certificates of deposit in amounts equal to the letters of credit.

See notes to condensed consolidated financial statements.  

5

AcelRx Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except where otherwise noted)

1. Organization and Summary of Significant Accounting Policies

AcelRx Pharmaceuticals, Inc., or the Company or AcelRx, was incorporated in Delaware on July 13, 2005 as SuRx, Inc., and in January 2006, the Company changed its name to AcelRx Pharmaceuticals, Inc. The Company’s operations are based in Redwood City, California.

AcelRx is a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for the treatment of acute pain. On November 2, 2018, the U.S. Food and Drug Administration, or FDA, approved the resubmitted New Drug Application, or NDA, for DSUVIA™ (known as DZUVEO™ outside of the United States). DSUVIA and the Company’s follow-on product candidate, Zalviso^®, each utilize sufentanil, delivered via a non-invasive route of sublingual administration. DSUVIA is a 30 mcg sufentanil sublingual tablet in a single-dose applicator approved for use in adults in a certified medically supervised healthcare setting, such as hospitals, surgical centers, and emergency departments, for the management of acute pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate. Zalviso delivers 15 mcg sufentanil sublingually through a non-invasive delivery route via a pre-programmed, patient-controlled analgesia, or PCA, system. AcelRx anticipates developing a distribution capability and commercial organization in the United States to market and sell DSUVIA in the United States by itself. The Company anticipates launching commercial sales of DSUVIA in the United States in the first quarter of 2019. In geographies where AcelRx decides not to commercialize products by itself, the Company may seek to out-license commercialization rights. The Company currently intends to commercialize and promote DZUVEO in Europe with a strategic partner. AcelRx intends to seek regulatory approval for Zalviso in the United States and, if successful, potentially promote Zalviso either by itself or with strategic partners. Zalviso is approved in Europe and is currently being commercialized by Grünenthal GmbH, or Grünenthal.

DSUVIA/DZUVEO

DSUVIA is a 30 mcg sufentanil sublingual tablet in a single-dose applicator intended for use in adults in a certified medically supervised healthcare setting for the management of acute pain administered by a healthcare professional. DSUVIA was initially developed at the request of the U.S. Department of Defense as a replacement for injections of morphine on the battlefield. In addition to the military application, AcelRx developed DSUVIA for the treatment of patients suffering from acute pain in multiple settings, such as emergency room patients; patients who are recovering from short-stay or ambulatory surgery and do not require more long-term analgesia; post-operative patients who are transitioning from the operating room to the recovery floor; and certain types of hospital-based procedures.

The Company filed a Marketing Authorisation Application, or MAA, for DZUVEO (sufentanil sublingual tablet, 30 mcg) for the treatment of patients with moderate-to-severe acute pain in a medically supervised setting with the European Medicines Agency, or EMA. In June 2018, the Company announced that the European Commission, or EC, had granted marketing approval of DZUVEO for the treatment of patients with moderate-to-severe acute pain in medically monitored settings.

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 seeking approval 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 from the FDA on the study protocol. In the IAP312 study, for which top-line results were announced in August 2017, Zalviso met safety, satisfaction and device usability expectations. These results will supplement the three Phase 3 trials already completed in the Zalviso NDA resubmission. The Company is currently 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 amended effective July 17, 2015 and September 20, 2016, or the Amended License Agreement, which grants Grünenthal rights to commercialize Zalviso PCA system, or the Product, in the countries of the EU, Switzerland, Liechtenstein, Iceland, Norway and Australia (collectively, the Territory) for human use in pain treatment within, or dispensed by, hospitals, hospices, nursing homes and other medically supervised settings, or the Field. In September 2015, the EC approved the MAA, previously submitted to the EMA, for Zalviso for the management of acute moderate-to-severe post-operative pain in adult patients. On December 16, 2013, AcelRx and Grünenthal, entered into a related Manufacture and Supply Agreement, or the MSA, and together with the License Agreement, the Agreements. Under the MSA, the Company will exclusively manufacture and supply the Product to Grünenthal for the Field in the Territory. On July 22, 2015, the Company and Grünenthal amended the MSA, or the Amended MSA, effective as of July 17, 2015. The Amended MSA and the Amended License Agreement are referred to as the Amended Agreements.

6

The Company has incurred recurring operating losses and negative cash flows from operating activities since inception. Although Zalviso has been approved for sale in Europe, on September 18, 2015, the Company sold the majority of the royalty rights and certain commercial sales milestones it is entitled to receive under the Amended License Agreement with Grünenthal to PDL BioPharma, Inc., or PDL, in a transaction referred to as the Royalty Monetization. Although the FDA recently approved DSUVIA, we have not yet commercially launched the product. As a result, the Company expects to continue to incur operating losses and negative cash flows until such time as DSUVIA has gained market acceptance and generated significant revenues.

Except as the context otherwise requires, when we refer to "we," "our," "us," the "Company" or "AcelRx" in this document, we mean AcelRx Pharmaceuticals, Inc., and its consolidated subsidiary. “DSUVIA” and “DZUVEO” are trademarks, and “ACELRX” and “Zalviso” are registered trademarks, all owned by AcelRx Pharmaceuticals, Inc. This report also contains trademarks and trade names that are the property of their respective owners.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, ARPI LLC, which was formed in September 2015 for the sole purpose of facilitating the monetization transaction with PDL of the expected royalty stream and milestone payments due from the sales of Zalviso in Europe by the Company’s commercial partner, Grünenthal, pursuant to the Amended License Agreement, or the Royalty Monetization. All intercompany accounts and transactions have been eliminated in consolidation. Refer to Note 8 “Liability Related to Sale of Future Royalties” for additional information.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission, or SEC. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

Operating results for the three and nine months ended September 30, 2018, are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. The condensed consolidated balance sheet as of December 31, 2017, was derived from the Company’s audited financial statements as of December 31, 2017, included in the Company’s Annual Report on Form 10-K filed with the SEC. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, which includes a broader discussion of the Company’s business and the risks inherent therein.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Management evaluates its estimates on an ongoing basis including critical accounting policies. Estimates are based on historical experience and on various other market-specific and other relevant assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

Revenue Recognition

Beginning January 1, 2018, the Company has followed the provisions of ASC Topic 606, Revenue from Contracts with Customers. The guidance provides 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, cost reimbursements 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 contracts provide for the reimbursement of qualified expenses for research and development activities. Revenue under these arrangements is recognized when the related qualified research expenses are incurred. The Company is entitled to reimbursement of overhead costs associated with the study costs under the DoD arrangements. The Company estimates this overhead rate by utilizing forecasted expenditures. Final reimbursable overhead expenses are dependent on direct labor and direct reimbursable expenses throughout the life of each contract, which may increase or decrease based on actual expenses incurred.

7

In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under its agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue 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. The Company’s performance obligations include commercialization license rights, development services, services associated with the regulatory approval process, joint steering committee services, demo devices, manufacturing services, material rights for discounts on manufacturing services, and product supply.

The Company has optional additional items in contracts, which are considered marketing offers and are accounted for as separate contracts when the customer elects such options. Arrangements that include a promise for future commercial product supply and optional research and development services at the customer’s or the Company’s discretion are generally considered as options. The Company assesses if these options provide a material right to the licensee and if so, such material rights are accounted for as separate performance obligations. If the Company is entitled to additional payments when the customer 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, while milestone payments are identified as variable consideration when determining the transaction price. Funding of research and development activities is considered variable until such costs are reimbursed at which point they are considered fixed. The Company allocates the total transaction price to each performance 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 being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal 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 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 the predominant item to which the royalties relate, the Company recognizes revenue at the later of (a) when the related sales occur, or (b) when the performance obligation 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, the Company must develop assumptions that require judgment to determine the stand-alone selling price of each performance obligation identified in the contract. Estimated selling prices for license rights and material rights for discounts on manufacturing services are calculated using an income approach model and can include the following key assumptions: the development timeline, sales forecasts, costs of product sales, commercialization expenses, discount rate, the time which the manufacturing services are expected to be performed, and probabilities of technical 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 Company expects to complete its performance obligations under the arrangement. The Company estimates the performance period or measure of progress at the inception of the arrangement and re-evaluates it each reporting period. This re-evaluation may shorten or lengthen the period over which revenue is recognized. Changes to these estimates are recorded on a cumulative catch up basis. If the Company cannot reasonably estimate when its performance obligations 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 for products 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 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 customer can use and benefit from the license. For performance obligations that are services, revenue is recognized over time proportionate to the costs that the Company has incurred to perform the services using the cost-to-cost input method.

8

Significant Accounting Policies 

The Company’s significant accounting policies are detailed in its Annual Report on Form 10-K for the year ended December 31, 2017. Aside from the adoption of ASC Topic 606 described below under “Recently Adopted Accounting Standards” and explained more fully above in “Revenue Recognition,” and in Note 4 “Adoption of ASC Topic 606, Revenue from Contracts with Customers” below, there have been no significant changes to the Company’s significant accounting policies during the three and nine months ended September 30, 2018, from those previously disclosed in its 2017 Annual Report on Form 10-K.

Recently Adopted Accounting Standards

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), to provide guidance on revenue recognition. In August 2015 and March, April, May and December 2016, the FASB issued additional amendments to the new revenue guidance relating to reporting revenue on a gross versus net basis, identifying performance obligations, licensing arrangements, collectability, noncash consideration, presentation of sales tax, transition, and clarifying examples. Collectively these are referred to as ASC Topic 606, which replaces all legacy GAAP guidance on revenue recognition and eliminates all industry-specific guidance. The new revenue recognition guidance provides a unified model to determine how revenue is recognized. The core principal of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount 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 the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each distinct performance obligation. ASC Topic 606 is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted one year earlier.

The Company adopted the new standard effective January 1, 2018 under the modified retrospective transition method, applying the new guidance in the first quarter of 2018 to those contracts which were not completed as of January 1, 2018. For contracts which were modified before the adoption date, the Company has elected to treat the contracts and their modifications as combined contracts. Upon adoption, there was no change to the units of accounting previously identified under legacy GAAP, which are now considered performance obligations under the new guidance, and there was no change to the revenue recognition pattern for each performance obligation. Therefore, the adoption of the new standard resulted in no cumulative effect to the opening accumulated deficit balance.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, to clarify which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under ASC 718. Under the new guidance, an entity will not apply modification accounting to a share-based payment award if all of the following remain unchanged immediately before and 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. Early adoption 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 not have 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 reduce diversity in practice in the classification and presentation of changes in restricted cash on the condensed consolidated statement of cash flows. The ASU requires that the condensed consolidated statement of cash flows explain the change in total cash and equivalents and amounts generally described as restricted cash or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. The ASU also requires a reconciliation between the total of cash and equivalents and restricted cash presented on the condensed consolidated statement of cash flows and the cash and equivalents balance presented on the condensed consolidated balance sheet. The Company adopted ASU No. 2016-18, and the guidance has been retrospectively applied to all periods presented. The adoption of the guidance did not have an impact on the Company’s condensed 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 Cash Payments, addressing eight specific cash flow issues in an effort to reduce diversity in practice. The amended guidance is effective for fiscal years beginning after December 15, 2017, and for interim periods within those years. The adoption of ASU 2016-15 effective January 1, 2018, did not have a material impact on the Company’s condensed consolidated statements of cash flows.

9

Recently Issued Accounting Standards 

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU No. 2018-15 provides new guidance on a customer’s accounting for implementation, set-up and other upfront costs incurred in a cloud computing arrangement that is hosted by a vendor, i.e., a service contract. The new guidance aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license under ASU No. 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. The new guidance also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. Entities can choose to adopt the new guidance (1) prospectively to eligible costs incurred on or after the date this guidance is first applied or (2) retrospectively. The Company is currently evaluating the method of adoption and the impact of adopting ASU 2018-15 on its condensed consolidated financial statements and disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes a new lease accounting model for lessees. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements which provides an optional transition method that allows entities to elect to apply the standard prospectively at its effective date, versus recasting the prior periods presented. The Company is currently in the process of evaluating the transition method. Unlike current GAAP which requires only capital leases to be recognized on the balance sheet, the new guidance will require both types of leases (i.e. operating and capital leases) to be recognized on the balance sheet. The FASB lessee accounting model will continue to account for both types of leases. The capital lease will be accounted for in substantially the same manner as capital leases are accounted for under existing GAAP. The operating lease will be accounted for in a manner similar to operating leases under existing GAAP, except that lessees will recognize a lease liability and a lease asset for all of those leases. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The Company expects to adopt this standard beginning in 2019. The Company does not expect that this standard will have a material impact on its condensed consolidated statements of comprehensive loss; however, the Company does expect that upon adoption, this standard will impact the carrying value of its assets and liabilities on its condensed consolidated balance sheets as a result of the requirement to record right-of-use assets and corresponding lease obligations for current operating leases. The Company is still evaluating whether there are other existing contracts that may become leases under the new lease standard, and the impact of the adoption of this standard on its condensed consolidated financial statements and disclosures. The Company will continue to monitor additional modifications, clarifications or interpretations undertaken by the FASB that may impact its current conclusions, and will expand its analysis to include any new lease arrangements initiated 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 at estimated fair value based on quoted market prices or observable market inputs of almost identical assets, with the unrealized holding gains and losses included in accumulated other comprehensive income. Marketable securities which have maturities beyond one year as of the end of the reporting period are classified as non-current.

The table below summarizes the Company’s cash, cash equivalents and investments (in thousands):  

	As of September 30, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Cash and cash equivalents:
Cash	$	394	$	—	$	—	$	394
Money market funds		32,168		—		—		32,168
U.S. government agency securities		25,004		—		—		25,004
Total cash and cash equivalents	$	57,566	$	—	$	—	$	57,566
Marketable securities:
U.S. government agency securities	$	5,995	$	—	$	—	$	5,995
Total marketable securities	$	63,561	$	—	$	—	$	63,561
Total cash, cash equivalents and investments	$	63,561	$	—	$	—	$	63,561

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	As of December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Cash and cash equivalents:
Cash	$	29,765	$	—	$	—	$	29,765
U.S. government agency securities		23,137		—		—		23,137
Total cash and cash equivalents	$	52,902	$	—	$	—	$	52,902
Marketable securities:
U.S. government agency securities	$	7,567	$	—	$	—	$	7,567
Total marketable securities	$	7,567	$	—	$	—	$	7,567
Total cash, cash equivalents and investments	$	60,469	$	—	$	—	$	60,469

As of September 30, 2018 and December 31, 2017, none of the available-for-sale securities held by the Company had material unrealized losses. There were no other-than-temporary impairments for these securities at September 30, 2018 or December 31, 2017. No gross realized gains or losses were recognized on the available-for-sale securities and, accordingly, there were no amounts reclassified out of accumulated other comprehensive income to earnings during the three and nine months ended September 30, 2018 and September 30, 2017.

As of September 30, 2018 and December 31, 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 are actively traded. The pricing information on these investment instruments are readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy. For Level II instruments, the Company estimates fair value by utilizing third party pricing services in developing fair value measurements where fair value is based on valuation methodologies such as models using observable market inputs, including benchmark yields, reported trades, broker/dealer quotes, bids, offers and other reference data. Such Level II instruments typically include U.S. treasury and U.S. government agency obligations. On March 2, 2017, the Company entered into an amended and restated loan agreement, or the Amended Loan Agreement with Hercules Capital Funding Trust 2014-1 and Hercules Technology II, L.P., together, Hercules, which contains a contingent put option liability. 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 (expense), net in the condensed consolidated statements of comprehensive loss. The fair value of the underlying debt facility is estimated by calculating the expected cash flows in consideration of an estimated probability of default and expected recovery rate in default and discounting such cash flows back to the reporting date using a risk-free rate.

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 September 30, 2018
	Fair Value		Level I		Level II		Level III
Assets
Money market funds	$	32,168	$	32,168	$	—	$	—
U.S. government agency obligations		30,999		—		30,999		—
Total assets measured at fair value	$	63,167	$	32,168	$	30,999	$	—
Liabilities
Contingent put option liability	$	144	$	—	$	—	$	144
Total liabilities measured at fair value	$	144	$	—	$	—	$	144

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	As of December 31, 2017
	Fair Value		Level I		Level II		Level III
Assets
U.S. government agency obligations	$	30,704	$	—	$	30,704	$	—
Total assets measured at fair value	$	30,704	$	—	$	30,704	$	—
Liabilities
Contingent put option liability	$	207	$	—		—	$	207
Total liabilities measured at fair value	$	207	$	—	$	—	$	207

As of September 30, 2017, the Company also held a Level III liability associated with warrants, or PIPE warrants, issued in connection with the Company’s private placement equity offering, completed in June 2012. The PIPE warrants were considered a liability and were valued using the Black-Scholes option-pricing model, the inputs for which included exercise price of the PIPE warrants, market price of the underlying common shares, expected term, volatility based on a group of the Company’s peers and the risk-free rate corresponding to the expected term of the PIPE warrants. Changes to any of these inputs could have a significant impact to the estimated fair value of the PIPE warrants. The PIPE warrants expired in November 2017.

The following tables set forth a summary of the changes in the fair value of the Company’s Level III financial liabilities for the three and nine months ended September 30, 2018 and September 30, 2017 (in thousands):

	Three Months Ended September 30, 2018			Nine Months Ended September 30, 2018
Fair value—beginning of period	$	166		$	207
Change in fair value of contingent put option associated with Amended Loan Agreement		(22	)		(63	)
Fair value—end of period	$	144		$	144

	Three Months Ended September 30, 2017			Nine Months Ended September 30, 2017
Fair value—beginning of period	$	288		$	412
Change in fair value of PIPE warrants		612			352
Change in fair value of contingent put option associated with Amended Loan Agreement		(53	)		83
Fair value—end of period	$	847		$	847

3. Inventories

Inventories consist of raw materials and work in process and are stated at the lower of cost or net realizable value and consist of the following (in thousands):

	Balance as of
	September 30, 2018		December 31, 2017
Raw materials	$	585	$	702
Work-in-process		271		254
Total	$	856	$	956

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4. 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 of January 1, 2018. Results for reporting periods beginning after January 1, 2018, are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historical accounting under Topic 605. The adoption of the new revenue recognition guidance 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 with Grünenthal related to Zalviso. At September 30, 2018, approximately $3.5 million of the transaction price under the Amended Agreements is allocated to the 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 Significant Accounting Policies - Revenue Recognition.”

The following table presents changes in the Company’s contract liabilities for the nine months ended September 30, 2018:

	Balance at Beginning of the Period		Additions		Deductions			Balance at the end of the Period
	(in thousands)
Contract liability:
Deferred revenue	$	3,825	$	-	$	(272	)	$	3,553

During the three and nine months ended September 30, 2018, the Company recognized the following revenue (in thousands):

	Three months ended September 30, 2018		Nine months ended September 30, 2018
Amounts included in contract liabilities at the beginning of the period:
Performance obligations satisfied – Amended Agreements	$	90	$	272
New activities in the period from performance obligations satisfied:
Performance obligations satisfied – Amended Agreements		—		237
Total revenue from performance obligations satisfied		90		509
Royalty revenue		87		293
Contract and other		200		736
Total revenue	$	377	$	1,538

5. U.S. Department of Defense

On May 11, 2015, the Company entered into an award contract (referred to as the DoD Contract) supported by the Clinical and Rehabilitative Medicine Research Program, or CRMRP, of the United States Army Medical Research and Materiel Command, or the USAMRMC, within 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 (sufentanil sublingual tablet, 30 mcg), a proprietary, non-invasive, single-use tablet in a disposable, pre-filled single-dose applicator, or SDA, for the treatment of moderate-to-severe acute pain. Under the terms of the DoD Contract, the DoD has and continues to reimburse 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. The period 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 DoD Contract and provide additional funding for the research. On March 2, 2016, the DoD Contract was amended to approve enrollment of additional patients in 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 absorbed within the current DoD Contract value. On March 9, 2017, the DoD Contract was amended to incorporate additional activities including the development and testing of packaging changes; additional stability testing; and preparation for any FDA advisory committee meeting for DSUVIA. The amendment also extends the DoD Contract period of performance by 11 months through February 28, 2018 to accommodate these additional activities. At December 31, 2017, the additional activities as outlined under the DoD Contract through February 28, 2018 were substantially complete. On February 28, 2018, the DoD contract was amended to incorporate additional services in the amount of $0.5 million and to extend the contract period by twelve months through February 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.

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Revenue is recognized based on expenses incurred by the Company in conducting research and development activities, including overhead, as set forth in the agreement. Revenue attributable to the research and development performed under the DoD Contract, recorded as contract and other revenue in the condensed consolidated statements of comprehensive loss, was $0.2 million and $0.7 million for the three and nine months ended September 30, 2018, respectively, and $0.3 million and $0.8 million for the three and nine months ended September 30, 2017, respectively.

6. Collaboration Agreement

As described in Note 1 “Organization and Summary of Significant Accounting Policies,” the Company has entered into the Amended Agreements with Grünenthal related to Zalviso.

Amended License Agreement

Under the Amended License Agreement, the Company is 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 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 fee payments, will be paid to PDL in connection with the Royalty Monetization. For additional information on the Royalty Monetization with PDL, see Note 8 “Liability Related to Sale of Future Royalties”. Unless earlier terminated, the Amended License Agreement continues in effect until the expiration of the obligation of Grünenthal to make royalty and supply and trademark fee payments, which supply and trademark fee continues for so long as the Company continues 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 for convenience.

Amended MSA

Under the terms of the Amended MSA, the Company will manufacture and supply the Product for use in the Field for the Territory exclusively for Grünenthal. The Product will be supplied at prices approximating the Company’s manufacturing cost, subject to certain caps, as defined in the MSA Amendment. The MSA Amendment requires the Company to use commercially reasonable efforts to enter stand-by contracts with third parties providing significant supply and manufacturing services and, under certain specified conditions, permits Grünenthal to use a third-party back-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 and supply and trademark fee payments or the end of any transition period for manufacturing obligations due to the expiration or termination of the Amended License Agreement. The Amended MSA is subject to earlier termination in connection with certain termination events in the Amended License Agreement, 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 or insolvency of either party.

During the three and nine months ended September 30, 2018, the Company recognized $0.2 million and $0.8 million in revenue under the Amended Agreements, respectively, primarily product sales revenue. During the three and nine months ended September 30, 2017, the Company recognized $1.2 million and $6.4 million in revenue under the Amended Agreements, respectively, primarily product sales revenue. As of September 30, 2018, the Company had current and noncurrent portions of the deferred revenue balance under the Amended Agreements of $0.3 million and $3.2 million, respectively. The deferred revenue balance consists primarily of the significant and incremental discount on manufacturing services, which is being recognized on a straight-line basis over the period such discount is made available to Grünenthal, which began in February 2016 and is estimated to continue through 2029.

7. Long-Term Debt

Amended Loan Agreement

The Company has long-term debt with Hercules under the Amended Loan Agreement that requires equal monthly payments of principal and interest through the scheduled maturity date of March 1, 2020. A final payment equal to 6.5% of the aggregate principal amount of $20.5 million in loans funded under the Amended Loan Agreement, or the End of Term 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.

The accrued balance due under the Amended Loan Agreement was $13.9 million at September 30, 2018 and $19.1 million at December 31, 2017. Interest expense related to the Amended Loan Agreement was $0.5 million, $0.2 million of which represented amortization of the debt discount, for the three months ended September 30, 2018, and $1.7 million, $0.5 million of which represented amortization of the debt discount, for the nine months ended September 30, 2018. Interest expense related to the Amended Loan Agreement was $0.9 million, $0.4 million of which represented amortization of the debt discount, for the three months ended September 30, 2017, and $2.6 million, $1.1 million of which represented amortization of the debt discount, for the nine months ended September 30, 2017.

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8. Liability Related to Sale of Future Royalties

On September 18, 2015, the Company entered into the Royalty Monetization with PDL for which it received gross proceeds of $65.0 million. Under the Royalty Monetization, PDL will receive 75% of the European royalties under the Amended License Agreement with Grünenthal, as well as 80% of the first four commercial milestones worth $35.6 million (or 80% of $44.5 million), up to a capped amount of $195.0 million over the life of the arrangement.

The following table shows the activity within the liability account during the nine months ended and the period from inception to September 30, 2018 (in thousands):

	Nine months ended September 30, 2018			Period from inception to September 30, 2018
Liability related to sale of future royalties — beginning balance	$	83,588		$	—
Proceeds from sale of future royalties		—			61,184
Non-cash royalty revenue		(190	)		(317	)
Non-cash interest expense recognized		8,724			31,255
Liability related to sale of future royalties as of September 30, 2018		92,122			92,122
Less: current portion		(377	)		(377	)
Liability related to sale of future royalties — net of current portion	$	91,745		$	91,745

As royalties are remitted to PDL from the Company’s subsidiary, ARPI LLC, as described in Note 1 “Organization and Summary of Significant Accounting Policies,” the balance of the liability will be effectively repaid over the life of the agreement. The Company will record non-cash royalty revenues and non-cash interest expense within its condensed consolidated statements of comprehensive loss over the term of the Royalty Monetization.

9. Warrants

Amended Loan Agreement Warrants

In connection with the Company’s Amended Loan Agreement, warrants to purchase 176,730 shares of common stock at $3.07 per share were issued to Hercules. As of September 30, 2018, these warrants had not been exercised and were still outstanding. These warrants expire in December 2018.

10. Stock-Based Compensation

The Company recorded total stock-based compensation expense for stock options, stock awards and the 2011 Employee Stock Purchase Plan, or ESPP, as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Cost of goods sold	$	119	$	80	$	280	$	243
Research and development		769		458		1,578		1,442
General and administrative		920		480		2,078		1,555
Total	$	1,808	$	1,018	$	3,936	$	3,240

As of September 30, 2018, there were 1,140,133 shares available for grant, 11,628,345 options outstanding and no restricted stock units outstanding under the Company’s 2011 Equity Incentive Plan and 858,889 shares available for grant under the ESPP.

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11. Stockholders’ Equity

Common Stock

2018 Underwritten Public Offering

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 the public. On August 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 were approximately $23.0 million with net proceeds to the Company of $21.7 million after deducting the underwriting discounts and commissions and other offering expenses payable by the Company.

2016 ATM Agreement 

During the nine months ended September 30, 2018, the Company issued and sold 2.3 million shares of common stock pursuant to the 2016 ATM Agreement, for which the Company received net proceeds of approximately $7.4 million, after deducting commissions, fees and expenses of $0.2 million.  

12. 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 common stock outstanding for the period. The diluted net loss per share of common stock is computed by giving effect to all potential common stock equivalents outstanding for the period determined using the treasury stock method. For purposes of this calculation, options to purchase common stock and warrants to purchase common stock were considered to be common stock equivalents. In periods with a reported net loss, common stock equivalents are excluded from the calculation of diluted net loss per share of common stock if their effect is antidilutive.

The following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have been antidilutive:

	September 30,
	2018		2017
ESPP and stock options to purchase common stock		12,003,600		8,922,456
Common stock warrants		176,730		689,186

13. Subsequent Event

On November 2, 2018, the FDA approved the resubmitted NDA for DSUVIA (sufentanil sublingual tablet, 30 mcg) for use in adults in a certified medically supervised healthcare setting, such as hospitals, surgical centers, and emergency departments, for the management of acute pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to them. In some cases you can identify forward-looking statements by words such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. Examples of these statements include, but are not limited to, statements related to the planned United States launch of DSUVIA^™ (sufentanil sublingual tablet, 30 mcg), known as DZUVEO^™ outside the United States; the process and timing of anticipated future development of Zalviso^® (sufentanil sublingual tablet system), including the timing of the planned NDA resubmission for Zalviso; the accuracy of our estimates regarding expenses, capital requirements and the need for financing; the status of the Amended Agreements with Grünenthal, including potential milestones and royalty payments under the Amended Agreements, or any other future potential collaborations; and the therapeutic and commercial potential of our approved products and product candidates, including potential market opportunities for DSUVIA, DZUVEO and Zalviso.

Forward-looking statements are based on AcelRx’s current expectations and inherently involve significant risks and uncertainties. Actual results and timing of events could differ materially from those anticipated in such forward-looking statements as a result of various factors. For a more detailed discussion of the potential risks and uncertainties that may impact the accuracy of these forward-looking statements, see the “Risk Factors” section in Part II, Item 1A of this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward-looking statements, which reflect AcelRx’s view only as of the date of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from those we expect. Except as required by law, we assume no obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. And while we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with the audited consolidated financial statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2017.

About AcelRx Pharmaceuticals

We are a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for use in medically supervised settings. DSUVIA^™ (known as DZUVEO^™ outside of the United States) 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. Food and Drug Administration, or FDA, approved our resubmitted New Drug Application, or NDA, for DSUVIA for use in adults in a certified medically supervised healthcare setting, such as hospitals, surgical centers, and emergency departments, for the management of acute pain severe enough to require an opioid analgesic and for which alternative treatments are 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. We anticipate developing a distribution capability and commercial organization to market and sell DSUVIA in the United States by ourselves. We currently anticipate the commercial launch of DSUVIA in the United States in the first quarter of 2019. In geographies where we decide not to commercialize ourselves, including for DZUVEO in Europe, we may seek to out-license commercialization rights. We currently intend to commercialize and promote DZUVEO in Europe with a strategic partner, although we have not yet entered into such an arrangement. We are currently evaluating the timing of the resubmission of the NDA for Zalviso. If we are successful in obtaining approval of Zalviso in the United States, we plan to potentially promote Zalviso either by ourselves or with strategic partners. Zalviso is approved in Europe and is currently being commercialized by Grünenthal GmbH, or Grünenthal.

We have chosen sufentanil as the therapeutic ingredient for our current product candidates. Opioids have been utilized for pain relief for centuries and are the standard-of-care for the treatment of moderate-to-severe acute pain. Sufentanil, a high-therapeutic index opioid, which has no active metabolites, is available as an injectable in several markets around the world and is used by anesthesiologists for induction of sedation or as an epidural; however, the injectable formulation is not suitable for the treatment of acute pain. Sufentanil has many pharmacological advantages over other opioids. Published studies demonstrate that sufentanil produces significantly less respiratory depressive effects relative to its analgesic effects compared to other opioids, including morphine and fentanyl. These third-party clinical results correlate well with preclinical trials demonstrating sufentanil’s high therapeutic index, or the ratio of the toxic dose to the therapeutic dose of a drug, used as a measure of the relative safety of the drug for a particular treatment. Accordingly, we believe that sufentanil can be developed to provide an effective and well-tolerated treatment for acute pain.

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We have created a proprietary sublingual (under the tongue) formulation of sufentanil intended for the treatment of moderate-to-severe acute pain. The sublingual formulation retains the therapeutic value of sufentanil and novel delivery devices provide a non-invasive route of administration. Sufentanil is highly lipophilic which provides for rapid absorption in the mucosal tissue, or fatty cells, found under the tongue, and for rapid transit across the blood-brain barrier to reach the mu-opioid receptors in the brain. The sublingual route of delivery used by DSUVIA and Zalviso provides a predictable onset of analgesia. The sublingual delivery system also eliminates the risk of intravenous, or IV, complications, such as catheter-related infections. In addition, because patients do not require direct connection to an IV infusion pump, or IV line, DSUVIA and Zalviso may allow for ease of patient mobility.

DSUVIA (sufentanil sublingual tablet, 30 mcg), known as DZUVEO outside the United States

DSUVIA is a non-invasive product consisting of 30 mcg sufentanil tablets delivered sublingually by a healthcare professional using a disposable, pre-filled, single-dose applicator, or SDA. DSUVIA has been approved in both the United States and Europe for the treatment of moderate-to-severe acute pain to be administered by a healthcare professional to a patient in medically supervised settings. Examples of potential patient populations and settings in which DSUVIA could be used include: emergency room patients; patients who are recovering from short-stay or ambulatory surgery and do not require more long-term analgesia; post-operative patients who are transitioning from the operating room to the recovery floor; certain types of hospital-based procedures; and for battlefield casualties. In the emergency room and in ambulatory care environments, patients often do not have immediate IV access available, or maintaining IV access may provide an impediment to rapid discharge. Moreover, IV dosing results in high peak plasma levels, thereby limiting the opioid dose and requiring frequent redosing intervals to titrate to satisfactory analgesia. Oral pills and liquids generally have slow and erratic onset of analgesia. Based on internal 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. In addition, based on our recent interactions with healthcare providers, and also as reported in recent media coverage, the need for new acute pain treatment options is further highlighted by the current shortage of IV opioids in hospitals throughout the United States. We believe this situation creates an environment to demonstrate how DSUVIA could help U.S. hospitals manage through the intravenous opioid shortage they are experiencing in their facilities today.

On May 11, 2015, we entered into an award contract (referred to as the DoD Contract) supported by the Clinical and Rehabilitative Medicine Research Program, or CRMRP, of the United States Army Medical Research and Materiel Command, or USAMRMC, within the U.S. Department of Defense, or the DoD, to support the development of DSUVIA. Pursuant to the terms of the DoD Contract, the DoD has the option to purchase 112,000 units of commercial DSUVIA product.

We anticipate we may need comparator studies of DZUVEO in the EU to ensure premium reimbursement in certain countries. As mentioned above, we intend to commercialize and promote DZUVEO in Europe with a strategic partner, but we have not yet entered into such an arrangement.

Zalviso (sufentanil sublingual tablet system)

Zalviso is intended for the management of moderate-to-severe acute pain in hospitalized adult patients. Zalviso consists of a pre-filled cartridge of 40 sufentanil sublingual tablets, 15 mcg, delivered by the Zalviso System, a needle-free, handheld, patient-administered, pain management system. 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 risk of healthcare provider programming errors. While still under development in the U.S., as discussed further below, Zalviso is approved and marketed in Europe.

On December 16, 2013, AcelRx and Grünenthal entered into a Collaboration and License Agreement, or the License Agreement, and related Manufacture and Supply Agreement, or the MSA, and together with the License Agreement, the Agreements. The License Agreement grants Grünenthal rights to commercialize Zalviso, our novel sublingual PCA system, or the Product, 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 homes and other medically supervised settings, or the Field. We retain rights with respect to the Product in countries outside the Territory, including the United States, Asia and Latin America. Under the MSA, we will exclusively manufacture and supply the Product to Grünenthal for the Field in the Territory. We entered into amendments to the License Agreement, effective July 17, 2015 and September 20, 2016, or the License Amendments, and together with the License Agreement, the Amended License Agreement, and entered into an amendment to the MSA, or the MSA Amendment, and together with the MSA, the Amended MSA, effective as of July 17, 2015, and together, the Amended Agreements. For additional information on the Amended Agreements, see Note 6 “Collaboration Agreement” in the accompanying notes to the condensed consolidated financial statements.

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Zalviso was approved for commercial sale by the EC in September 2015 and Grünenthal began its European launch of Zalviso with its first commercial sale occurring in April 2016. On September 18, 2015, we sold a majority of the expected royalty stream and commercial milestones from the European sales of Zalviso by Grünenthal to PDL, or the Royalty Monetization. For additional information on the Royalty Monetization with PDL, see Note 8 “Liability Related to Sale of Future Royalties” in the accompanying notes to the condensed consolidated financial statements.

We submitted an NDA for Zalviso in September 2013, or the Zalviso NDA, and on July 25, 2014, the Division of Anesthesia, Analgesia, and Addiction Products, or the Division, of the FDA issued a CRL for the Zalviso NDA. The CRL contained requests for additional information on the Zalviso 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, we received 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 be required 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 into account comments from the FDA on the study protocol. In the IAP312 study, 320 hospitalized, post-operative patients used Zalviso to self-administer 15 mcg sublingual sufentanil tablets as often as once every 20 minutes for 24-to-72 hours to manage their moderate-to-severe acute pain. A total of 7,293 sufentanil tablets were dispensed by the 320 patients, of which 2.2% of these patients experienced a Zalviso device error over the course of the study. This error rate was statistically less than the 5% limit specified in the study objectives and none of these device errors resulted in an over-dosing event. Separate from device errors, and consistent with patient training, 6 patients called the nurse when they failed to properly self-administer a single tablet which allowed the nurse to properly retrieve and dispose 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) were discovered with 6 additional patients. Overall, efficacy and safety results of this study supported earlier clinical findings, with favorable tolerability and a significant majority of “good” or “excellent” ratings provided by both patients and healthcare providers when assessing the method of pain control. We intend to submit the results from the IAP312 study, together with our earlier Phase 3 studies (IAP309, IAP310 and IAP311), all of which met safety and efficacy endpoints, as part of our resubmission of the NDA for Zalviso.

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 begin commercialization activities to support the U.S. launch of DSUVIA, continue our research and development activities and support Grünenthal’s European sales of Zalviso. As a result, we expect to continue to incur operating losses and negative cash flows until such time as DSUVIA has gained market acceptance 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 entitled to receive under the Grünenthal Agreements to PDL in September 2015.

We currently anticipate the commercial launch of DSUVIA in the United States in the first quarter of 2019. As we begin the commercial launch of DSUVIA, we expect the business aspects of our company to become more complex. We plan to continue to add personnel and incur additional costs related to the maturation of our business and the commercialization of DSUVIA and potential commercialization of Zalviso in the United States, subject to FDA approval. In addition, we believe that continued investment in research and development is critical to attaining our strategic objectives. In order to develop Zalviso, and any future product candidates, as commercially viable therapeutics, we expect to expend significant resources for expertise in manufacturing, regulatory affairs, clinical research and other aspects of pharmaceutical development.

To date, we have funded our operations primarily through the issuance of equity securities, borrowings, payments from our commercial partner, Grünenthal, monetization of certain future royalties and commercial sales milestones from the sales of Zalviso by Grünenthal, and funding from the Department of Defense, or DoD.

Our revenues since inception have consisted primarily of revenues from our Amended License Agreement with Grünenthal and our research contracts with the DoD. 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 milestones specified in the Amended License Agreement. 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.

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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 the commercialization of DZUVEO in Europe. There can be no assurance that we will enter into a collaborative agreement for DZUVEO, or any other collaborative 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 will generate revenue from those products in excess of our operating expenses, nor that we will obtain marketing approval for Zalviso, or any future product candidates, and subsequently generate revenue from those product candidates in excess of our operating expenses.

Our net loss for the three months and nine months ended September 30, 2018 was $12.5 million and $34.6 million, respectively, compared to net losses of $13.0 million and $41.6 million for the three and nine months ended September 30, 2017, respectively. As of September 30, 2018, we had an accumulated deficit of $332.5 million. As of September 30, 2018, we had cash, cash equivalents and short-term investments totaling $63.6 million compared to $60.5 million as of December 31, 2017.

Critical Accounting Estimates 

The accompanying discussion and analysis of our financial condition and results of operations are based upon our financial statements and the related disclosures, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts in our financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. Our critical accounting policies and estimates are detailed in our Annual Report on Form 10-K for the year ended December 31, 2017. Aside from the adoption of Revenue from Contracts with Customers (Topic 606) explained more fully in Note 1 “Organization and Summary of Significant Accounting Policies - Revenue Recognition,” and in Note 4 “Adoption of ASC Topic 606, Revenue from Contracts with Customers,” in the accompanying notes to the condensed consolidated financial statements, there have been no significant changes to our critical accounting policies and estimates during the three and nine months ended September 30, 2018, from those previously disclosed in our 2017 Annual Report on Form 10-K.

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 commercial launch of DSUVIA, our research and development efforts and variations in the level of expenses related to developmental efforts during any given period. Results of operations for any period may be unrelated to results of operations for any other period. In addition, historical results should not be viewed as indicative of future operating results. We are subject to risks common to companies in our industry and at our stage of development, including risks inherent in our efforts to commercialize DSUVIA, our research and development efforts, reliance upon our collaborator, enforcement of our patent and proprietary rights, need for future capital, potential competition and uncertainty of clinical trial results or regulatory approvals or clearances. In order for a product candidate to be commercialized based on our research, we and our collaborators must conduct preclinical tests and clinical trials, demonstrate the efficacy and safety of our product candidates, obtain regulatory approvals or clearances and enter into manufacturing, distribution and marketing arrangements, as well as obtain market acceptance.

Three and Nine Months Ended September 30, 2018 and 2017

Revenue

Collaboration Agreement Revenue

In September 2015, the EC granted marketing approval for Zalviso to our commercial partner, Grünenthal, and Grünenthal commercially launched Zalviso in Europe, with the first commercial sale occurring in April 2016. We estimate and recognize royalty revenue and non-cash royalty revenue on a quarterly basis. Adjustments to estimated revenue are recognized in the subsequent quarter based on actual revenue earned per the royalty reports received from Grünenthal.

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For the three months ended September 30, 2018, we recognized $0.2 million in revenue under the Amended Agreements, consisting primarily of product sales revenue. For the three months ended September 30, 2017, we recognized $1.2 million in revenue under the Amended Agreements, primarily product sales revenue. Revenue recognized under the Amended Agreements for the nine months ended September 30, 2018 was $0.8 million, $0.2 million of which was non-cash royalty revenue, with the remainder consisting primarily of product sales revenue, compared to $6.4 million for the nine months ended September 30, 2017, consisting primarily of product sales revenue. The decrease in collaboration agreement revenue for the three and nine months ended September 30, 2018, as compared to the prior year periods, was primarily the result of Grünenthal working down its existing inventories. While Grünenthal anticipates positive sales growth for Zalviso in fiscal year 2018, this trend will not always closely align with the timing of our product sales revenue as Grünenthal continues to work down its existing inventories. Therefore, despite Grünenthal’s continued growth expectations for Zalviso, we expect our collaboration agreement revenue related to product sales to continue to decline in fiscal year 2018 before increasing modestly in 2019. In addition, under the Royalty Monetization, we sold a portion of the expected royalty stream and commercial milestones from the European sales of Zalviso by Grünenthal to PDL. As a result, collaboration agreement revenue is not expected to have a significant impact on our cash flows in the near-term since a significant portion of European Zalviso royalties and milestones were already monetized with PDL in 2015. We anticipate that royalty revenues and non-cash royalty revenues from the commercial sale of Zalviso in 2018 will continue to be minimal.

As of September 30, 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 significant and incremental discount on manufacturing services, as compared to market rates for contract manufacturing margin. The value assigned to this portion of the total allocated consideration was $4.4 million. We anticipate that the long-term deferred revenue balance will decline on a straight-line basis through 2029, as we recognize collaboration revenue under the Amended Agreements.

Contract and Other Revenue

During the three and nine months ended September 30, 2018, we recognized revenue of $0.2 million and $0.7 million, respectively, for services performed under the DoD Contract for DSUVIA, as compared to $0.3 million and $0.8 million during the three and nine months ended September 30, 2017, respectively. 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.

Cost of goods sold

Total cost of goods sold for the three and nine months ended September 30, 2018 and 2017 was as follows (in thousands):

	Three Months Ended September 30,										Nine Months Ended September 30,
	2018		2017		$ Change 2018 vs. 2017			% Change 2018 vs. 2017			2018		2017		$ Change 2018 vs. 2017			% Change 2018 vs. 2017
	(In thousands, except percentages)
Cost of goods sold	$	875	$	2,029	$	(1,154	)		(57	)%	$	2,738	$	9,697	$	(6,959	)		(72	)%

In October 2015, we initiated commercial production of Zalviso for Grünenthal. Under the Amended Agreements, we will sell Zalviso at a predetermined transfer price. We will not recover internal indirect costs as part of the transfer price. At current low volume levels, our direct costs are in excess of the transfer prices we are receiving from Grünenthal. In addition, the Amended Agreements include declining maximum transfer prices over the term of the contract with Grünenthal. These transfer prices were agreed to assuming economies of scale that would occur with increasing production volumes (from the potential approval of Zalviso in the U.S. and an increase in demand in Europe) and corresponding decreases in manufacturing costs. We do not have long-term supply agreements with our contract manufacturers and prices are subject to periodic changes. To date, we have not yet resubmitted the NDA for Zalviso and sales by Grünenthal in Europe have not been substantial. If we do not timely resubmit the NDA for Zalviso and then receive timely approval and are unable to successfully launch Zalviso in the U.S., or the volume of Grünenthal sales does not increase significantly, we will not achieve the manufacturing cost reductions required in order to accommodate these declining transfer prices without a corresponding decrease in our gross margin.

Cost of goods sold for Zalviso delivered to Grünenthal includes the inventory costs of the active pharmaceutical ingredient, or API, third-party contract manufacturing costs, estimated warranty costs, packaging and distribution costs, shipping, handling and storage costs and impairment charges. These direct costs included in costs of goods sold totaled $0.1 million and $0.6 million in the three and nine months ended September 30, 2018, respectively, and $1.1 million and $6.2 million in the three and nine months ended September 30, 2017, respectively. The indirect costs to manufacture include internal personnel and related costs for purchasing, supply chain, quality assurance, depreciation and related expenses. Indirect costs included in costs of goods sold totaled $0.8 million and $2.1 million in the three and nine months ended September 30, 2018, respectively, and $0.9 million and $3.4 million in the three and nine months ended September 30, 2017, respectively. We periodically evaluate the carrying value of inventory on hand for potential excess amounts over demand using the same lower of cost or net realizable value approach as that used to value the inventory. During the nine months ended September 30, 2017, we recorded an inventory impairment charge of $0.4 million, primarily for ZALVISO raw materials inventory on hand, plus related purchase commitments. For the foreseeable future, we anticipate negative gross margins on Zalviso product delivered to Grünenthal.

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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 and development expenses included the following:

• expenses incurred under agreements with contract research organizations and clinical trial sites;

• employee-related expenses, which include salaries, benefits and stock-based compensation;

• payments to third-party pharmaceutical and engineering development contractors;

• payments to third-party manufacturers;

• depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities and equipment, and equipment and laboratory and other supply costs; and

• costs for equipment and laboratory and other supplies. 

While we completed the Phase 3 clinical development programs for DSUVIA and Zalviso in fiscal year 2017, we expect to incur future research and development expenditures to support the FDA regulatory review of the Zalviso NDA, once it is resubmitted.

We track external development expenses on a program-by-program basis. Our internal development resources are shared among all of our programs. Compensation and benefits, facilities, depreciation, stock-based compensation, and development support services are not allocated specifically to projects and are considered research and development overhead. Below is a summary of our research and development expenses during the three and nine months ended September 30, 2018 and 2017 (in thousands, except percentages):

	Three Months Ended September 30,										Nine Months Ended September 30,
Drug Indication/Description	2018		2017		$ Change 2018 vs. 2017			% Change 2018 vs. 2017			2018		2017		$ Change 2018 vs. 2017			% Change 2018 vs. 2017
	(In thousands, except percentages)
DSUVIA	$	678	$	843	$	(165	)		(20	)%	$	2,163	$	3,066	$	(903	)		(29	)%
ZALVISO		65		692		(627	)		(91	)%		567		5,983		(5,416	)		(91	)%
Overhead		2,899		2,378		521			22	%		7,703		6,684		1,019			15	%
Total research and development expenses	$	3,642	$	3,913	$	(271	)		(7	)%	$	10,433	$	15,733	$	(5,300	)		(34	)%

Due to the inherently unpredictable nature of product development, development timelines and the probability of success, development costs can differ materially from expectations. In addition, we cannot predict which product candidates may be subject to future collaborations, when these arrangements will be secured, if at all, and to what degree these arrangements would affect our development plans and capital requirements.

The $0.3 million decrease in research and development expenses for the three months ended September 30, 2018, as compared to the three months ended September 30, 2017, was primarily due to a $0.6 million decrease in Zalviso-related expenses and a $0.2 million decrease in DSUVIA-related development spending, offset by a $0.5 million net increase in other research and development expenses. The $5.3 million decrease in research and development expenses for the nine months ended September 30, 2018, as compared to the nine months ended September 30, 2017, was mainly due to a $5.4 million decrease in Zalviso-related expenses and a $0.9 million decrease in DSUVIA-related development spending, offset by a $1.0 million net increase in other research and development expenses. The decrease in Zalviso-related spending in 2018 as compared to the prior year periods is primarily due to the completion of the Phase 3 clinical development program in 2017, while the decrease in DSUVIA-related spending in 2018 as compared to the prior year periods is primarily due to a decrease in development-related expenses. The increase in other research and development expenses in 2018 as compared to the prior year periods is primarily the result of increased personnel expenses as we prepare for the commercial launch of DSUVIA.

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 for general legal, audit and consulting services. We expect general and administrative expenses in the fiscal year 2018 to increase as compared to fiscal year 2017 expenses, as we focus our efforts on preparing for the commercialization of DSUVIA in the United States.

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Total general and administrative expenses for the three and nine months ended September 30, 2018 and 2017 were as follows:

	Three Months Ended September 30,									Nine Months Ended September 30,
	2018		2017		$ Change 2018 vs. 2017		% Change 2018 vs. 2017			2018		2017		$ Change 2018 vs. 2017		% Change 2018 vs. 2017
	(In thousands, except percentages)
General and administrative expenses	$	5,188	$	4,406	$	782		18	%	$	13,117	$	12,700	$	417		3	%

General and administrative expenses during the three months ended September 30, 2018 increased by $0.8 million, as compared to the three months ended September 30, 2017 and increased by $0.4 million during the nine months ended September 30, 2018, as compared to the nine months ended September 30, 2017. In both periods, the increases were primarily due to increased personnel-related expenses in preparation for the commercial launch of DSUVIA.

Other (Expense) Income

Total other (expense) income for the three and nine months ended September 30, 2018 and 2017 was as follows (in thousands, except percentages):

	Three Months Ended September 30,												Nine Months Ended September 30,
	2018			2017			$ Change 2018 vs. 2017			% Change 2018 vs. 2017			2018			2017			$ Change 2018 vs. 2017			% Change 2018 vs. 2017
	(In thousands, except percentages)
Interest expense	$	(529	)	$	(919	)	$	390			42	%	$	(1,758	)	$	(2,596	)	$	838			(32	)%
Interest income and other income (expense), net		312			(465	)		777			(167	)%		643			(215	)		858			(399	)%
Non-cash interest expense on liability related to sale of future royalties		(2,913	)		(2,768	)		(145	)		5	%		(8,724	)		(7,935	)		(789	)		10	%
Total other (expense) income	$	(3,130	)	$	(4,152	)	$	1,022			(25	)%	$	(9,839	)	$	(10,746	)	$	907			(8	)%

Interest expense consisted primarily of interest accrued or paid on our debt obligation agreements and amortization of debt discounts. Interest expense pertains to interest on the Amended Loan Agreement with Hercules Capital Funding Trust 2014-1 and Hercules Technology II, L.P., together, Hercules. Refer to Note 7 “Long-Term Debt” in the accompanying notes to the condensed consolidated financial statements for additional information. Primarily as a result of the lower principal balance in the three and nine months ended September 30, 2018 as compared to the three and nine months ended September 30, 2017, the amount of interest expense incurred decreased. As of September 30, 2018, the accrued balance due to Hercules was $13.9 million.

Interest income and other income (expense), net, for the three and nine months ended September 30, 2018 primarily related to interest earned on our investments, while for the three and nine months ended September 30, 2017 it consisted primarily of the change in the fair value of our warrants, or PIPE warrants, which were issued in connection with the June 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 to the Amended Loan Agreement with Hercules.

The increase in non-cash interest expense on the liability related to the sale of future royalties for the three and nine months ended September 30, 2018 as compared to the three and nine months ended September 30, 2017, is attributable to the Royalty Monetization that we completed in September 2015. As described above, the Royalty Monetization has been recorded as debt under the applicable accounting guidance. We impute interest on the liability and record interest expense based on the amount and timing of royalty and milestone payments expected to be received by PDL over the life of the arrangement. There are a number of factors that could materially affect the estimated interest rate and we will assess this estimate on a periodic basis. As a result, future interest rates could differ significantly and any such change in interest rate will be adjusted prospectively. We anticipate that we will incur approximately $12 million in non-cash interest expense related to the Royalty Monetization during the year ended December 31, 2018.

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Liquidity and Capital Resources

Liquidity

We have incurred losses and generated negative cash flows from operations since inception. We expect to continue to incur significant losses in 2018 and may incur significant losses and negative cash flows from operations for the foreseeable future. We have funded our operations primarily through issuance of equity securities, borrowings, payments from our commercial partner, Grünenthal, monetization of certain future royalties and commercial sales milestones from the European sales of Zalviso by Grünenthal, and our contracts with the DoD.

As of September 30, 2018, we had cash, cash equivalents and investments totaling $63.6 million compared to $60.5 million as of December 31, 2017. The decrease was primarily due to cash required to fund our continuing operations, as we continue our research and development and pre-commercialization activities and support Grünenthal’s European sales of Zalviso. We anticipate that our existing capital resources will permit us to meet our capital and operational requirements through at least the end of the fourth quarter of 2019. However, our expectations may change depending on a number of factors including our expenditures related to the preparation for the United States commercial launch of DSUVIA, any changes or delays in the NDA resubmission of Zalviso and the FDA approval process for Zalviso. Our existing capital resources likely will not be sufficient to fund our operations until such time as we may be able to generate sufficient revenues to sustain our operations. Additional capital may not be available on terms acceptable to us, or at all. If adequate funds are not available, or if the terms underlying potential funding sources are unfavorable, our business and our ability to develop our product candidates would be harmed.

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. On August 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 were approximately $23.0 million with net proceeds to us of $21.7 million after deducting the underwriting discounts and commissions and other offering expenses payable by us.

On June 21, 2016, we entered into a Controlled Equity Offering^SM Sales Agreement, or the Sales Agreement, with Cantor Fitzgerald & Co., or Cantor, as agent, pursuant to which AcelRx may offer and sell, from time to time through Cantor, shares of the Company’s common stock, or the Common Stock, having an aggregate offering price of up to $40.0 million. During the nine months ended September 30, 2018, we issued and sold an aggregate of 2.3 million shares of common stock pursuant to the Sales Agreement, for which we received net proceeds of approximately $7.4 million, after deducting commissions, fees and expenses of $0.2 million. As of September 30, 2018, we had issued and sold an aggregate of 7.7 million shares of common stock pursuant to the Sales Agreement, for which we had received net proceeds of approximately $23.1 million, after deducting commissions, fees and expenses of $0.7 million.

On September 18, 2015, we sold a portion of the expected royalty stream and commercial milestone payments from the European sales of Zalviso by Grünenthal to PDL. The total liability related to sale of future royalties to PDL as of September 30, 2018 was $92.1 million.

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 million related 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 for Zalviso in September 2015. In addition, under the terms of 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 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 and trademark fee payments, will be paid to PDL in connection with the Royalty Monetization, as discussed above.

On March 2, 2017, we amended and restated the Original Loan Agreement with Hercules, which is referred to as the Amended Loan Agreement. Pursuant to the Amended Loan Agreement, we borrowed approximately $20.5 million upon closing of the transaction on March 2, 2017, which is represented by secured term promissory notes, or the Notes. Our obligations under the Amended Loan Agreement are secured by a security interest in substantially all of our assets, other than our intellectual property. Loans under the Amended Loan Agreement now mature in March 2020. For more information, see Note 7 “Long-Term Debt” in the accompanying notes to the condensed consolidated financial statements.

As of September 30, 2018, the accrued balance due under the Amended Loan Agreement was $13.9 million, which includes the accrued portion of the End of Term Fee.

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Our cash and investment balances are held in a variety of interest bearing instruments, including obligations of U.S. government agencies, money market funds and time deposits. Cash in excess of immediate requirements is invested with a view toward capital preservation and liquidity.

Cash Flows

The following is a summary of our cash flows for the periods indicated and has been derived from our condensed consolidated financial statements which are included elsewhere in this Form 10-Q (in thousands):

	Nine Months Ended September 30,
	2018			2017
Net cash used in operating activities	$	(20,085	)	$	(23,089	)
Net cash provided by (used in) investing activities		1,083			(2,495	)
Net cash provided by financing activities		23,666			13,210

Cash Flows from Operating Activities

The primary use of cash for our operating activities during these periods was to fund the development of our product candidates, including commercial readiness activities for our approved product, DSUVIA, and our product candidate, Zalviso, in addition to the support of Grünenthal’s European sales of Zalviso. Our cash used for operating activities also reflected changes in our working capital, net of adjustments for non-cash charges, such as depreciation and amortization of our fixed assets, stock-based compensation, non-cash interest expense related to the sale of future royalties, interest expense related to our debt financings and the contingent put option liability.

Cash used in operating activities of $20.1 million during the nine months ended September 30, 2018, reflected a net loss of $34.6 million, partially offset by aggregate non-cash charges of $13.2 million. Non-cash charges included $8.7 million in non-cash interest expense on the liability related to the royalty monetization and $3.9 million for stock-based compensation expense. The net change in our operating assets and liabilities included a decrease in accounts receivable of $1.3 million.

Cash used in operating activities of $23.1 million during the nine months ended September 30, 2017, reflected a net loss of $41.6 million, partially offset by aggregate non-cash charges of $14.3 million, and a net change of $4.2 million in our net operating assets and liabilities. Non-cash charges included $7.9 million in non-cash interest expense on the liability related to the royalty monetization, $3.2 million for stock-based compensation, $1.4 million in depreciation expense, $1.1 million in non-cash interest expense related to the Amended Loan Agreement, $0.4 million in inventory impairment due to excess ZALVISO inventory and $0.4 million due to the change in fair value of our PIPE warrant liability and contingent put liability. The net change in our operating assets and liabilities included a decrease in accounts receivable of $4.5 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 nine months ended September 30, 2018, cash provided by investing activities of $1.1 million was the net result of $14.5 million in proceeds from maturity of investments, offset by $12.8 million for purchases of investments and purchases of property and equipment of $0.6 million. During the nine months ended September 30, 2017, cash used in investing activities of $2.5 million was due to 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 nine months ended September 30, 2018, cash provided by financing activities was primarily due to net proceeds of $29.1 million from the issuance of common stock, including $21.7 million in net proceeds from our underwritten public offering plus $7.4 million in net proceeds received under the Sales Agreement. In addition, we used $5.7 million during the nine months ended September 30, 2018 to repay our long-term debt with Hercules. During the nine months ended September 30, 2017, cash provided by financing activities of $13.2 million was primarily due to $13.1 million in net proceeds from the sale of our common stock under the 2016 ATM Agreement.

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Operating Capital and Capital Expenditure Requirements

Our rate of cash usage may increase in the future, in particular to support our product development activities, including activities undertaken to prepare for the potential commercialization of our product candidates, to resubmit the Zalviso NDA to the FDA, and to support the anticipated FDA review of the resubmitted ZALVISO NDA. In the short-term, we anticipate that our existing capital resources will permit us to meet our capital and operational requirements through at least the end of the fourth quarter of 2019. Our current operating plan includes anticipated activities required to resubmit the NDA for Zalviso, to support the FDA review of the resubmitted Zalviso NDA, once resubmitted, and expenditures related to our preparation for the commercialization of DSUVIA in the United States. These assumptions may change as a result of many factors. We will continue to evaluate the work necessary to successfully launch DSUVIA and gain approval of Zalviso in the United States and intend to update our cash forecasts 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 terms acceptable to us, or at all. If adequate funds are not available, or if the terms underlying potential funding sources are unfavorable, our business and our ability to develop our product candidates would be harmed.

Our future capital requirements may vary materially from our expectations based on numerous factors, including, but not limited to, the following:

• expenditures related to our preparation for the commercialization of DSUVIA and potential commercialization of Zalviso;

• future manufacturing, selling and marketing costs related to DSUVIA and Zalviso, including our contractual obligations to Grünenthal for Zalviso;

• 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 our product candidates, 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 number of product candidates that we pursue;

• the costs involved in filing and prosecuting patent applications and enforcing and defending patent claims;

• the timing and terms of future in-licensing and out-licensing transactions;

• the cost and timing of establishing sales, marketing, manufacturing and distribution capabilities;

• the cost of procuring clinical and commercial supplies of our product candidates;  

• the extent to which we acquire or invest in businesses, products or technologies; and

• the expenses associated with any possible litigation.

We will need substantial funds to:

• commercialize any products we market, including DSUVIA in the United States, and Zalviso, if approved in the United States;

• manufacture and market our products;

• conduct preclinical and clinical testing of our product candidates, 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 sufficient revenues to sustain our operations. To the extent that our capital resources are insufficient to meet our future capital requirements, we will have to raise additional funds through the sale of our equity securities, monetization of current and future assets, issuance of debt or debt-like securities or from development and licensing arrangements to continue our development programs. We may be unable to raise such additional capital on favorable terms, or at all. If we raise additional capital by selling our equity or convertible debt securities, the issuance of such securities could result in dilution of our shareholders’ equity positions. If adequate funds are not available we may have to:

• significantly curtail or put on hold commercialization or development efforts of our product candidates or other operations;

• obtain funds through entering into collaboration agreements on unattractive terms; and/or

• delay, postpone or terminate planned clinical trials.

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Off-Balance Sheet Arrangements

Through September 30, 2018, we have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our cash, cash equivalents and short-term investments as of September 30, 2018, consisted primarily of money market funds and U.S. government agency securities. We do not have any auction rate securities on our condensed consolidated balance sheet, as they are not permitted by our investment policy. Our cash is invested in accordance with an investment policy approved by our Board of Directors which specifies the categories, allocations, and ratings of securities we 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, particularly because the majority of our investments are in short-term marketable debt securities. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. In an attempt to limit interest rate risk, we follow guidelines to limit the average and longest single maturity dates, place our investments with high quality issuers and follow internally developed guidelines to limit the amount of credit exposure to any one issuer. Some of the securities that we invest in may be subject to market 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 security that was issued with a fixed interest rate and the prevailing interest rate later rises, the value of our investment may decline. If a 10 percent change in interest rates were to have occurred on September 30, 2018, this change would not have had a material effect on the fair value of our investment portfolio as of that date. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate.

In addition, domestic and international equity markets have experienced and may continue to experience heightened volatility and turmoil based on domestic and international economic conditions and concerns. In the event these economic conditions and concerns continue and the markets continue to remain volatile, our results of operations could be adversely affected by those factors in many ways, including making it more difficult for us to raise funds if necessary and our stock price may further decline. In addition, we maintain significant amounts of cash and cash equivalents that are not federally insured. If economic instability continues, we cannot provide assurance that we will not experience losses on these investments.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the rules and regulations thereunder, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Evaluation of disclosure controls and procedures. As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in internal control over financial reporting. There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1. 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 legal proceedings. We may, however, be involved in material legal proceedings in the future. Such matters are subject to uncertainty and there can be no assurance that such legal proceedings will not have a material adverse effect on our business, results of operations, financial position or cash flows.

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Item 1A. Risk Factors

This Quarterly Report on Form 10-Q contains forward-looking information based on our current expectations. Because our actual results may differ materially from any forward-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. You should carefully consider these risk factors, together with all of the other information included in this Quarterly Report on Form 10-Q as well as our other publicly available filings with the U.S. Securities and Exchange Commission, or SEC.

We have marked with an asterisk (*) those risks described below that reflect substantive changes from, or additions to, the risks described in our Annual Report on Form 10-K for the year ended December 31, 2017.

Risks Related to Commercialization of Our Approved Products and Our Product Candidates

Our success depends heavily on successful commercialization of DSUVIA, which received approval in November 2018 from the U.S. Food and Drug Administration, or FDA, for use in adults in a certified medically supervised healthcare setting, for the management of acute pain severe enough to require 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 now commercialization of DSUVIA for use in adults in a certified medically supervised healthcare setting for the management of acute pain. The success of DSUVIA 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, including IV-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 successfully commercialize 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 the acceptance 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 number of factors, including:

• demonstration of clinical safety and efficacy compared to other products;

• the relative convenience, ease of administration and acceptance by physicians, patients and health care payors;

• the use of DSUVIA for the management of moderate-to-severe acute pain by a healthcare professional for patient types that were not specifically studied in our Phase 3 trials;

• the use of Zalviso for the management of moderate-to-severe acute pain in the hospital setting for patient types that were not specifically 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;

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• limitations or warnings contained in the FDA-approved label for DSUVIA, or the European Medicines Agency, or EMA-approved label for DZUVEO, or Zalviso;

• restrictions or limitations placed on DSUVIA due to the REMS;

• availability of alternative treatments;

• existing capital investment by hospitals in IV PCA technology;

• pricing and cost-effectiveness;

• the effectiveness of our or any future collaborators’ sales and marketing strategies;

• our ability to obtain formulary approval; and,

• our ability to obtain and maintain sufficient third-party coverage and reimbursement.

If our approved products do not achieve an adequate level of acceptance by physicians, nurses, patients and pharmacy and therapeutics committees, we may not generate sufficient revenue and we may not become or remain profitable.

If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our product candidates, we may be unable 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, managerial and other capabilities or make arrangements with third parties to perform these services. In addition, we plan to enter into agreements with third parties for the distribution of approved product candidates; however, if there are delays in establishing such relationships or those third parties do not perform as expected, our ability to effectively distribute products would suffer.

We have entered into a collaboration with Grünenthal for the commercialization of Zalviso in Europe and Australia and intend to enter into additional strategic partnerships with third parties to commercialize our product candidates outside of the United States. DZUVEO was approved by the EC in June 2018, but we have not yet entered into a collaboration agreement with a strategic partner for the commercialization of DZUVEO in Europe, and there can be no assurance that we will successfully enter into such an agreement. We may also consider the option to enter into strategic partnerships for our product candidates in the United States. We face significant competition in seeking appropriate strategic partners, and these strategic partnerships can be intricate and time consuming to negotiate and document.

We may not be able to negotiate future strategic partnerships on acceptable terms, or at all. We are unable to predict when, if ever, we will enter into any strategic partnerships because of the numerous risks and uncertainties associated with establishing strategic partnerships. Our current or future collaboration partners, if any, may not dedicate sufficient resources to the commercialization of Zalviso or DZUVEO in Europe, or may otherwise fail in their commercialization due to factors beyond our control. If we are unable to establish effective collaborations to enable the sale of our product candidates, if approved, to healthcare professionals and in geographical regions that will not be covered by our own marketing and sales force, or if our potential future collaboration partners do not successfully commercialize our product candidates, if approved, 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 to generate 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 be unable to compete successfully against these more established companies.

A key part of our business strategy is to establish collaborative relationships to commercialize and fund development and approval of our product candidates, particularly outside of the United States. We may not succeed in establishing and maintaining collaborative relationships, which may significantly limit our ability to develop and commercialize our products successfully, if at all.

We will need to establish and maintain successful collaborative relationships to obtain international sales, marketing and distribution capabilities for our product candidates. 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, manufacturing issues, a change in business strategy, a change of control or other reasons;

• our contracts for collaborative arrangements are terminable at will on written notice and may otherwise expire or terminate, and we may not have alternatives available to achieve the potential for our products in those territories or markets;

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• 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 in termination 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 and efficacy of our drug candidates, obtain regulatory approvals and our ability to successfully manufacture and achieve market acceptance of products developed from our product candidates;

• we or our partners may fail to properly initiate, maintain or defend our intellectual property rights, where applicable, or a party may use our proprietary information in such a way as to invite litigation that could jeopardize or potentially invalidate our proprietary information or expose us to potential liability;

• our partners may not devote sufficient capital or resources towards our product candidates; and

• our partners may not comply with applicable government regulatory requirements necessary to successfully market and sell our products.

If any collaborator fails to fulfill its responsibilities in a timely manner, or at all, any research, clinical development, manufacturing or commercialization efforts pursuant to that collaboration could be delayed or terminated, or it may be necessary for us to assume responsibility for expenses or activities that would otherwise have been the responsibility of our collaborator. If we are unable to establish and maintain collaborative relationships on acceptable terms or to successfully and timely transition terminated collaborative agreements, we may have to delay or discontinue further development of one or more of our product candidates, undertake development and commercialization activities at our own expense or find alternative sources of capital.

Approval of Zalviso and DZUVEO in Europe has resulted, and any future approvals of our product candidates outside of the United States will result, in a variety of risks associated with international operations that could materially adversely affect 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 also require 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;

• 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 to doing business in another country;

• workforce uncertainty in countries where labor unrest is more common than in the United States;

• production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and

• business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters including earthquakes, typhoons, floods and fires.

If we, or current and potential partners, are unable to compete effectively, our product candidates may not reach their commercial potential.

The U.S. market for DSUVIA and Zalviso is characterized by intense competition and cost pressure. DSUVIA, and Zalviso, if approved, will compete with a number of existing and future pharmaceuticals and drug delivery devices developed, manufactured and marketed by others. We or our current and potential partners will compete against fully integrated pharmaceutical companies and smaller companies that are collaborating with larger pharmaceutical companies.

There are a wide variety of approved injectable and oral opioid products to treat moderate-to-severe acute pain, including IV opioids such as morphine, fentanyl, hydromorphone and meperidine or oral opioids such as oxycodone and hydrocodone. DSUVIA does not require placement of an IV line and therefore direct competitors in the emergency department are other non-invasive, rapid-acting analgesics. In this environment, DSUVIA may compete with Egalet Corporation’s SPRIX (intranasal ketorolac) or products that are in development, such as INSYS’ sublingual buprenorphine spray. Transmucosal fentanyl products, such as ACTIQ or FENTORA (Cephalon, Inc., a subsidiary of Teva Pharmaceutical Products Ltd.), are approved for opioid-tolerant patients suffering from cancer pain and therefore are not a competitor for DSUVIA. Orally administered tablets or liquids containing oxycodone or hydrocodone often have slower absorption and slower analgesic onset than transmucosal opioids. Examples of oral opioids include Acura Pharmaceuticals, Inc.’s OXAYDO (marketed by Egalet Corporation), Collegium Pharmaceuticals, Inc.’s NUCYNTA, and Purdue Pharma, L.P.’s OXYFAST, or generic oral opioids which have moderate-to-severe acute pain labeling.

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Often used in combination with opioids are generic injectable local anesthetics, such as bupivacaine, or branded formulations thereof, including Pacira Pharmaceuticals, Inc.’s EXPAREL. In addition, Heron Therapeutics, Inc. is in Phase 3 development of HTX-011, a long-acting formulation of the local anesthetic bupivacaine in a fixed-dose combination with the anti-inflammatory meloxicam for the prevention of post-operative pain. These products may reduce the amount of opioids required to achieve adequate pain control but usually do not obviate the need for opioids completely. Similarly, there are many 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. submitted a New Drug Application, or NDA, for IV meloxicam for the treatment of moderate-to-severe acute pain. These products are all invasively administered via an IV and, as a result, we do not believe they are direct competitors to the non-invasive DSUVIA.

We believe that Zalviso would compete with a number of opioid-based treatment options that are currently available, as well as some products that are in development. The hospital market for opioids for moderate-to-severe acute pain is large and competitive. The primary competition for Zalviso is the IV PCA pump, which is widely used in the moderate-to-severe acute pain in the hospital setting. Leading manufacturers of IV PCA pumps include Hospira, Inc. (sold by Pfizer, Inc. to ICU Medical), CareFusion Corporation (purchased by Becton, Dickinson and Company), Baxter International, Inc., Curlin Medical, Inc. and Smiths Medical. The most common opioids used to treat moderate-to-severe acute pain are morphine, hydromorphone and fentanyl, all of which are available as generics both from generic product manufacturers as well as from compounding pharmacies. In addition, branded manufacturers (e.g., Hospira, Inc.) sell pre-filled glass syringes of morphine to fit their IV PCA pump systems. These systems, however, are invasive and require programming, which can lead to dosing errors, and therefore, while they are commonly used, we do not believe they are 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 opioids and other agents can be used in this system. Oral opioids tend to have slower onset than transmucosal opioids, such as Zalviso. The Medicine Company’s IONSYS is a non-invasive transdermal opioid PCA that could potentially compete with Zalviso; however, a worldwide recall of the product was announced due to a commercial refocusing of the company. Additional potential opioid competitors for Zalviso include Cara Therapeutics, Inc., who is developing a kappa opioid agonist, CR845, as an IV agent for the management of post-operative moderate-to-severe pain. Also, Trevena, Inc., has submitted an NDA for IV oliceridine, an intravenous G-protein biased ligand that targets the mu-opioid receptor for the treatment of moderate-to-severe acute pain, with a clinical development focus in acute post-operative pain. Both of these product candidates are invasive and, therefore, we do not believe they are direct competition to the non-invasive Zalviso.

It is possible that any of these competitors could develop or improve technologies or products that would render our product candidates obsolete or non-competitive, which could adversely affect our revenue potential. Key competitive factors affecting the commercial success of our product candidates are likely 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 in the discovery and development of drug candidates, obtaining FDA and other regulatory approval of products and the commercialization of those products. Accordingly, our competitors may be more successful than we are in obtaining FDA approval for drugs and achieving widespread market acceptance. Our competitors’ drugs or drug delivery systems may be more effective, have fewer adverse effects, be less expensive to develop and manufacture, or be more effectively marketed and sold than any product candidate we may commercialize. This may render our product candidates 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 and additional technologies become available. These entities may also establish collaborative or licensing relationships with our competitors, which may adversely affect our competitive position. Finally, the development of different methods for the treatment of moderate-to-severe acute pain could render our products non-competitive or obsolete. These and other risks may materially adversely affect our ability to attain or sustain profitable operations.

Formulary approval may not be available, or could be subject to certain restrictions for DSUVIA, or Zalviso, if approved, in the United States, which could make it difficult for us to sell our products profitably.*

Obtaining formulary approval can be an expensive and time-consuming process. We cannot be certain if and when we will obtain formulary approval to allow us to sell our products into our target markets. Failure to obtain timely formulary approval will limit our commercial success. If we are successful in obtaining formulary approval, we may need to complete evaluation programs whereby DSUVIA, or Zalviso, if approved, is used on a limited basis for certain patient types. Hospitals may seek to obtain DSUVIA or Zalviso devices at little or no cost during this evaluation period. Revenue generated from these hospitals during the evaluation period would be minimal. The evaluation period may last several months and there can be no assurance that use during the evaluation period will lead to formulary approval of DSUVIA, or Zalviso, if approved. Further, even successful formulary approval may be subject to certain restrictions based on patient type or hospital protocol. Failure to obtain timely formulary approval for DSUVIA, and/or Zalviso, if approved, would materially adversely affect our ability to attain or sustain profitable operations.

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Coverage and adequate reimbursement may not be available for DSUVIA, or Zalviso, if approved, in the United States, or DZUVEO or Zalviso in Europe, 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 DZUVEO in Europe, or Grünenthal’s ability to expand sales of Zalviso in Europe successfully will depend, in part, on the extent to which coverage and adequate reimbursement will be available from government payer programs at the federal and state levels, authorities, including Medicare and Medicaid, private health insurers, managed care plans and other third-party payers.

No uniform policy requirement for coverage and reimbursement for drug products exists among third-party payers in the United States or 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 no assurance that coverage and adequate reimbursement will be applied consistently or obtained in the first instance. Our inability to promptly obtain coverage and adequate reimbursement rates from third party payers could significantly harm our operating results, our ability to raise capital needed to commercialize any future approved drugs and our overall financial condition.

A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and other third-party payers have attempted to control costs by limiting coverage and the amount of reimbursement for particular medical products. There have been a number of legislative and regulatory proposals to change the healthcare system in the United States and in some foreign jurisdictions that could affect our ability to sell our products profitably. These legislative and/or regulatory changes may negatively impact the reimbursement for our products, following approval. The availability of numerous generic pain medications may also substantially reduce the likelihood of reimbursement for DSUVIA, or Zalviso, if approved in the United States, and DZUVEO and Zalviso in Europe and elsewhere. The application of user fees to generic drug products may expedite the approval of additional pain medication generic drugs. We expect to experience pricing pressures in connection with our sales of DSUVIA, and Zalviso, if approved, in the United States, Grünenthal’s European sales of Zalviso, future product sales of DZUVEO, and any other product candidates, 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 maintain reimbursement coverage for our products or are significantly delayed in doing so, we will have difficulty achieving market acceptance of our products and our business will be harmed.

Furthermore, market acceptance and sales of our product candidates, if approved, will depend on reimbursement policies and may be affected by future healthcare reform measures. Government authorities and third-party payers, such as private health insurers, hospitals and health maintenance organizations, decide which drugs they will pay for and establish reimbursement levels. We cannot be sure that reimbursement will be available for DSUVIA in the United States, or DZUVEO or Zalviso in Europe or Zalviso, or any of our other product candidates, if approved in the United States. Also, reimbursement amounts may reduce the demand for, or the price of, our products. For example, as mentioned above, we anticipate we may need comparator studies of DZUVEO in Europe to ensure premium reimbursement in certain countries. If reimbursement is not available, or is available only to limited levels, we may not be able to successfully commercialize DSUVIA in the United States, or DZUVEO or Zalviso in Europe, or Zalviso, or any of product candidates, 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 in obtaining approvals. Some countries require approval of the sale price of a product before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay commercial launch of the product, possibly for lengthy time periods, and negatively impact the revenues able to be generated from the sale of the product in that country. For example, although in September 2015 the EC approved the MAA for Grünenthal to market Zalviso in the European Economic Area countries, including the 28 EU member states as well as Norway, Iceland and Liechtenstein, separate pricing and reimbursement approvals may impact their ability to successfully commercialize Zalviso. Adverse pricing limitations may hinder our ability to recoup our investment in DSUVIA in the United States, or Zalviso and our other drug candidates, even if those drug candidates obtain marketing approval.

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In the United States, there has been increasing legislative and enforcement interest with respect to specialty drug pricing practices. Specifically, there have been several recent U.S. Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs. At the federal level, the Trump Administration’s budget proposal for fiscal year 2019 contains additional drug price control measures that could be enacted during the 2019 budget process or in other future legislation, including, for example, measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices under Medicaid and to eliminate cost sharing for generic drugs for low-income patients. While any proposed measures will require authorization through additional legislation to become effective, Congress and the Trump Administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. At the state level, legislatures are increasingly passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. Furthermore, even after initial price and reimbursement approvals, reductions in prices and changes in reimbursement levels can be triggered by multiple factors, including reference pricing systems and publication of discounts by third party payers or authorities in other countries. In Europe, prices can be reduced further by parallel distribution and parallel trade, i.e. arbitrage between low-priced and high-priced countries. If any of these events occur, revenue from sales of Zalviso 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 product candidates, including DSUVIA, or Zalviso, if approved in the United States, we may become subject to significant liability. Such enforcement has become more common in the industry. The FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription drug products. In particular, a product may not be promoted for uses that are not approved by the FDA or such other regulatory agencies as reflected in the product’s approved labeling. While we have received marketing approval for DSUVIA for our proposed indication, physicians may nevertheless use our products for their patients in a manner that is inconsistent with the approved label, if the physicians personally believe in their professional medical judgment it could be used in such manner. However, if the FDA determines that our promotional materials or training constitutes promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our promotional or training materials 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 our ability to operate our business and our financial results. The FDA or other enforcement authorities could also request that we enter into a consent decree or a 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 our product candidates, including Zalviso in the United States, if approved, we could become subject to significant liability, which would materially adversely affect our business and financial condition.

Guidelines and recommendations published by government agencies, as well as non-governmental organizations, can reduce the use DSUVIA, or our product candidates, including Zalviso, if approved.*

Government agencies and non-governmental organizations promulgate regulations and guidelines applicable to certain drug classes that may include DSUVIA and the product candidates that we are developing. Recommendations of government agencies or non-governmental organizations may relate to such matters 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 and guidelines may impact our product candidates and our ability to gain marketing approval. Regulations or guidelines suggesting the reduced use of certain drug classes that may include DSUVIA or the product candidates that we are developing, or the use of competitive or alternative products as the standard-of-care to be followed by patients and healthcare providers, could result in decreased use of DSUVIA or our product candidates, or negatively impact our ability to gain market acceptance and market share.

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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-users access to a broad range of pharmaceutical products from multiple suppliers at competitive prices and, in certain cases, exercise considerable influence over the drug purchasing decisions of such end-users. Hospitals and other end-users contract with the GPO of their choice for their purchasing needs. We expect to derive revenue from end-user customers that are members of GPOs, for DSUVIA, and, if approved, Zalviso. Establishing and maintaining strong relationships with these GPOs will require us to be a reliable supplier, remain price competitive and comply with FDA regulations. The GPOs with whom we have relationships may have relationships with manufacturers that sell competing products, and such GPOs may earn higher margins from these products or combinations of competing products or may prefer products other than ours for other reasons. If we are unable to establish or maintain our GPO relationships, sales of DSUVIA, and any future approved products, 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 our product candidates, including Zalviso, if approved.*

We intend to rely primarily upon pharmaceutical wholesalers in connection with the distribution of DSUVIA in the United States, and our product candidates, including Zalviso, if approved. As part of the DSUVIA REMS program, we will monitor distribution and audit wholesalers’ data. If our wholesalers do not comply with the DSUVIA REMS requirements, or if we are unable to establish or maintain our business relationships with these pharmaceutical wholesalers on commercially acceptable terms, or if our wholesalers are unable to distribute our drugs for regulatory, compliance or any other reason, it could have a material adverse effect on our sales and may prevent us from achieving profitability.

Risks Related to Clinical Development and Regulatory Approval

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 the management of moderate-to-severe acute pain in adult patients in the hospital setting. Our Phase 3 program for Zalviso initially consisted of three Phase 3 clinical trials. We reported positive top-line data from each of these trials and submitted an NDA for Zalviso to the FDA in September 2013, which the FDA then accepted for filing in December 2013. In July 2014, the FDA issued a CRL for our NDA for Zalviso, or the Zalviso CRL. The Zalviso CRL contained requests for additional information on the Zalviso System to ensure proper use of the device. The requests 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. Furthermore, in March 2015, we received correspondence from the FDA stating that in addition to the bench testing and two Human Factors studies we had performed in response to the issues identified in the Zalviso CRL, a clinical trial was 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 and initiated 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 the Zalviso 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 failure rate. The study design required a minimum of 315 patients. In the IAP312 study, sites proactively looked for tablets that have been dispensed by the patient but failed to be placed under the tongue, known as dropped tablets. The FDA refers to dropped tablets as inadvertent dispensing. Correspondence from the FDA suggests that they may include the rate of inadvertent dispensing along with the device failures to calculate a total error rate. The IAP312 study 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 be unacceptable 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 are currently evaluating the timing of the resubmission of our NDA for Zalviso.

There is no guarantee that the additional work we performed related to Zalviso, including the IAP312 trial, will result in our successfully obtaining FDA approval 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 to calculate 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 of the device, inadvertent dosing (dropped tablets), or other issues. At any future point in time, the FDA could require us to complete further clinical, Human Factors, pharmaceutical, reprocessing or other studies, which could delay or preclude any NDA resubmission or approval of the NDA and could require us to obtain significant additional funding. There is no guarantee such funding would be available to us on favorable terms, if at all. We intend to resubmit the Zalviso NDA seeking a label indication for the management of moderate-to-severe acute pain in adult patients in the hospital setting. However, our clinical trial data was generated exclusively from the post-operative segment of this population, and the FDA may restrict any approval to post-operative patients only, which would reduce our commercial opportunity.

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Upon resubmission of the Zalviso NDA, the FDA may hold an advisory committee meeting to obtain committee input on the safety and efficacy of Zalviso. Typically, advisory committees will provide responses to specific questions asked by the FDA, including the committee’s view on the approvability of the drug under review. Advisory committee decisions are not binding, but an adverse decision at the advisory committee may have a negative 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 the FDA, which must approve all drug trade names to avoid medication errors and misbranding. However, the FDA may withdraw this approval in which case any brand recognition or goodwill that we establish with the name Zalviso prior to commercialization may be worthless.

Any delay in approval by the FDA of the Zalviso NDA, 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, generating revenues 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.

Positive clinical results obtained to date for our product candidates may be disputed in FDA review, do not guarantee regulatory approval and may not be obtained from 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 for Zalviso. 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 data from our trials was negative or inconclusive or could reach a different conclusion than we did on that same data. Negative or inconclusive results of a clinical trial or difference of opinion could cause the FDA to require us to repeat the trial or conduct additional clinical trials prior to obtaining approval for commercialization, and there is no guarantee that additional trials would achieve positive results or that the FDA will agree with our interpretation of the results. For example, although we had achieved the primary endpoints in each of our three Phase 3 clinical trials for Zalviso which were included in our NDA filed in 2013, in March 2015, we received correspondence from the FDA stating that in addition to the bench testing and two Human Factors studies we had performed in response to the issues identified in the Zalviso CRL, a clinical trial would be needed to assess the risk of inadvertent dispensing and overall risk of dispensing failures. While we believe Zalviso met safety, satisfaction and device usability expectations in this trial, known as IAP312, there is no guarantee the FDA will agree with our interpretation of these results. If the FDA were to require any additional clinical trials for Zalviso, our development efforts would be further delayed, which would have a material adverse effect on our business. Any such determination by the FDA would delay the timing of our commercialization plan for Zalviso, or further development of our other product candidates, and adversely affect our business operations.

Delays in clinical trials are common and have many causes, and any delay could result in increased costs to us and jeopardize or delay our ability to obtain 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 clinical trials and several Phase 2 clinical trials for Zalviso, future clinical trials may not begin on time, have an effective design, enroll a sufficient number of patients or be completed on schedule, if at all. For example, we postponed the start of IAP312, originally planned for the first quarter of 2016, to September 2016. The postponement was due to a delay in the receipt and testing of final clinical supplies for this trial. As a result, the development timeline for Zalviso was further extended.

Our clinical trials for any of our product candidates could be delayed for a variety of reasons, including:

• inability to raise funding necessary to initiate or continue a trial;

• delays in obtaining regulatory approval to commence a trial;

• delays in reaching agreement with the FDA on final trial design;

• imposition of a clinical hold by the FDA, IRBs or other regulatory authorities;

• delays in reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites;

• delays in obtaining required Institutional Review Board approval at each site;

• delays in recruiting suitable patients to participate in a trial;

• delays in the testing, validation, manufacturing and delivery of the tablets and device components of our product candidates;  

• delays in having patients complete participation in a trial or return for post-treatment follow-up;

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• 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 clinical trials are delayed for any of the above reasons, our development costs may increase, our approval process could be delayed and our ability to commercialize and commence sales of our product candidates could be materially harmed, which could 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 deemed insufficient 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 a clinical 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 request for an additional clinical trial and our planned response to the Zalviso CRL. In response to discussions with the FDA, we agreed to complete an additional open-label study with Zalviso in post-operative patients, known as IAP312. We completed the protocol review for IAP312 and announced positive results from this study in August 2017, which we intend to use to support our NDA resubmission. We are currently evaluating the timing of the resubmission of our NDA for Zalviso.

Although we believe the IAP312 study met safety, satisfaction and device usability expectations, there is no guarantee the IAP312 trial results will address 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 the Zalviso CRL and designed the protocol for the additional Zalviso clinical trial to further address these issues, there is no guarantee the FDA will deem such protocols and results sufficient to address those issues when they are formally reviewed as a part of an NDA resubmission. Any delay in obtaining, or inability to obtain, regulatory approval would prevent us from commercializing Zalviso in the United States, generating revenues and achieving profitability. If any of these events occur, we may be forced to delay or abandon our development and commercialization efforts for Zalviso in the United States, which would have a material adverse effect on our business and could potentially cause us to cease operations.

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 different opinion and deem the results insufficient. The FDA may provide review commentary at any time during the resubmission and review process that could adversely affect or even prevent the approval of Zalviso, which would adversely affect our business. We may not be able to identify appropriate remediations to issues that the FDA may raise, and we may not have sufficient time or financial resources to conduct future activities to remediate issues raised by the FDA.

Our product candidates may cause adverse effects or have other properties that could delay or prevent their regulatory approval or limit the scope of any approved label or market acceptance.

Adverse events, or AEs, caused by our product candidates could cause us, other reviewing entities, clinical trial sites or regulatory authorities to interrupt, delay or halt clinical trials and could result in the denial of regulatory approval. Phase 2 clinical trials we conducted with Zalviso did generate some 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, that were 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 Phase 3, double-blind, placebo-controlled, abdominal surgery trial (IAP310), 5% of Zalviso-treated patients dropped out of the trial prematurely due to an AE (7% in placebo group). There were no SAEs determined to be related to study drug. In our Phase 3, double-blind, placebo-controlled, orthopedic surgery trial (IAP311), 7% of Zalviso-treated patients dropped out of the trial prematurely due to an AE (7% in placebo group). Two patients (one each in the Zalviso group and placebo group) experienced an SAE considered possibly or probably related to the trial drug by the investigator. In our Phase 3 multicenter, open-label study of Zalviso (IAP312), 2% of patients dropped out prematurely due to an AE. Five patients experienced SAEs in the IAP312 study (four in the sufentanil sublingual tablet group and one in the placebo group) considered possibly or probably related to the study drug by the investigator.

In our Phase 2 DSUVIA placebo-controlled bunionectomy study (SAP202), two patients in the DSUVIA 30 mcg group (5%) discontinued treatment due to an 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 3 placebo-controlled abdominal surgery study (SAP301), no DSUVIA-treated patients dropped out of the trial prematurely due to an AE (4% in placebo group). 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 room study (SAP302), no DSUVIA-treated patients dropped out of the trial prematurely due to an AE. One patient had an SAE possibly or probably related to study drug. In our post-operative study in patients aged 40 years or older (SAP303), 3% of DSUVIA-treated patients dropped out of the trial prematurely due to an AE. There were no SAEs deemed related to study drug.

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If DSUVIA, or any of our future products, including Zalviso, cause serious or unexpected side effects after receiving marketing approval, a number of potentially significant negative consequences could result, including:

• regulatory authorities may withdraw their approval of the product or impose restrictions on its distribution in the form of modified Risk Evaluation 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 the affected product candidate and could substantially increase the costs of commercializing our product candidates.

Additional time may be required to obtain U.S. regulatory approval for Zalviso because it is a drug/device combination product.*   

DSUVIA and Zalviso are combination product candidates with both drug and device components. The FDA requires both the drug and device components of combination product candidates to be reviewed as part of an NDA submission. There are very few examples of the FDA approval process for drug/device combination products such as DSUVIA and Zalviso. As a result, we have in the past, experienced delays in the development and commercialization of DSUVIA, and may in the future, experience delays in the development and commercialization of Zalviso, due to regulatory uncertainties in the product development and approval process, in particular as it relates to a drug/device combination product approval under an NDA. For example, we originally submitted the NDA for DSUVIA in December 2016. In October 2017, we received a CRL from the FDA for DSUVIA which contained requests for additional information and testing of DSUVIA to assess the safety of DSUVIA dosed at the maximum amount described in the proposed label in at least 50 patients. 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 move towards resubmission of the DSUVIA NDA. In the Type A meeting, we discussed a proposal to address the safety of DSUVIA dosed at the maximum amount by reducing the maximum dose in the proposed label. In April 2018, we completed the HF study to validate the revised Directions for Use, or DFU, and in May 2018, we announced the resubmission of 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 any future 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. In addition, in March 2015, we received correspondence from the FDA stating that in addition to the bench testing and two Human Factors studies we had performed in response to the issues identified in the Zalviso CRL, a clinical trial is needed to assess the risk of inadvertent dispensing and overall risk of dispensing failures. Based on our Type C meeting with the FDA in early September 2015 to discuss the FDA’s request for an additional clinical trial and our planned response to the Zalviso CRL, we submitted a protocol to the FDA for a clinical study in post-operative patients designed to evaluate the effectiveness of changes made to the functionality and usability of the Zalviso device and to take into account comments from the FDA on the study protocol. We completed the protocol review and announced positive results from this study in August 2017, which we intend to use to support our NDA resubmission. We are currently evaluating the timing of the resubmission of our NDA for Zalviso.

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.

We may experience market resistance, delays or rejections based upon additional government regulation from future legislation or administrative action, 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 American families 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.

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In May 2017, the current FDA Commissioner established an Opioid Policy Steering Committee to address and advise regulators on opioid use. The Committee was charged with three initial questions: (i) should the FDA require mandatory education for healthcare professionals, or HCPs, who prescribe opioids; (ii) should the FDA take steps to ensure the number of prescribed opioid doses is more closely tailored to the medical indication; and (iii) is the FDA properly considering the risk 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.

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 and guidelines. The regulatory agency may delay, limit or deny marketing approval of our product candidates as a result of such inspections. In June 2014, the FDA completed an inspection at our corporate offices. We received a single observation on a Form 483 as a result of the inspection. Although we believe we have adequately addressed this observation in revised standard operating procedures, we, our contract manufacturers, and their vendors, are all subject to preapproval and post-approval inspections at any time. The results of these inspections could impact our ability to obtain FDA approval for Zalviso and, if approved, our ability to launch and successfully commercialize Zalviso in the United States.

Any delay in, or failure to receive or maintain, approval for any of our product candidates could prevent us from generating meaningful revenues or achieving profitability. Our product candidates may not be approved even if they achieve their endpoints in clinical trials. Regulatory agencies, including the FDA, or their advisors, may disagree with our trial design and our interpretations of data from preclinical studies and clinical trials. Regulatory agencies may change requirements for approval even after a clinical trial design has been approved. The FDA exercises significant discretion over the regulation of combination 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 regulation of Zalviso, or DSUVIA, under the medical device provisions of the Federal Food, Drug and Cosmetic Act, or FDCA. We must comply with the Quality Systems Regulation, or QSR, which sets forth the FDA’s current good manufacturing practice, or cGMP, requirements for medical devices, and other applicable government regulations and corresponding foreign standards for drug cGMPs. If we fail to comply with these regulations, it could have a material adverse effect on our business and financial condition.

Regulatory agencies also may approve a product candidate for fewer or more limited indications than requested or may grant approval subject to the performance of post-marketing trials. In addition, regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates. For example, we intend to resubmit our NDA seeking approval of Zalviso for the management of moderate-to-severe acute pain in adult patients in the hospital setting; however, our clinical trial data was generated exclusively from the post-operative segment of this population, and the FDA may restrict any approval to post-operative patients only, which would reduce our commercial opportunity.

The process for obtaining approval of an NDA is time consuming, subject to unanticipated delays and costs, and requires the commitment of substantial resources.

If the FDA determines that any of the clinical work submitted, including the clinical trials, Human Factors studies and bench testing submitted for a product candidate in support of an NDA were not conducted in full compliance with the applicable protocols for these trials, studies and testing as well as with applicable regulations and standards, or if the FDA does not agree with our interpretation of the results of such trials, studies and testing, the FDA may 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 audit some 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 of any of our data would negatively impact our ability to obtain marketing authorization for a product candidate and would have a material adverse 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 in FDA policies for drug approval during the review period. For example, although many products have been approved by the FDA in recent years under Section 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 of Section 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. More generally, the FDA’s comprehensive action plan to take concrete steps towards reducing the impact of opioid abuse on American families and communities may result in delays and challenges in obtaining NDA approval. Any significant delay in the acceptance, review or approval of an NDA that we have submitted would have a material adverse effect on our business and financial condition and would require us to obtain significant additional funding.

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Although we have obtained regulatory approval for DSUVIA, and even if we obtain regulatory approval for Zalviso or any future product candidates in the United States, we and our collaborators 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 or any future product candidates in the United States, the FDA may impose significant restrictions on the indicated uses or marketing of our product candidates or impose ongoing requirements for potentially costly post-approval trials or post-market surveillance. Additionally, the labeling approved for DSUVIA includes restrictions on use due to the opioid nature of sufentanil. The labeling approved for Zalviso or any future product candidates, if approved, 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, safety surveillance, advertising, promotion, record-keeping and reporting of safety and other post-market information. The holder of an approved NDA is obligated to monitor and report AEs and any failure of a product to meet the specifications in the NDA. The holder of an approved NDA must also submit new 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 and state laws. Zalviso or any future product candidates, if approved, 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 obtain or 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 is approved by the FDA. The state licensing process may take several months which would delay commercialization in those states. In addition, manufacturers of drug products and their facilities are subject to payment of user fees and continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMPs and adherence to commitments made in the NDA. If we, or a regulatory agency, discover previously unknown problems with a product, such as AEs of unanticipated severity or frequency, or problems with the facilities where the product is manufactured, a regulatory agency may impose restrictions relative to that product or the manufacturing facilities, including requiring recall or withdrawal of the product from the market or suspension of manufacturing.

If we fail to comply with applicable regulatory requirements following approval of our product candidates, a regulatory agency may:

• issue a warning letter asserting that we are in violation of the law;

• seek an injunction or impose civil or criminal penalties or monetary fines;

• suspend or withdraw regulatory approval;

• suspend any ongoing clinical trials;

• refuse to approve a pending NDA or supplements to an NDA submitted by us;

• seize product; or

• refuse to allow us to enter into supply contracts, including government contracts.

Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. The occurrence of any event or penalty described above may inhibit our ability to commercialize any future approved products 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 would limit our ability to realize their full market potential.*

In order to market any products outside of the United States, we or our commercial partners, including Grünenthal in Europe, must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. On September 22, 2015, we announced that the EC had 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 the treatment of patients with moderate-to-severe acute pain in medically monitored settings. We have not yet entered into a collaboration agreement with a strategic partner for the commercialization of DZUVEO in Europe and there can be no assurance that we will successfully enter into such an agreement.

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Outside of Europe, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. Approval processes vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking foreign regulatory approval could result in difficulties and costs for us and require additional non-clinical trials or clinical trials, which could be costly and time consuming. Regulatory requirements can vary widely from country-to-country and could delay or prevent the introduction of our products in those countries. Our current clinical trial data may not be sufficient to support marketing approval or premium reimbursement in all territories. For example, we anticipate we may need comparator studies for DZUVEO in Europe to ensure premium reimbursement in certain countries. Grünenthal does have products approved in international markets, Grünenthal’s experience in international markets does not guarantee compliance with regulatory requirements in those markets. Similarly, while we have obtained approval of DZUVEO in Europe, even if we are successful in entering into a collaboration agreement with a commercial partner, we will be substantially dependent on that commercial partner to comply with regulatory requirements. If we, or our commercial partners, fail to comply with regulatory requirements in international markets or to obtain and maintain required approvals, or if regulatory approvals in international markets are delayed, our target market will be reduced and our ability to realize the full market potential of our products will be harmed.

DSUVIA, and any future approved product candidates, including Zalviso, will require Risk Evaluation and Mitigation Strategies, or REMS.*

DSUVIA, and Zalviso, if approved, in the United States will require REMS. The DSUVIA REMS includes restrictions on product distribution and use only in certified medically supervised settings. Before DSUVIA is distributed, an authorized representative from each medically supervised setting must sign an attestation that they have the ability to manage acute opioid overdose, and will train all relevant staff on administration of DSUVIA, including the importance of only dispensing the product in a medically supervised setting. The REMS program for DSUVIA may significantly increase our costs to commercialize this product. While we have received pre-clearance from the FDA regarding certain aspects of the proposed required REMS for Zalviso, we cannot predict the final REMS to be required as 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 and the potential commercial market could be restricted. Furthermore, risks of sufentanil that are not adequately addressed through the DSUVIA REMS program or the proposed REMS programs for our future product candidates, including Zalviso, may also prevent or delay their approval for commercialization.  

Existing and future legislation may increase the difficulty and cost for us to commercialize DSUVIA, and Zalviso or any of our product candidates that may obtain commercial approval in the future, and affect the prices we may obtain.

In the United States and some foreign jurisdictions, the legislative landscape continues to evolve, including changes to the regulation of opioid-containing products. There have been a number of legislative and regulatory changes and proposed changes regarding healthcare systems that could prevent or delay marketing approval of Zalviso outside of Europe, or our other product candidates. These changes will restrict or regulate post-approval activities for DSUVIA, DZUVEO and Zalviso, and affect our ability to profitably sell any products for which we obtain marketing approval. For example, in February 2016, the FDA announced a comprehensive action plan to take concrete steps towards reducing the impact of opioid abuse on American families 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 the European Union, or EU, the pricing of prescription drugs is subject to government control. In addition, the EU provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal 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, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, impose new taxes and fees on the health industry and impose additional health policy reforms. Aspects of the Affordable Care Act that may impact our business include:

• extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations;

• 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 government investigative 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 may also increase our regulatory burdens and operating costs.

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Legislative changes to the Affordable Care Act remain possible and appear likely in the 115th U.S. Congress and under the Trump Administration. Since January 2017, President Trump has signed two Executive Orders and other directives designed to delay the implementation of certain provisions of the Affordable Care Act or otherwise circumvent some of the requirements for health insurance mandated by the Affordable Care Act. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the Affordable Care Act. While Congress has not passed comprehensive repeal legislation, two bills affecting the implementation of certain taxes under the Affordable Care Act have been signed into law. The Tax Cuts and Jobs Act of 2017 includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Act on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate”. Additionally, on January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain fees mandated by the Affordable Care Act, including the so-called “Cadillac” tax on certain high cost employer- sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device excise tax on non-exempt medical devices. Further, the Bipartisan Budget Act of 2018, or the BBA, among other things, amends the Affordable Care Act, effective January 1, 2019, to increase from 50% to 70% the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D and to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole”. Congress may still consider other legislation to repeal and replace elements of the Affordable Care Act. We expect that the Affordable Care Act, as currently enacted or as it may be amended or repealed in the future, and other healthcare reform measures that may be adopted in the future, could have a material adverse effect on our industry generally and on our ability to successfully commercialize our product candidates, if approved. We cannot predict the likelihood, nature or extent of government regulation that may arise from 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 in existing requirements or the adoption of new requirements or policies, or if we or our collaborators are not able to maintain regulatory compliance, our product candidates may lose any regulatory approval that may have been obtained and we may not achieve or sustain profitability, which would adversely affect our business.

In addition, other legislative changes have been proposed and adopted in the United States since the Affordable Care Act was enacted. Aggregate reductions of Medicare 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 is taken. The American Tax Payer Relief Act further reduced Medicare payments to several providers, including hospitals.

Moreover, the Drug Supply Chain Security Act of 2013 imposes additional obligations on manufacturers of pharmaceutical products, among others, related to product tracking and tracing. Among the requirements of this new legislation, manufacturers will be required to provide certain information regarding the drug product to individuals and entities to which product ownership is transferred, label drug product with a product identifier, and keep certain records regarding the drug product.

Legislative and regulatory proposals have been made to expand post-approval requirements and further restrict sales and promotional activities for pharmaceutical products. We are not sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be.

We expect that additional healthcare reform measures will be adopted within and outside the United States in the future, any of which could negatively impact our business. The continuing efforts of the government, insurance companies, managed care organizations and other payers of healthcare services to contain or reduce costs of healthcare may adversely affect the demand for any drug products for which we may obtain regulatory approval, 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, our ability to generate revenues and achieve or maintain profitability, and the level of taxes that we are required to pay.

Risks Related to Our Financial Condition and Need for Additional Capital

We have incurred significant losses since our inception, anticipate that we will continue to incur significant losses in 2018 and may continue to incur losses for the foreseeable future.*   

We have incurred significant net losses in each year since our inception in July 2005, and as of September 30, 2018, we had an accumulated deficit of $332.5 million.

We have devoted most of our financial resources to research and development, including our non-clinical development activities and clinical trials. To date, 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 our ability to generate revenues. We expect to continue to incur substantial expenses as we support commercialization activities for DSUVIA, conduct research and development activities for our product candidates, including the FDA regulatory review of the resubmitted Zalviso NDA, once resubmitted, and support the manufacturing and supply of Zalviso in Europe for Grünenthal. While Grünenthal has begun European commercial sales of Zalviso, if DSUVIA is not successfully commercialized, if Zalviso, or our other product candidates are 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 obtaining regulatory approval to market our product candidates outside of the United States through current and future collaborations which may not materialize or prove to be successful.

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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 successfully complete the development of, obtain the necessary regulatory approvals for, and commercialize our product candidates. Although we received FDA approval of DSUVIA, we have not yet launched commercial sales of DSUVIA in the United States, and we may never generate significant revenues from sales of DSUVIA, Zalviso or any other product candidates in the United States to become profitable. Although DZUVEO was approved by the EC in June 2018, we have not yet entered into a collaboration agreement with a strategic partner to commercialize DZUVEO in Europe and there can be no assurance that we will successfully enter into such an agreement. While we have a collaboration agreement with Grünenthal for commercialization of Zalviso in Europe and Australia, Grünenthal may not recognize a level of commercial sales of Zalviso for which we would receive sales milestone payments. Even if Grünenthal is successful in commercialization 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 first four commercial sales milestones, we will receive only 25% of the sales royalties and 20% of the first four commercial milestones under the Amended License Agreement. In addition, we do not anticipate generating revenues from our other product candidates for the foreseeable future, if ever. 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 Zalviso, if approved in the United States, by building internally or through entering a collaboration, a hospital-directed sales force in the United States, and with third parties internationally, including Grünenthal and any future collaboration partner for DZUVEO, which may require additional funding.

Because of the numerous risks and uncertainties associated with launching a commercial pharmaceutical product, pharmaceutical product development and 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 maintain profitability. Our expenses could increase beyond expectations if we are delayed in launching DSUVIA or receiving regulatory approval for Zalviso in the United States, or if we are 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 the sale of DSUVIA, or any future approved products, we may not become profitable and may need to obtain additional funding to continue operations.

We are substantially dependent on our commercial partner, Grünenthal, to successfully commercialize Zalviso in Europe.

Under our amended agreements with Grünenthal, we have granted Grünenthal rights to commercialize Zalviso in the 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 homes and 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 April 2016.

During the pilot and launch phases in the various European countries, Grünenthal has reported certain issues from HCPs with the initial set up of the Zalviso controllers before being given to patients for use. To address the issues, we have assisted Grünenthal with implementing additional training for HCPs and we have revised the controller software. Controllers with the revised software, which was delivered in December 2016, have undergone extensive bench testing and we believe we have successfully addressed the issues as presented. Additional devices were delivered beginning in early 2017. 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 can be 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 and future 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 may have a negative impact on future revenues received and recognized by us.

There is no guarantee that Grünenthal will achieve commercial success in its Zalviso launch in the European Union or anywhere in the Territory. In September 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 receive only 25% of the royalties and 20% of the first four commercial milestones under the License Agreement, and 100% of the royalties after the capped amount is reached.

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Any failures in commercialization of Zalviso outside the United States could have a material adverse impact on our business, including an adverse impact on the commercialization of DSUVIA or the development of Zalviso in the United States, if related to issues underlying the sufentanil sublingual tablet technology, safety or efficacy. Additionally, we agreed to certain representations and covenants relating to the Amended Agreements under our agreements with PDL, and, if we breach those representations or covenants, we may become subject to indemnification claims by PDL and liable to PDL for its indemnifiable losses relating to such breaches. The amount of such losses could be material and could have a material adverse impact on our business.

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 commercialize DZUVEO 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 in identifying a commercial partner and entering into a collaboration agreement, we will be substantially dependent on this partner to successfully commercialize DZUVEO in Europe. Any failures in the commercialization of DZUVEO in Europe could have a significant adverse impact on our revenues and operating results.

Any future collaboration agreement for DZUVEO, will likely require us to support the manufacturing and supply of the product in Europe for our commercial partner. In addition, we anticipate we may need comparator studies in Europe to ensure premium reimbursement in certain countries. Our inability to profitably manufacture and supply DZUVEO to any future commercial partner, or to successfully complete these additional comparator studies and obtain premium reimbursement in certain countries, may prevent, limit or delay commercialization and any associated future revenues from DZUVEO in Europe.

We may be unable to achieve the manufacturing cost reductions required in order to accommodate the declining transfer prices under the Amended Agreements without a corresponding decrease in our gross margin.

Under the Amended Agreements with Grünenthal, we will sell Zalviso at a predetermined transfer price that approximates the direct cost of manufacture at our contract manufacturers. We will not recover internal indirect costs as part of the transfer price. In addition, the Amended Agreements include declining maximum transfer prices over the term of the contract with Grünenthal. These transfer prices were agreed to assuming economies of scale that would occur with increasing production volumes (from the potential approval of Zalviso in the U.S. and an increase in demand in Europe) and corresponding decreases in manufacturing costs. We do not have long-term supply agreements with our contract manufacturers and prices are subject to periodic 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 not receive 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 increase significantly, we are not likely to achieve the manufacturing cost reductions required in order to accommodate these declining transfer prices which would affect our ability to achieve net gross profit 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 clinical trials for our product candidates, understanding the market potential for our product candidates and preparing for the commercialization of DSUVIA and the potential commercialization Zalviso in the United States. We have never ourselves directly commercialized a product. Consequently, any predictions that are made about our future success, or viability, or evaluation of our business and prospects, may not be accurate.

We will require additional capital and may be unable to raise capital, which would force us to delay, reduce or eliminate our commercialization efforts and 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 incur significant expenditures in connection with our ongoing activities including the commercial launch of DSUVIA in the United States and support for FDA regulatory review of the resubmitted Zalviso NDA, once resubmitted. While we believe we have sufficient capital resources to continue planned operations through at least the end of the fourth quarter of 2019, we will need additional capital to pursue full commercialization of DSUVIA and any of our product candidates, including Zalviso, if approved.

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Clinical trials, regulatory reviews, and the launch of commercial product are expensive activities. In addition, commercialization costs for DSUVIA, and Zalviso if approved in the United States, may be significantly higher than estimated. We may experience technical difficulties in our commercialization efforts or otherwise, which could substantially increase the costs of commercialization. Revenues may be lower than expected and accordingly costs to produce such revenues may exceed those revenues. We will need to seek additional capital to continue operations. Such capital demands could be substantial. In the future, we may seek to sell additional equity or debt securities, including under the Sales Agreement with Cantor, monetize or securitize certain assets including future royalty streams and milestones, obtain a credit facility, or enter into product development, license or distribution agreements with third parties, or divest one or more of our product candidates. 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. For example, in March 2015, we received correspondence from the FDA stating that we needed to complete an additional clinical trial of Zalviso. We submitted a protocol to the FDA for a clinical study in post-operative patients designed to evaluate the effectiveness of changes made to the functionality and usability of the Zalviso device and to take into account comments from the FDA on the study protocol. We announced positive results from this study, IAP312, in August 2017, which we intend to use to support our NDA resubmission. We are currently evaluating the timing of the resubmission of our NDA for Zalviso. The IAP312 clinical trial, and the corresponding extension of the Zalviso development program, unexpectedly increased our capital requirements. 

Furthermore, any product development, licensing, distribution or sale agreements that we enter into may require us to relinquish valuable rights. We may not 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 be required to reduce our workforce, delay, reduce the scope of, or eliminate, one or more of our research and development programs in advance of the date on which we exhaust our cash resources to ensure that we have sufficient capital to meet our obligations and continue on a path designed to preserve stockholder value.

Securing additional financing may divert our management from our day-to-day activities, which may adversely affect our ability to develop and commercialize our product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to:

• significantly delay, scale back or discontinue the commercialization of DSUVIA, or the development of our product candidates, including Zalviso;

• seek additional corporate partners for Zalviso on terms that might be less favorable than might otherwise be available; or  

• relinquish, or license on unfavorable terms, our rights to technologies or product candidates that we otherwise would seek to develop or commercialize ourselves.

To fund our operations, we may sell additional equity securities, which may result in dilution to our stockholders, or debt securities, which may impose restrictions 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 with Cantor, which would result in dilution to our stockholders or impose restrictive covenants that may adversely impact our business. The sale of additional equity or convertible debt securities would result in the issuance of additional shares of our capital stock and dilution to all of our stockholders. For example, as of September 30, 2018, we had issued and sold an aggregate of 7.7 million shares of common stock pursuant to the Sales Agreement with Cantor, for which we had received net proceeds of approximately $23.1 million. In addition, 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. On August 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 incurrence of additional indebtedness would result in increased fixed payment obligations and could also result in certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions, such as minimum cash balances, that could adversely impact our ability to conduct our business. If we are unable to expand our operations or otherwise capitalize on our business opportunities, our business, financial condition and results of operations could be materially adversely affected and we may not be able to meet our debt service obligations.

We might be unable to service our existing debt due to a lack of cash flow and might be subject to default.*   

As of September 30, 2018, we have approximately $13.9 million of debt, which includes the accrual portion of the End of Term Fee, under our Amended Loan Agreement with Hercules. The Amended Loan Agreement has a scheduled maturity date of March 2020 and is secured by a first priority security interest in substantially all of our assets, with the exception of our intellectual property and those assets sold under the Royalty Monetization, where the security interest is limited to proceeds of intellectual property if it is licensed or sold.

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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 become insolvent, Hercules could elect to declare all amounts outstanding, together with accrued and unpaid interest and penalty, to be immediately due and payable. Additional capital may not be available on terms acceptable to us, or at all. In addition, the Royal Monetization has the effect of decreasing future 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 in cash, 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 a first claim on our assets pledged under the Amended Loan Agreement. If Hercules should attempt to foreclose on the collateral, it is unlikely that there would be any assets remaining after repayment in full of such secured indebtedness. Any default under the Amended Loan Agreement and resulting foreclosure would have a material adverse effect on our financial condition and our ability to continue our operations.

The costs incurred under the DoD Contract are subject to audit by the Department of Defense and any identified deficiencies could jeopardize past or future funding.

On May 11, 2015, we entered into an award contract supported by the Clinical and Rehabilitative Medicine Research Program, or CRMRP, of the United States Army Medical Research and Materiel Command, or USAMRMC, within the U.S. Department of Defense, or the DoD, in which the DoD agreed to provide 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 has reimbursed us for costs incurred for development, manufacturing, regulatory and clinical costs outlined in the DoD Contract, including reimbursement for certain personnel and overhead expenses. The period of performance under the DoD Contract began on May 11, 2015 and currently extends 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 DoD may find deficiencies during the course of an audit which could jeopardize, or even eliminate, continued funding from the DoD, as well as require repayment of any funds they had provided us since inception of the DoD Contract. In addition, if the DoD determines that we have failed to comply with specific contractual or legal requirements, or fail to satisfy an audit, a variety of penalties can be imposed in addition to monetary damages, including criminal and civil penalties. The DoD could suspend or debar us from all government contract work. The occurrence of any of these actions could harm our 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 preclinical and clinical drug supplies for our product candidates.*

Reliance on third party manufacturers entails many risks including:

• the inability to meet our product specifications and quality requirements consistently;

• a delay or inability to procure or expand sufficient manufacturing capacity;

• manufacturing and product quality issues related to scale-up of manufacturing;

• costs and validation of new equipment and facilities required for scale-up;

• a failure to maintain in good order our production and manufacturing equipment for our products;

• a failure to comply with cGMP and similar foreign standards;

• the inability to negotiate manufacturing agreements with third parties under commercially reasonable terms;

• termination or nonrenewal of manufacturing agreements with third parties in a manner or at a time that is costly or damaging to us;

• the reliance on a limited number of sources, and in some cases, single sources for product components, such that if we are unable to secure a sufficient supply of these product components, we will be unable to manufacture and sell our product candidates in a timely fashion, in sufficient quantities or under acceptable terms;

• the lack of qualified backup suppliers for those components that are currently purchased from a sole or single source supplier;

• operations of our third-party manufacturers or suppliers could be disrupted by conditions unrelated to our business or operations, including the 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.

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Any of these events could lead to stock outs, inability to successfully commercialize our products, clinical trial delays, or failure to obtain regulatory approval. 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 collaboration agreement will likely require us to manufacture and supply DZUVEO to our commercial partner. As mentioned above, we are obligated to manufacture and supply Zalviso under the Amended Agreements with Grünenthal for use in Europe and their other licensed territories. If we are unable to establish a reliable commercial supply of Zalviso for Grünenthal’s Territory, we may be unable to satisfy our obligations under the Amended Agreements in a timely manner or at all, and we may, as a result, be in breach of the Amended Agreements. If any such breach were to be material and remain uncured, it could result in Grünenthal terminating the Amended Agreements, which in turn could result in us being responsible for indemnification of losses suffered by PDL 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 drug component of our product candidates and any disruption in the chain of supply may cause delay in developing and commercializing our product candidates.

We have used two established suppliers of sufentanil citrate for our tablets. However, currently we only have one supplier qualified for our manufacture of DSUVIA, known as DZUVEO outside the United States, and Zalviso. For each product, only one of the two suppliers will be qualified as a vendor with the FDA and EMA. 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 will require a regulatory submission to the FDA and European Health Authority which must be approved before the new process API can be used commercially in each corresponding territory. Any alternative vendor would need to be qualified through an NDA supplement and/or an MAA variation which could result in further delay. The FDA or other regulatory agencies outside of the United States may also require additional trials if a 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 II compound. These factors necessitate the use of specialized equipment and facilities for manufacture of sufentanil sublingual tablets. There are a limited number of facilities that can accommodate our manufacturing process and we need to use dedicated equipment throughout development and commercial manufacturing to avoid the possibility of cross-contamination. If our equipment breaks down or needs to be repaired or replaced, it may cause significant 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 delay or impair our ability to commercialize DSUVIA, or any future approved products, 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 any future approved product candidates, 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 our product candidates. In the future, we may identify significant impurities which could result in failure to maintain regulatory approval of DSUVIA, increased scrutiny by regulatory agencies, delays in clinical program and regulatory approval, increases in our operating expenses, or failure to obtain approval for our product candidates.

We have built out a suite within Patheon’s production facility in Cincinnati, Ohio that serves as a manufacturing facility for clinical and commercial supplies of sufentanil sublingual tablets. Late stage development and manufacture of registration stability lots, which were utilized in clinical trials, were manufactured at this location. While we have produced a number of commercial lots at Patheon to support Grünenthal’s launch in Europe, our experience is limited, which has and may in the future impact our ability to deliver commercial supplies to Grünenthal on a timely basis.

In January 2013, we entered into a Manufacturing Services Agreement, or the Services Agreement, with Patheon under which Patheon has agreed to manufacture, supply, and provide certain validation and stability services with respect to Zalviso for potential sales in the United States, Canada, Mexico and other countries, subject to agreement by the parties to any additional fees for such other countries. On August 22, 2017, we entered into an amendment to the Services Agreement with Patheon under which Patheon has agreed to manufacture, supply, and provide certain validation and stability services with respect to DSUVIA for potential sales in United States, Canada and Mexico, and other countries. There is no guarantee that Patheon’s services will be satisfactory or that they will continue to meet the strict regulatory guidelines of the FDA or other foreign regulatory agencies. If Patheon cannot provide us with an adequate supply of sufentanil sublingual tablets, we may be required to pursue alternative sources of manufacturing capacity. Switching or adding commercial manufacturing capability can involve substantial cost and require extensive management time and focus, as well as additional regulatory filings which may result in significant delays. In addition, there is a natural transition period when a new manufacturing facility commences work. As a result, delays may occur, which can materially impact our ability to meet our desired commercial timelines, thereby increasing our costs and reducing our ability to generate revenue.

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The facilities of any of our future manufacturers of sufentanil-containing sublingual tablets must be approved by the FDA or the relevant foreign regulatory agency, such as the EMA, before commercial distribution from such manufacturers occurs. We do not fully control the manufacturing process of sufentanil sublingual tablets and are completely dependent on these third-party manufacturing partners for compliance with the FDA or other foreign regulatory agency’s requirements for manufacture. In addition, although our third-party manufacturers are well-established commercial manufacturers, we are dependent on their continued adherence to cGMP manufacturing and acceptable changes to their process. If our manufacturers do not meet the FDA or other foreign regulatory agency’s strict regulatory requirements, they will not be able to secure FDA or other foreign regulatory agency approval for their manufacturing facilities. Although European inspectors have approved our tablet manufacturing site, our third-party manufacturing partner is responsible for maintaining compliance with the relevant foreign regulatory agency’s requirements. If the FDA or the relevant foreign regulatory agency does not approve these facilities for the commercial manufacture of sufentanil sublingual tablets, we will need to find alternative suppliers, which would result in significant delays in obtaining FDA approval for Zalviso, and other foreign regulatory agency approval of DZUVEO and Zalviso outside Europe. 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 Factors studies, and have manufactured for and completed Phase 3 clinical trials using the intended commercial device. We have made modifications to the design of the Zalviso device subsequent to the original submission of the Zalviso NDA, which we plan to include as a part of the resubmitted Zalviso NDA. We submitted a protocol to the FDA for a clinical study in post-operative patients designed to evaluate the effectiveness of changes made to the functionality 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, which we 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 device for commercial use. 

We have manufactured and shipped commercial supplies of Zalviso for delivery to Grünenthal; however, our experience is limited. We will continue to rely on contract manufacturers, component fabricators and third-party service providers to produce the necessary Zalviso devices for the commercial marketplace. We currently outsource manufacturing and packaging of 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 were made and will continue to be made utilizing short-term purchase agreements and we may not be able to enter into long-term agreements for commercial supply of DSUVIA, DZUVEO or Zalviso devices with third-party manufacturers or may be unable to do so on acceptable terms. In addition, we have encountered and may continue to encounter production issues with our current or future contract manufacturers and other third party service providers, including the reliability of the production equipment, quality of the components produced, their inability to meet demand or other unanticipated 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 Zalviso, if approved in the U.S. and any other foreign territories.

We may not be able to establish additional sources of supply for sufentanil-containing sublingual tablets or device manufacture. Such suppliers are subject to FDA and other foreign regulatory agency’s regulations requiring that materials be produced under cGMPs or Quality System Regulations, or QSR, or in ISO 13485 accredited manufacturers, and subject to ongoing inspections by regulatory agencies. Failure by any of our suppliers to comply with applicable regulations may result in delays and interruptions to our product candidate supply while we seek to secure another supplier that meets all regulatory requirements. In addition, if we are unable to establish a reliable commercial supply of Zalviso for Grünenthal’s Territory, we may be unable to satisfy our obligations under the Amended Agreements in a timely manner or at all, and we may, as a result, be in breach of the Amended Agreements.

For DSUVIA, we currently package the finished goods under a manual process at the Sharp facility and have a secondary contract packaging facility identified. We also intend to package finished goods of DZUVEO at the Sharp facility in the same manner. The capacity and cost to package the finished goods under this manual process is not optimal to support successful future sales of DSUVIA and DZUVEO. We have initiated the process to purchase an automated filling and packaging line to support increased capacity packaging for DSUVIA. We expect to complete the acquisition and installation of this line 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 the necessary regulatory approvals to manufacture product.

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Reliance on third party manufacturers entails risks to which we would not be subject if we manufactured the product candidates ourselves, including the possible breach of the manufacturing agreements by the third parties because of factors beyond our control; and the possibility of termination or nonrenewal of the agreements by the third parties because of our breach of the manufacturing agreement or based on their own business priorities.

We rely on third parties to conduct, supervise and monitor our clinical trials, and if those third parties perform in an unsatisfactory manner, it may harm 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 clinical program for Zalviso. We rely on CROs, as well as clinical trial sites, to ensure the proper and timely conduct of our clinical trials and document preparation. While we have agreements governing their activities, we have limited influence over their actual performance. We have relied and plan to continue to rely upon CROs to monitor and manage data for our clinical programs for Zalviso, and any other product candidates, as well as the execution of nonclinical and clinical trials. We control only certain aspects of our CROs’ activities. Nevertheless, we are responsible for ensuring that each of our trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards and our reliance on the CROs does not relieve us of our regulatory responsibilities.

We, and our CROs, are required to comply with the FDA’s current good clinical practices, or cGCPs, which are regulations and guidelines enforced by the FDA for all of our product candidates in clinical development. The FDA enforces these cGCPs through periodic inspections of trial sponsors, principal investigators and clinical trial sites. If we or our CROs fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA may require us to perform additional clinical trials before approving our marketing applications. Upon inspection, the FDA may determine that our clinical trials do not comply with cGCPs. Accordingly, if our CROs or clinical trial sites fail to comply with these regulations, 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 nonclinical programs. These CROs may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical trials, or other drug development activities which could harm our competitive position. We face the risk of potential unauthorized disclosure or misappropriation of our intellectual property by CROs, which may allow our potential competitors to access our proprietary technology. If our CROs do not successfully carry out their contractual duties or obligations, fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements, or for any other reasons, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize Zalviso, or any other product candidates. As a result, our financial results and the commercial prospects for Zalviso or any future product candidates for which we may obtain approval would be harmed, our costs could increase, and our ability to generate revenues could be delayed.

Risks Related to Our Business Operations and Industry

Failure to receive required quotas of controlled substances or comply with the Drug Enforcement Administration regulations, or the cost of compliance with these regulations, may adversely affect our business.

Our sufentanil-based products are subject to extensive regulation by the DEA, due to their status as scheduled drugs. Sufentanil is a Schedule II opioid, considered to present a high risk of abuse. The manufacture, shipment, storage, sale and use of controlled substances are subject to a high degree of regulation, including security, record-keeping and reporting obligations enforced by the DEA and also by comparable state agencies. In addition, our contract manufacturers are required to maintain relevant licenses and registrations. This high degree of regulation can result in significant compliance costs, which may have an adverse effect on the commercialization of DSUVIA and the development and commercialization of any future product candidates.

The DEA limits the availability and production of all Schedule II substances, including sufentanil, through a quota system. The DEA requires substantial evidence and documentation of expected legitimate medical and scientific needs before assigning quotas to manufacturers. Our contract manufacturers apply for quotas on our behalf. We will need significantly greater amounts of sufentanil to successfully commercialize DSUVIA, implement Grünenthal’s European commercialization plans for Zalviso, to support European commercialization of DZUVEO and to commercialize any of our products that may be approved by the FDA in the future, including Zalviso. Any delay or refusal by the DEA in establishing the procurement quota or a reduction in our quota for sufentanil or a failure to increase it over time to meet anticipated increases in demand could delay or stop the clinical development of any of our product candidates or the commercial sale of any approved products. This, in turn, could have a material adverse effect on our business, results of operations, financial condition and prospects.

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Our relationships with clinical investigators, health care professionals, consultants, commercial partners, third-party payers, hospitals, and other customers 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 obtain marketing 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 or financial arrangements and relationships through which we research, market, sell and distribute the products for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws, include, but are not limited to, the following:

• the federal healthcare Anti-Kickback Statute prohibits, among other things, persons or entities from knowingly and willfully soliciting, offering, receiving or paying any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or 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 for payment or approval that are false or fraudulent or from knowingly making a false statement to improperly avoid, decrease or conceal an obligation 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 for knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or to obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payer (e.g., public or private) and knowingly or willfully falsifying, concealing, or covering up by any trick or device a material fact or making any materially false statement in connection with the delivery of, or payment for, healthcare benefits, 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 implementing regulations, impose certain obligations, including mandatory contractual terms, on covered healthcare providers, health plans and clearinghouses, as well as their respective business associates that perform services for them that involve the use, or disclosure of, individually identifiable health information, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;

• 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 strict requirements 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 Education Reconciliation 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 and other transfers of value provided to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members;

• analogous state laws that may apply to our business practices, including but not limited to, state laws that require pharmaceutical companies to implement compliance programs and/or comply with the pharmaceutical industry’s voluntary compliance guidelines; state laws that impose restrictions on pharmaceutical companies’ marketing practices and require manufacturers to track and file reports relating to pricing and marketing information, which requires tracking and reporting gifts, compensation and other remuneration and items of value provided to healthcare 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 jurisdictions generally prohibit companies and their intermediaries from providing money or anything of value to officials of foreign governments, foreign political parties, or international organizations with the intent to obtain or retain business or seek a business advantage. Recently, there has been a substantial increase in anti-bribery law enforcement activity by U.S. regulators, with more frequent and aggressive investigations and enforcement proceedings by both the Department of Justice and the U.S. Securities and Exchange Commission. A determination that our operations or activities are not, or were not, in compliance with United States or foreign laws or regulations could result in the imposition of substantial fines, interruptions of business, loss of supplier, vendor or other third-party relationships, termination of necessary licenses and permits, and other legal or equitable sanctions. Other internal or government investigations or legal or regulatory proceedings, including lawsuits brought by private litigants, may also follow as a consequence.

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Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations, agency guidance or case 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 other healthcare regulatory laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and 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, additional oversight and reporting obligations if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with these laws, and the curtailment or restructuring of our operations any of which could adversely affect our ability to operate our business and our financial results. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses or divert our management’s attention from the operation of our business.

In order to supply the Zalviso device to Grünenthal for commercial sales, we must maintain conformity of our quality system to applicable ISO standards 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 CE Mark approval in December 2014, which permits the commercial sale of the Zalviso device in Europe. In connection with the CE Mark approval, we were also granted International Standards Organization, or ISO, 13485:2003 certification of our quality management system in November 2014. This is an internationally recognized quality standard for medical devices. Certification of our quality management system was issued by the British Standards Institution, or BSI, a Notified Body. ISO 13485:2003 certification recognizes that consistent quality policies and procedures are in place for the development, design and manufacturing of medical devices. The certification indicates that we have successfully implemented a quality system that conforms to ISO 13485 standards for medical devices. Certification to this standard is one of the key regulatory requirements for a CE Mark in the EU and European Economic Area (which includes the 28 EU member states as well as Norway, Iceland and Liechtenstein), or EEA, as well as to meet equivalent requirements in other international markets. The certification applies to the Redwood City, California location which designs, manufactures and distributes finished medical devices, and includes critical suppliers. If we fail to remain in compliance with applicable European laws and directives, we would be unable to continue to affix the CE Mark to our Zalviso device, which would prevent Grünenthal from selling these devices within the EU and EEA.

Significant disruptions of our information technology systems or data security incidents could result in significant financial, legal, regulatory, business and reputational harm to us.

We are increasingly dependent on information technology systems and infrastructure, including mobile technologies, to operate our business. In the ordinary course of our business, we collect, store, process and transmit large amounts of sensitive information, including intellectual property, proprietary business information, personal information and other confidential information. It is critical that we do so in a secure manner to maintain the confidentiality, integrity and availability of such sensitive information. We have also outsourced elements of our operations (including elements of our information technology infrastructure) to third parties, and as a result, we manage a number of third-party vendors who may or could have access to our computer networks or our confidential information. In addition, many of those third parties in turn subcontract or outsource some of their responsibilities to third parties. While all information technology operations are inherently vulnerable to inadvertent or intentional security breaches, incidents, attacks and 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. Potential vulnerabilities can be exploited from inadvertent or intentional actions of our employees, third-party vendors, business partners, or by malicious third parties. Attacks of this nature are increasing in their frequency, levels of persistence, sophistication and intensity, and are being conducted by sophisticated 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 could include the deployment of harmful malware, ransomware, denial-of-service attacks, social engineering and other means to affect service reliability and threaten the confidentiality, integrity and availability of information. In addition, the prevalent use of mobile devices increases the risk of data security incidents.

Significant disruptions of our third-party vendors’ and/or business partners’ information technology systems or other similar data security incidents could adversely affect our business operations and/or result in the loss, misappropriation, and/or unauthorized access, use or disclosure of, or the prevention of access to, sensitive information, which could result in financial, legal, regulatory, business and reputational harm to us. In addition, information technology system disruptions, whether from attacks on our technology environment or from computer viruses, natural disasters, terrorism, war and telecommunication 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 our costs to recover or reproduce the data.

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There is no way of knowing with certainty whether we have experienced any data security incidents that have not been discovered. While we have no reason to believe this to be the case, attackers have become very sophisticated in the way they conceal access to systems, and many companies that have been 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 to comply with applicable federal and/or state breach notification laws and foreign law equivalents, subject us to time consuming, distracting and expensive litigation, regulatory investigation and oversight, mandatory corrective action, require us to verify the correctness of database contents, or otherwise subject 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 or perceived failure by us or our vendors or business partners to comply with our privacy, confidentiality or data security-related legal or other obligations to third parties, or any further security incidents or other inappropriate access events that result in the unauthorized access, release or transfer of sensitive information, 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 and potential partners, to lose trust in us or we could be subject to claims by third parties that we have breached our privacy- or confidentiality-related obligations, which could materially and adversely affect our business and prospects. Moreover, data security incidents and other inappropriate access can be difficult to detect, and any delay in identifying them may lead to increased harm of the type described above. While we have implemented security measures intended to protect our information technology systems and infrastructure, there can be no assurance that such measures will successfully prevent service interruptions or security incidents.

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 to weather, natural disasters, or man-made incidents. We are also vulnerable to other types of natural disasters and other events that could disrupt our operations. We do not carry insurance for earthquakes or other natural disasters and we may not carry sufficient business interruption insurance to compensate 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 employees are “at will” employees. Recruiting and retaining qualified scientific, clinical, manufacturing, and commercial personnel will also be critical to our success. We may not be able to attract and retain these personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. There is currently a shortage of skilled executives in our industry, which is likely to continue. As a result, competition for skilled personnel is intense and the turnover rate can be high. In addition, failure to succeed in clinical trials, or delays in the regulatory approval process, may make it more challenging to recruit and retain qualified personnel. The inability to recruit or loss of the services of any executive or key employee might impede the progress of our research, development and commercialization objectives.

 In the future, we will need to expand our organization, and we may experience difficulties in managing this growth, which could disrupt our operations.*

As of September 30, 2018, we had 57 full-time employees. With FDA approval of DSUVIA and the upcoming commercial launch in the United States, we plan to continue to expand our employee base to increase our managerial, sales, marketing, operational, quality, engineering, medical, financial and other resources and to hire more consultants and contractors. Future growth will impose significant additional responsibilities on our management, including the need to identify, recruit, maintain, motivate and integrate additional employees, consultants and contractors. Also, our management may need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations, which may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Our expected growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of additional product candidates. If our management is unable to effectively manage our growth, our expenses may increase more than expected, our ability to generate and/or grow revenues could be reduced, and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize DSUVIA, and compete effectively will depend, in part, on our ability to effectively manage any future growth.

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We face potential product liability, and, if successful claims are brought against us, we may incur substantial liability.

Commercial sales of DSUVIA and the use of our product candidates in clinical trials exposes us to the risk of product liability claims. Product liability claims might be brought against us by patients, health care providers, pharmaceutical companies or others selling or otherwise coming into contact with our products. If we cannot successfully defend against product liability claims, we could incur substantial liability and costs. In addition, regardless of merit or eventual outcome, product liability claims may result in:

• impairment of our business reputation;

• withdrawal of clinical trial participants;

• costs due to related litigation;

• distraction of management’s attention from our primary business;

• substantial monetary awards to patients or other claimants;

• the inability to commercialize our product candidates; and,

• decreased demand for our product candidates, if approved for commercial sale.

Our current product liability insurance coverage may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive and in the future 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. We intend to expand our insurance coverage to include the sale of DSUVIA in the United States; however, we may be unable to obtain product liability insurance on commercially reasonable terms or in adequate amounts. With the European approval of Zalviso, we expanded our insurance coverage to include the sale of Zalviso to our commercial partner, Grünenthal. We intend to commercialize and promote DZUVEO in Europe with a strategic partner which may result in further expansion of our insurance coverage to include 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. On occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated adverse effects. A successful product liability claim or series of claims brought against us could cause our stock price to decline and, if judgments exceed our insurance coverage, could adversely affect our results of operations and business.

Our employees, independent contractors, principal investigators, consultants, commercial partners and vendors may engage in misconduct or other improper 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 in fraudulent conduct or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct that violates (1) the laws of the FDA and similar foreign regulatory bodies, including those laws requiring the reporting of true, complete and accurate information to such regulatory bodies; (2) healthcare fraud and abuse laws of the United States and similar foreign fraudulent misconduct laws; and (3) laws requiring the reporting of financial information or data accurately. Specifically, the promotion, sales and marketing of healthcare items and services, as well as certain business arrangements in the healthcare industry are subject to extensive laws designed to prevent misconduct, including fraud, kickbacks, self-dealing and other abusive practices. These laws may restrict or prohibit a wide range of pricing, discounting, marketing, structuring and commission(s), certain customer incentive programs and other business arrangements generally. Activities subject to these laws also involve the improper use of information obtained 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 in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws. If any such actions are instituted against us, and we are not successful in defending ourselves, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, disgorgement, individual imprisonment, additional oversight and reporting obligations if we become subject to a corporate integrity agreement or similar agreements to resolve allegations of non-compliance with these laws, 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 our results of operations.

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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 adversely affected.

To protect our proprietary technology, we rely on patents as well as other intellectual property protections including trade secrets, nondisclosure agreements, and confidentiality provisions. As of October 18, 2018, we are the owner of record of 68 issued patents worldwide. These issued patents cover AcelRx’s sufentanil sublingual tablet, medication delivery devices, packaging and other platform technology. These issued patents are expected to provide 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 our product candidates. The patent applications that we have filed and have not yet been granted may fail to result in issued patents in the United States or in foreign countries. Even if the patents do successfully issue, third parties may challenge the patents.

Our commercial success will depend in part on successfully defending our current patents against third party challenges and expanding our existing patent portfolio to provide additional layers of patent protection, as well as extending patent protection. There can be no assurance that we will be successful in defending our existing and future patents against third party challenges, or that our pending patent applications will result in additional issued patents.

The patent positions of pharmaceutical companies, including us, can be highly uncertain and involve complex and evolving legal and factual questions. No consistent policy regarding the breadth of claims allowed in pharmaceutical patents has emerged to date in the United States. Legal developments 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 the respective court or agency in such adversarial proceedings would not make unfavorable decisions, such as reducing the scope of a patent of ours or determining that a patent of ours is invalid or unenforceable. There is also no assurance that any patents issued to us will provide us with competitive advantages, will not be challenged by any third parties, or that the patents of others will not prevent the commercialization of products incorporating our technology. Furthermore, there can be no guarantee that others will not independently develop similar products, duplicate any of our products, or design around our patents.

Litigation involving patents, patent applications and other proprietary rights is expensive and time consuming. If we are involved in such litigation, it could cause delays in bringing our product candidates or approved products to market and interfere with our business.

Our commercial success depends in part on not infringing patents and proprietary rights of third parties. Although we are not currently aware of litigation or other proceedings or third-party claims of intellectual property infringement related to DSUVIA or our other product candidates, including Zalviso, the pharmaceutical industry is characterized by extensive litigation regarding patents and other intellectual property rights.

As we enter our target markets, it is possible that competitors or other third parties will claim that our products and/or processes infringe on their intellectual 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 these patents.

In a patent infringement claim against us, we may assert, as a defense, that we do not infringe the relevant patent claims, that the patent is invalid or both. The strength of our defenses will depend on the patents asserted, the interpretation of these patents, and our ability to invalidate the asserted patents. However, we could be unsuccessful in advancing non-infringement and/or invalidity arguments in our defense. In the United States, issued patents enjoy a presumption of validity, and the party challenging the validity of a patent claim must present clear and convincing evidence of invalidity, which is a high 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 pay the 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 to one 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 to pay substantial royalties or grant cross licenses to our patent rights. For example, if the relevant patent is owned by a competitor, that competitor may choose not to license patent rights to us. If we 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 be pending applications, unknown to us, that later result in issued patents that could cover one or more of our products.

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It is possible that we may in the future receive, particularly as a public company, communications from competitors and other companies alleging that we may 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 expend considerable resources to counter such claims and may not be able to 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 legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in pharmaceutical patents has emerged to date in the United States. The pharmaceutical patent situation outside the United States is even more uncertain. Changes in either the patent laws or in interpretations of patent 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 States patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. The United States Patent and Trademark Office has developed new regulations and procedures to govern the full implementation of the Leahy-Smith Act, and many of the substantive 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 its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued 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 currently or may in the future own or license from third parties. Claims could be brought regarding the validity of our patents by third parties and regulatory agencies. Further, if any patent license we obtain is deemed invalid and/or unenforceable, it could impact our ability to commercialize or partner our technology.

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’s technology does not in fact infringe upon our patents. An adverse determination of any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our related pending patent applications at risk of not issuing. Litigation may fail and, even if successful, may result in substantial costs and be a distraction to our management. We may not be able to prevent misappropriation of our proprietary rights, particularly in countries outside the United States where patent rights may be more difficult to enforce. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential or sensitive information could be compromised by disclosure in the event of litigation. In addition, during the course of litigation there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock.

The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:

• we were the first to make the inventions covered by each of our pending patent applications or issued patents;

• our patent applications were filed before the inventions covered by each patent or patent application was published by a third party;

• we were the first to file patent applications for these inventions;

• others will not independently develop similar or alternative technologies or duplicate any of our technologies;

• any patents issued to us or our collaborators will provide a basis for commercially viable products, will provide us with any competitive advantages 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 we may have, which could materially harm our business, negatively affect our position in the marketplace, limit our ability to commercialize our products and product candidates, and delay or render impossible our achievement of profitability.

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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 is appropriate 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 agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets and proprietary information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights. Failure to obtain or maintain trade secret protection could enable competitors to use our proprietary information to develop products that compete with our products or cause additional, material adverse effects upon 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 the United States Patent and Trademark Office and various foreign governmental patent agencies in several stages over the lifetime of the patents and/or applications.

We have systems in place, including use of third party vendors, to manage payment of periodic maintenance fees, renewal fees, annuity fees and various other patent and application fees. The United States Patent and Trademark Office, or the USPTO, and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. There are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. If this occurs, our competitors might be able to enter the market, which would have a material adverse effect on our business.

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 have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to 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, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit.

Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. Additionally, claims may be brought regarding the validity of our patents by third parties and regulatory agencies in the United States and foreign countries. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of intellectual property.

We have not yet registered our trademarks in all of our potential markets, and failure to secure those registrations could adversely affect our business.

We have registered our ACELRX mark in the United States, Canada, the EU and India. In early 2014, the FDA accepted the Zalviso mark and, in November 2018, the FDA accepted the DSUVIA mark. Although we are not currently aware of any oppositions to or cancellations of our registered trademarks or pending applications, it is possible that one or more of the applications could be subject to opposition or cancellation after the marks are registered. The registrations will be subject to use and maintenance requirements. It is also possible that we have not yet registered all of our trademarks in all of our potential markets, and that there are names or symbols other than “ACELRX” that may be protectable marks for which we have not sought registration, and failure to secure those registrations could adversely affect our business. Opposition or cancellation proceedings may be filed against our trademarks and our trademarks may not survive such proceedings.

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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 price dropped 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 wide fluctuations 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 any future approved product candidates, including Zalviso;

• inability to obtain additional funding, including funding necessary for the planned commercialization and manufacturing of DSUVIA in the United States, and Zalviso, if approved in the United States;

• any delay in resubmitting the NDA for Zalviso, and any additional adverse developments or perceived adverse developments with respect to the 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 product candidates, or the inability to do so at
acceptable prices;

• adverse regulatory decisions;

• inability to maintain ISO 13485 certification and CE Mark approval for Zalviso;

• introduction of new products, services or technologies by our competitors;

• failure to meet or exceed financial projections we provide to the public;

• failure to meet or exceed the estimates and projections of the investment community;

• the perception of the pharmaceutical industry by the public, legislatures, regulators and the
investment community;

• announcements of significant acquisitions, strategic partnerships, joint ventures, or other significant transactions, including disposition transactions, 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 protection for our technologies;

• additions or departures of key scientific or management personnel;

• significant lawsuits, including patent or stockholder litigation;

• changes in the market valuations of similar companies;

• sales of our common stock by us or our stockholders in the future; and

• trading volume of our common stock.

In addition, the stock market in general, and The Nasdaq Global Market, or Nasdaq, in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance.

Historically, our common stock has thinly traded, and in the future may continue to be thinly traded, and our stockholders may be unable to sell at or near 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 our common stock on Nasdaq during the nine months ended September 30, 2018 and September 30, 2017 was approximately 600,000 and 680,000 shares per day, respectively. Moreover, in the days leading up to the November 3, 2018 PDUFA date for DSUVIA, our stock trading volume grew significantly with over 30 million shares trading on October 10, 2018 alone. A more active market for our stock has only recently developed and may not be sustained. Our stockholders may be unable to sell their common stock at 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 share price will be more volatile than a seasoned issuer for the indefinite future. As noted above, our common stock may be sporadically and/or thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline significantly in the event that a large number of our common stock are sold on the market without commensurate demand, as compared to a seasoned issuer that could better absorb those sales without adverse impact on its share price.

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Our principal stockholders and management own a significant percentage of our stock and are able to exert significant control over matters subject to stockholder approval.

Our executive officers and directors, together with the stockholders with whom our executive officers and directors are affiliated or associated, beneficially own a significant percentage of our voting stock. Therefore, these stockholders have the ability to influence us through this ownership position. These stockholders are able to determine all matters requiring stockholder approval. For example, these stockholders, acting together, are able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may believe are in your best interest as one of our stockholders.

We incur significant increased costs as a result of operating as a public company, and our management is required to devote substantial time to new compliance initiatives.

As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, as well as the information and reporting requirements of the Exchange Act and other federal securities laws, and rules subsequently implemented by the SEC and Nasdaq, have imposed various requirements on public companies. The costs of compliance with the Sarbanes-Oxley Act and of preparing and filing annual and quarterly reports, proxy statements and other information with the SEC, the Dodd-Frank Act, and regulations promulgated under these statutes, are significant. Our management and other personnel need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations increase our legal and financial compliance costs and make some activities more time-consuming and costly. For example, these rules and regulations make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain our current 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 a timely manner, it may affect the reliability of our internal control over financial reporting. Assessing our staffing and training procedures to improve our internal 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 over key 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 our independent registered public accounting firm, identify and report a material weakness, it could adversely affect our stock price.

Sales of a substantial number of shares of our common stock in the public market by our existing stockholders could cause our stock price to fall.

Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. A significant number of shares of our common stock are held by some of our original pre-IPO venture investors. These investors have previously distributed and may in the future distribute their shares of AcelRx to their limited partners. Historically, these limited partners have subsequently sold those shares on the open market following the distribution. Sales of substantial number of shares of our common stock following such distributions may lead to a decline in the price of our common stock.

We are unable to predict the effect that sales may have on the prevailing market price of our common stock. All of our shares of common stock outstanding are eligible for sale in the public market, subject in some cases to the volume limitations and manner of sale requirements of Rule 144 under the Securities Act. Sales of stock by our stockholders could have a material adverse effect on the trading price of our common stock.

In addition, certain holders of our securities are entitled to certain rights with respect to the registration of their shares of common stock under the Securities Act. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.

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Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our Sales Agreement with Cantor and our equity 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 by issuing additional equity securities, including pursuant to the Sales Agreement with Cantor, our stockholders may experience substantial dilution. We may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible securities or other equity securities in more than one transaction, investors may be materially diluted by subsequent sales. These sales may also result in material dilution to our existing stockholders, and new investors could gain rights superior to our existing stockholders.

Pursuant to the 2011 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 by 4% 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 action to 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 2011 Equity Incentive Plan each year. If our Board of Directors elects to increase the number of shares available for future grant by the maximum amount each year, 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 stock of pharmaceutical companies. These broad market fluctuations may cause the market price of our common stock to decline. In addition, the market price of 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 is especially relevant for us because biotechnology and biopharmaceutical companies often experience significant stock price volatility in connection with their investigational drug candidate development programs and the FDA's review of their NDAs.

If AcelRx experiences a decline in its stock price, we could face additional securities class action lawsuits. Securities class actions are often expensive and can 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 newly enacted federal income tax law, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), 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 to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits (including reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions generally referred to as “orphan drugs”). Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law is uncertain, and our business and financial condition could be adversely affected. In addition, it is uncertain if and to what extent various states will conform to the newly enacted federal tax law. The impact of this tax reform on holders of our common stock is also uncertain and could be adverse. Investors should consult with their legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding our common stock.

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.  

Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited. The completion of the July 2013 public equity offering, together with our public equity offering in December 2012, our initial public offering, private placements and other transactions that have occurred, have triggered such an ownership change. In addition, since we will need to raise substantial additional funding to finance our operations, we may undergo further ownership changes in the future. In the year ended December 31, 2015, we used net operating losses to reduce 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 offset United States federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us.

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 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 Loan Agreement. Regardless of the restrictions in our Amended Loan Agreement or the terms of any potential future indebtedness, we anticipate that we will retain all available funds and any future earnings to support our operations and finance the growth and development of our business and, therefore, we do not expect to pay cash dividends in the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our Board of Directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our Board of Directors may deem relevant.

Provisions in our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a 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 if an acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or remove our current management. These provisions include:

• authorizing the issuance of “blank check” preferred stock, the terms of which may be established and shares of which may be issued without stockholder 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 acted upon 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 for stockholders to replace members of our Board of Directors, which is responsible for appointing the members of our management. In addition, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder, unless such transactions are approved by our Board of Directors. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders. Further, other provisions of Delaware law may also discourage, delay or prevent someone from acquiring us or merging with us.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

		Incorporation By Reference
Exhibit Number	Exhibit Description	Form	SEC File No.	Exhibit	Filing Date
3.1	Amended and Restated Certificate of Incorporation of the Registrant,currently in effect.	8-K	001-35068	3.1	02/18/2011
3.2	Amended and Restated Bylaws of the Registrant, currently in effect.	S-1	333-170594	3.4	01/07/2011
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 and Accounting Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
32.1	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

*     The certifications attached as Exhibit 32.1 accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 5, 2018	AcelRx Pharmaceuticals, Inc.
	(Registrant)
	/s/    Raffi M. Asadorian
	Raffi M. Asadorian
	Chief Financial Officer
	(Duly Authorized and Principal Financial and Accounting Officer)

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EX-31.1

 Exhibit 31.1

CERTIFICATION

I, Vincent J. Angotti, certify that:

1. I have reviewed this quarterly report on Form 10-Q 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 the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial 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 in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness 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 recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, 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 the registrant’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 reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 5, 2018

/s/ Vincent J. Angotti

Vincent J. Angotti

Chief Executive Officer 

(Principal Executive Officer)

EX-31.2

 Exhibit 31.2

CERTIFICATION

I, Raffi M. Asadorian, certify that:

1. I have reviewed this quarterly report on Form 10-Q 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 the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial 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 in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness 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 recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, 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 the registrant’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 reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 5, 2018

/s/ Raffi M. Asadorian

Raffi M. Asadorian

Chief Financial Officer

(Principal Financial and Accounting Officer)

EX-32.1

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 of Chapter 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 knowledge:

1. The Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2018, to which this Certification is attached as Exhibit 32.1 (the “Periodic 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 Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

In Witness Whereof, the undersigned has set his hands hereto as of the 5^th day of November 2018.

/s/ Vincent J. Angotti	/s/ Raffi M. Asadorian
Vincent J. Angotti	Raffi M. Asadorian
Chief Executive Officer	Chief Financial Officer

This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of AcelRx Pharmaceuticals, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing. 

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Document And Entity Information - shares	9 Months Ended
	Sep. 30, 2018	Oct. 30, 2018
Document Information [Line Items]
Entity Registrant Name	ACELRX PHARMACEUTICALS INC
Entity Central Index Key	0001427925
Trading Symbol	acrx
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Current Reporting Status	Yes
Entity Emerging Growth Company	false
Entity Small Business	true
Entity Common Stock, Shares Outstanding (in shares)		61,907,272
Document Type	10-Q
Document Period End Date	Sep. 30, 2018
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	Q3
Amendment Flag	false

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Condensed Consolidated Balance Sheets (Current Period Unaudited) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017	[1]
Assets
Cash and cash equivalents	$ 57,566	$ 52,902
Short-term investments	5,995	7,567
Accounts receivable, net	187	1,533
Tax receivable	352
Inventories	856	956
Prepaid expenses and other current assets	1,048	455
Total current assets	66,004	63,413
Property and equipment, net	11,004	11,051
Restricted cash	178	178
Long-term tax receivable	351	703
Other assets	207	207
Total Assets	77,744	75,552
Liabilities and Stockholders’ Deficit
Accounts payable	1,775	1,424
Accrued liabilities	3,621	3,543
Long-term debt, current portion	8,372	7,727
Deferred revenue, current portion	326	362
Liability related to the sale of future royalties, current portion	377	604
Total current liabilities	14,471	13,660
Deferred rent, net of current portion	442	378
Long-term debt, net of current portion	5,502	11,369
Deferred revenue, net of current portion	3,227	3,463
Liability related to the sale of future royalties, net of current portion	91,745	82,984
Contingent put option liability	144	207
Total liabilities	115,531	112,061
Commitments and Contingencies
Stockholders’ Deficit:
Common stock, $0.001 par value—100,000,000 shares authorized as of September 30, 2018 and December 31, 2017; 61,790,346 and 50,899,154 shares issued and outstanding as of September 30, 2018 and December 31, 2017	61	51
Additional paid-in capital	294,613	261,310
Accumulated deficit	(332,461)	(297,870)
Total stockholders’ deficit	(37,787)	(36,509)
Total Liabilities and Stockholders’ Deficit	$ 77,744	$ 75,552

[1] The condensed consolidated balance sheet as of December 31, 2017 has been derived from the audited financial statements as of that date included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

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Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - $ / shares	Sep. 30, 2018	Dec. 31, 2017	[1]
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, authorized (in shares)	100,000,000	100,000,000
Common stock, issued (in shares)	61,790,346	50,899,154
Common stock, outstanding (in shares)	61,790,346	50,899,154

[1] The condensed consolidated balance sheet as of December 31, 2017 has been derived from the audited financial statements as of that date included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

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Condensed Consolidated Statements of Comprehensive Loss (Unaudited) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Revenue:
Revenue	$ 377	$ 1,487	$ 1,538	$ 7,255
Operating costs and expenses:
Cost of goods sold	875	2,029	2,738	9,697
Research and development	3,642	3,913	10,433	15,733
General and administrative	5,188	4,406	13,117	12,700
Total operating costs and expenses	9,705	10,348	26,288	38,130
Loss from operations	(9,328)	(8,861)	(24,750)	(30,875)
Other (expense) income:
Interest expense	(529)	(919)	(1,758)	(2,596)
Interest income and other income (expense), net	312	(465)	643	(215)
Non-cash interest expense on liability related to future sale of royalties	(2,913)	(2,768)	(8,724)	(7,935)
Total other expense	(3,130)	(4,152)	(9,839)	(10,746)
Net loss before income taxes	(12,458)	(13,013)	(34,589)	(41,621)
Provision for income taxes			(2)	(2)
Net loss	(12,458)	(13,013)	(34,591)	(41,623)
Other comprehensive loss:
Unrealized losses on available-for-sale securities				(3)
Comprehensive loss	$ (12,458)	$ (13,013)	$ (34,591)	$ (41,626)
Net loss per share of common stock, basic and diluted (in dollars per share)	$ (0.21)	$ (0.28)	$ (0.64)	$ (0.91)
Shares used in computing net loss per share of common stock, basic and diluted (in shares)	60,004,416	46,365,436	54,292,206	45,701,446
Collaboration Agreement Revenue [Member]
Revenue:
Revenue	$ 177	$ 1,225	$ 802	$ 6,444
Contract and Other [Member]
Revenue:
Revenue	$ 200	$ 262	$ 736	$ 811

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Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Cash flows from operating activities:
Net loss	$ (34,591)	$ (41,623)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash royalty revenue related to royalty monetization	(220)	(89)
Non-cash interest expense on liability related to royalty monetization	8,724	7,935
Depreciation and amortization	435	1,388
Non-cash interest expense related to debt financing	489	1,060
Stock-based compensation	3,936	3,240
Revaluation of put option and PIPE warrant liabilities	(63)	435
Inventory impairment charge		369
Other	(84)	(3)
Changes in operating assets and liabilities:
Accounts receivable	1,346	4,490
Inventories	100	1,060
Prepaid expenses and other assets	(563)	(224)
Accounts payable	403	220
Accrued liabilities	236	(1,300)
Deferred revenue	(272)	(271)
Deferred rent	39	224
Net cash used in operating activities	(20,085)	(23,089)
Cash flows from investing activities:
Purchase of property and equipment	(573)	(2,495)
Purchase of investments	(12,844)
Proceeds from maturities of investments	14,500
Net cash provided by (used in) investing activities	1,083	(2,495)
Cash flows from financing activities:
Principal payments on long-term debt	(5,711)
Net proceeds from issuance of common stock in connection with equity financings	29,073	13,120
Payment of debt modification transaction costs		(204)
Net proceeds from issuance of common stock through equity plans	304	294
Net cash provided by financing activities	23,666	13,210
Net increase (decrease) in cash, cash equivalents and restricted cash	4,664	(12,374)
Cash, cash equivalents and restricted cash—Beginning of period	53,080	80,488
Cash, cash equivalents and restricted cash—End of period	$ 57,744	$ 68,114

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Reconciliation of Cash, Cash Equivalents, and Restricted Cash

9 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Cash and Cash Equivalents Disclosure [Text Block]

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statement of cash flows (in thousands): 

	September 30 ,		September 30 ,
	2018		2017
Cash and cash equivalents		57,566		67,936
Restricted cash		178		178
Cash, cash equivalents and restricted cash shown in the statement of cash flows		57,744		68,114

Amounts included in restricted cash represent letters of credit required to be maintained under the Company’s facility lease and corporate credit card agreements as security for performance under these agreements. The letters of credit are secured by certificates of deposit in amounts equal to the letters of credit.

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Note 1 - Organization and Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Basis of Presentation and Significant Accounting Policies [Text Block]

1.

Organization and Summary of Significant Accounting Policies

AcelRx Pharmaceuticals, Inc., or the Company or AcelRx, was incorporated in Delaware on

July 13, 2005

as SuRx, Inc., and in

January 2006,

the Company changed its name to AcelRx Pharmaceuticals, Inc. The Company’s operations are based in Redwood City, California.

AcelRx is a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for the treatment of acute pain. On

November 2, 2018,

the U.S. Food and Drug Administration, or FDA, approved the resubmitted New Drug Application, or NDA, for DSUVIA™ (known as DZUVEO™ outside of the United States). DSUVIA and the Company’s follow-on product candidate, Zalviso

®

, each utilize sufentanil, delivered via a non-invasive route of sublingual administration. DSUVIA is a

30

mcg sufentanil sublingual tablet in a single-dose applicator approved for use in adults in a certified medically supervised healthcare setting, such as hospitals, surgical centers, and emergency departments, for the management of acute pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate. Zalviso delivers

15

mcg sufentanil sublingually through a non-invasive delivery route via a pre-programmed, patient-controlled analgesia, or PCA, system. AcelRx anticipates developing a distribution capability and commercial organization in the United States to market and sell DSUVIA in the United States by itself. The Company anticipates launching commercial sales of DSUVIA in the United States in the

first

quarter of

2019.

In geographies where AcelRx decides

not

to commercialize products by itself, the Company

may

seek to out-license commercialization rights. The Company currently intends to commercialize and promote DZUVEO in Europe with a strategic partner. AcelRx intends to seek regulatory approval for Zalviso in the United States and, if successful, potentially promote Zalviso either by itself or with strategic partners. Zalviso is approved in Europe and is currently being commercialized by Grünenthal GmbH, or Grünenthal.

DSUVIA

/DZUVEO

DSUVIA is a

30

mcg sufentanil sublingual tablet in a single-dose applicator intended for use in adults in a certified medically supervised healthcare setting for the management of acute pain administered by a healthcare professional. DSUVIA was initially developed at the request of the U.S. Department of Defense as a replacement for injections of morphine on the battlefield. In addition to the military application, AcelRx developed DSUVIA for the treatment of patients suffering from acute pain in multiple settings, such as emergency room patients; patients who are recovering from short-stay or ambulatory surgery and do

not

require more long-term analgesia; post-operative patients who are transitioning from the operating room to the recovery floor; and certain types of hospital-based procedures.

The Company filed a Marketing Authorisation Application, or MAA, for DZUVEO (sufentanil sublingual tablet,

30

mcg) for the treatment of patients with moderate-to-severe acute pain in a medically supervised setting with the European Medicines Agency, or EMA. In

June 2018,

the Company announced that the European Commission, or EC, had granted marketing approval of DZUVEO for the treatment of patients with moderate-to-severe acute pain in medically monitored settings.

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 seeking approval 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 from the FDA on the study protocol. In the

IAP312

study, for which top-line results were announced in

August 2017,

Zalviso met safety, satisfaction and device usability expectations. These results will supplement the

three

Phase

3

trials already completed in the Zalviso NDA resubmission. The Company is currently 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 amended effective

July 17, 2015

and

September 20, 2016,

or the Amended License Agreement, which grants Grünenthal rights to commercialize Zalviso PCA system, or the Product, in the countries of the EU, Switzerland, Liechtenstein, Iceland, Norway and Australia (collectively, the Territory) for human use in pain treatment within, or dispensed by, hospitals, hospices, nursing homes and other medically supervised settings, or the Field. In

September 2015,

the EC approved the MAA, previously submitted to the EMA, for Zalviso for the management of acute moderate-to-severe post-operative pain in adult patients. On

December 16, 2013,

AcelRx and Grünenthal, entered into a related Manufacture and Supply Agreement, or the MSA, and together with the License Agreement, the Agreements. Under the MSA, the Company will exclusively manufacture and supply the Product to Grünenthal for the Field in the Territory. On

July 22, 2015,

the Company and Grünenthal amended the MSA, or the Amended MSA, effective as of

July 17, 2015.

The Amended MSA and the Amended License Agreement are referred to as the Amended Agreements.

The Company has incurred recurring operating losses and negative cash flows from operating activities since inception. Although Zalviso has been approved for sale in Europe, on

September 18, 2015,

the Company sold the majority of the royalty rights and certain commercial sales milestones it is entitled to receive under the Amended License Agreement with Grünenthal to PDL BioPharma, Inc., or PDL, in a transaction referred to as the Royalty Monetization. Although the FDA recently approved DSUVIA, we have

not

yet commercially launched the product. As a result, the Company expects to continue to incur operating losses and negative cash flows until such time as DSUVIA has gained market acceptance and generated significant revenues.

Except as the context otherwise requires, when we refer to "we," "our," "us," the "Company" or "AcelRx" in this document, we mean AcelRx Pharmaceuticals, Inc., and its consolidated subsidiary. “DSUVIA” and “DZUVEO” are trademarks, and “ACELRX” and “Zalviso” are registered trademarks, all owned by AcelRx Pharmaceuticals, Inc. This report also contains trademarks and trade names that are the property of their respective owners.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, ARPI LLC, which was formed in

September 2015

for the sole purpose of facilitating the monetization transaction with PDL of the expected royalty stream and milestone payments due from the sales of Zalviso in Europe by the Company’s commercial partner, Grünenthal, pursuant to the Amended License Agreement, or the Royalty Monetization. All intercompany accounts and transactions have been eliminated in consolidation. Refer to Note

8

“Liability Related to Sale of Future Royalties” for additional information.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission, or SEC. Accordingly, they do

not

include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

Operating results for the

three

and

nine

months ended

September 30, 2018,

are

not

necessarily indicative of the results that

may

be expected for the year ending

December 

31,

2018.

The condensed consolidated balance sheet as of

December 31, 2017,

was derived from the Company’s audited financial statements as of

December 31, 2017,

included in the Company’s Annual Report on Form

10

-K filed with the SEC. These financial statements should be read in conjunction with the Company’s Annual Report on Form

10

-K for the year ended

December 31, 2017,

which includes a broader discussion of the Company’s business and the risks inherent therein.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Management evaluates its estimates on an ongoing basis including critical accounting policies. Estimates are based on historical experience and on various other market-specific and other relevant assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are

not

readily apparent from other sources. Actual results could differ from those estimates.

Revenue Recognition

Beginning

January 

1,

2018,

the Company has followed the provisions of ASC Topic

606,

 

Revenue from Contracts with Customers

. The guidance provides 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, cost reimbursements 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 contracts provide for the reimbursement of qualified expenses for research and development activities. Revenue under these arrangements is recognized when the related qualified research expenses are incurred. The Company is entitled to reimbursement of overhead costs associated with the study costs under the DoD arrangements. The Company estimates this overhead rate by utilizing forecasted expenditures. Final reimbursable overhead expenses are dependent on 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 following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue 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.

The Company’s performance obligations include commercialization license rights, development services, services associated with the regulatory approval process, joint steering committee services, demo devices, manufacturing services, material rights for discounts on manufacturing services, and product supply.

The Company has optional additional items in contracts, which are considered marketing offers and are accounted for as separate contracts when the customer elects such options. Arrangements that include a promise for future commercial product supply and optional research and development services at the customer’s or the Company’s discretion are generally considered as options. The Company assesses if these options provide a material right to the licensee and if so, such material rights are accounted for as separate performance obligations. If the Company is entitled to additional payments when the customer 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, while milestone payments are identified as variable consideration when determining the transaction price. Funding of research and development activities is considered variable until such costs are reimbursed at which point they are considered fixed. The Company allocates the total transaction price to each performance 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 being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal 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 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 the predominant item to which the royalties relate, the Company recognizes revenue at the later of (a) when the related sales occur, or (b) when the performance obligation 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, the Company must develop assumptions that require judgment to determine the stand-alone selling price of each performance obligation identified in the contract. Estimated selling prices for license rights and material rights for discounts on manufacturing services are calculated using an income approach model and can include the following key assumptions: the development timeline, sales forecasts, costs of product sales, commercialization expenses, discount rate, the time which the manufacturing services are expected to be performed, and probabilities of technical 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 Company expects to complete its performance obligations under the arrangement. The Company estimates the performance period or measure of progress at the inception of the arrangement and re-evaluates it each reporting period. This re-evaluation

may

shorten or lengthen the period over which revenue is recognized. Changes to these estimates are recorded on a cumulative catch up basis. If the Company cannot reasonably estimate when its performance obligations 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 for products 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 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 customer can use and benefit from the license. For performance obligations that are services, revenue is recognized over time proportionate to the costs that the Company has incurred to perform the services using the cost-to-cost input method.

Significant Accounting Policies

The Company’s significant accounting policies are detailed in its Annual Report on Form

10

-K for the year ended

December 31, 2017.

Aside from the adoption of ASC Topic

606

described below under “Recently Adopted Accounting Standards” and explained more fully above in “Revenue Recognition,”and in Note

4

“Adoption of ASC Topic

606,

Revenue from Contracts with Customers

” below, there have been

no

significant changes to the Company’s significant accounting policies during the

three

and

nine

months ended

September 30, 2018,

from those previously disclosed in its

2017

Annual Report on Form

10

-K.

Recently Adopted Accounting Standards

In

May 2014,

the FASB issued ASU

No.

2014

-

09,

Revenue from Contracts with Customers (Topic

606

)

, to provide guidance on revenue recognition. In

August 2015

and

March,

April,

May

and

December 2016,

the FASB issued additional amendments to the new revenue guidance relating to reporting revenue on a gross versus net basis, identifying performance obligations, licensing arrangements, collectability, noncash consideration, presentation of sales tax, transition, and clarifying examples. Collectively these are referred to as ASC Topic

606,

which replaces all legacy GAAP guidance on revenue recognition and eliminates all industry-specific guidance. The new revenue recognition guidance provides a unified model to determine how revenue is recognized. The core principal of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount 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 the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each distinct performance obligation. ASC Topic

606

is effective for interim and annual reporting periods beginning after

December 15, 2017,

with early adoption permitted

one

year earlier.

The Company adopted the new standard effective

January 1, 2018

under the modified retrospective transition method, applying the new guidance in the

first

quarter of

2018

to those contracts which were

not

completed as of

January 1, 2018.

For contracts which were modified before the adoption date, the Company has elected to treat the contracts and their modifications as combined contracts. Upon adoption, there was

no

change to the units of accounting previously identified under legacy GAAP, which are now considered performance obligations under the new guidance, and there was

no

change to the revenue recognition pattern for each performance obligation. Therefore, the adoption of the new standard resulted in

no

cumulative effect to the opening accumulated deficit balance.

In

May 2017,

the FASB issued ASU

2017

-

09,

Compensation - Stock Compensation (Topic

718

):

Scope of Modification Accounting

, to clarify which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under ASC

718.

Under the new guidance, an entity will

not

apply modification accounting to a share-based payment award if all of the following remain unchanged immediately before and 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. Early adoption 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

not

have 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 reduce diversity in practice in the classification and presentation of changes in restricted cash on the condensed consolidated statement of cash flows. The ASU requires that the condensed consolidated statement of cash flows explain the change in total cash and equivalents and amounts generally described as restricted cash or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. The ASU also requires a reconciliation between the total of cash and equivalents and restricted cash presented on the condensed consolidated statement of cash flows and the cash and equivalents balance presented on the condensed consolidated balance sheet. The Company adopted ASU

No.

2016

-

18,

and the guidance has been retrospectively applied to all periods presented. The adoption of the guidance did

not

have an impact on the Company’s condensed 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 Cash Payments,

 addressing

eight

specific cash flow issues in an effort to reduce diversity in practice. The amended guidance is effective for fiscal years beginning after

December 15, 2017,

and for interim periods within those years. The adoption of ASU

2016

-

15

effective

January 1, 2018,

did

not

have a material impact on the Company’s condensed consolidated statements of cash flows.

Recently Issued Accounting Standards

In

August 2018,

the FASB issued ASU

No.

2018

-

15,

Intangibles—Goodwill and Other—Internal-Use Software (Subtopic

350

-

40

): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

. ASU

No.

2018

-

15

provides new guidance on a customer’s accounting for implementation, set-up and other upfront costs incurred in a cloud computing arrangement that is hosted by a vendor, i.e., a service contract. The new guidance aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license under ASU

No.

2015

-

05,

Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement

. The new guidance also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures. ASU

2018

-

15

is effective for fiscal years beginning after

December 15, 2019,

and interim periods within those fiscal years, with early adoption permitted. Entities can choose to adopt the new guidance (

1

) prospectively to eligible costs incurred on or after the date this guidance is

first

applied or (

2

) retrospectively. The Company is currently evaluating the method of adoption and the impact of adopting ASU

2018

-

15

on its condensed consolidated financial statements and disclosures.

In

February 2016,

the FASB issued ASU

No.

2016

-

02,

Leases (Topic

842

)

, which establishes a new lease accounting model for lessees. In

July 2018,

the FASB issued ASU

No.

2018

-

11,

Leases (Topic

842

): Targeted Improvements

which provides an optional transition method that allows entities to elect to apply the standard prospectively at its effective date, versus recasting the prior periods presented. The Company is currently in the process of evaluating the transition method. Unlike current GAAP which requires only capital leases to be recognized on the balance sheet, the new guidance will require both types of leases (i.e. operating and capital leases) to be recognized on the balance sheet. The FASB lessee accounting model will continue to account for both types of leases. The capital lease will be accounted for in substantially the same manner as capital leases are accounted for under existing GAAP. The operating lease will be accounted for in a manner similar to operating leases under existing GAAP, except that lessees will recognize a lease liability and a lease asset for all of those leases. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after

December 15, 2018,

with early adoption permitted. The Company expects to adopt this standard beginning in

2019.

The Company does

not

expect that this standard will have a material impact on its condensed consolidated statements of comprehensive loss; however, the Company does expect that upon adoption, this standard will impact the carrying value of its assets and liabilities on its condensed consolidated balance sheets as a result of the requirement to record right-of-use assets and corresponding lease obligations for current operating leases. The Company is still evaluating whether there are other existing contracts that

may

become leases under the new lease standard, and the impact of the adoption of this standard on its condensed consolidated financial statements and disclosures. The Company will continue to monitor additional modifications, clarifications or interpretations undertaken by the FASB that

may

impact its current conclusions, and will expand its analysis to include any new lease arrangements initiated prior to adoption. 

XML

Note 2 - Investments and Fair Value Measurement

9 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Investments and Fair Value Measurement Disclosure [Text Block]

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 at estimated fair value based on quoted market prices or observable market inputs of almost identical assets, with the unrealized holding gains and losses included in accumulated other comprehensive income. Marketable securities which have maturities beyond

one

year as of the end of the reporting period are classified as non-current.

The table below summarizes the Company’s cash, cash equivalents and investments (in thousands):  

	As of September 30 , 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Cash and cash equivalents:
Cash	$	394	$	—	$	—	$	394
Money market funds		32,168		—		—		32,168
U.S. government agency securities		25,004		—		—		25,004
Total cash and cash equivalents	$	57,566	$	—	$	—	$	57,566
Marketable securities:
U.S. government agency securities	$	5,995	$	—	$	—	$	5,995
Total marketable securities	$	63,561	$	—	$	—	$	63,561
Total cash, cash equivalents and investments	$	63,561	$	—	$	—	$	63,561

	As of December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Cash and cash equivalents:
Cash	$	29,765	$	—	$	—	$	29,765
U.S. government agency securities		23,137		—		—		23,137
Total cash and cash equivalents	$	52,902	$	—	$	—	$	52,902
Marketable securities:
U.S. government agency securities	$	7,567	$	—	$	—	$	7,567
Total marketable securities	$	7,567	$	—	$	—	$	7,567
Total cash, cash equivalents and investments	$	60,469	$	—	$	—	$	60,469

As of

September 30, 2018

and

December 

31,

2017,

none

of the available-for-sale securities held by the Company had material unrealized losses. There were

no

other-than-temporary impairments for these securities at

September 30, 2018

or

December 

31,

2017.

No

gross realized gains or losses were recognized on the available-for-sale securities and, accordingly, there were

no

amounts reclassified out of accumulated other comprehensive income to earnings during the

three

and

nine

months ended

September 30, 2018

and

September 30, 2017.

As of

September 30, 2018

and

December 

31,

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 are actively traded. The pricing information on these investment instruments are readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level

1

of the fair value hierarchy. For Level II instruments, the Company estimates fair value by utilizing

third

party pricing services in developing fair value measurements where fair value is based on valuation methodologies such as models using observable market inputs, including benchmark yields, reported trades, broker/dealer quotes, bids, offers and other reference data. Such Level II instruments typically include U.S. treasury and U.S. government agency obligations. On

March 2, 2017,

the Company entered into an amended and restated loan agreement, or the Amended Loan Agreement with Hercules Capital Funding Trust

2014

-

1

and Hercules Technology II, L.P., together, Hercules, which contains a contingent put option liability. 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 (expense), net in the condensed consolidated statements of comprehensive loss. The fair value of the underlying debt facility is estimated by calculating the expected cash flows in consideration of an estimated probability of default and expected recovery rate in default and discounting such cash flows back to the reporting date using a risk-free rate.

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 September 30 , 2018
	Fair Value		Level I		Level II		Level III
Assets
Money market funds	$	32,168	$	32,168	$	—	$	—
U.S. government agency obligations		30,999		—		30,999		—
Total assets measured at fair value	$	63,167	$	32,168	$	30,999	$	—
Liabilities
Contingent put option liability	$	144	$	—	$	—	$	144
Total liabilities measured at fair value	$	144	$	—	$	—	$	144

	As of December 31, 2017
	Fair Value		Level I		Level II		Level III
Assets
U.S. government agency obligations	$	30,704	$	—	$	30,704	$	—
Total assets measured at fair value	$	30,704	$	—	$	30,704	$	—
Liabilities
Contingent put option liability	$	207	$	—		—	$	207
Total liabilities measured at fair value	$	207	$	—	$	—	$	207

As of

September 30, 2017,

the Company also held a Level III liability associated with warrants, or PIPE warrants, issued in connection with the Company’s private placement equity offering, completed in

June 2012.

The PIPE warrants were considered a liability and were valued using the Black-Scholes option-pricing model, the inputs for which included exercise price of the PIPE warrants, market price of the underlying common shares, expected term, volatility based on a group of the Company’s peers and the risk-free rate corresponding to the expected term of the PIPE warrants. Changes to any of these inputs could have a significant impact to the estimated fair value of the PIPE warrants. The PIPE warrants expired in

November 2017.

The following tables set forth a summary of the changes in the fair value of the Company’s Level III financial liabilities for the

three

and

nine

months ended

September 30, 2018

and

September 30, 2017 (

in thousands):

	Three Months Ended September 30, 2018			Nine Months Ended September 30, 2018
Fair value—beginning of period	$	166		$	207
Change in fair value of contingent put option associated with Amended Loan Agreement		(22	)		(63	)
Fair value—end of period	$	144		$	144

	Three Months Ended September 30, 2017			Nine Months Ended September 30, 2017
Fair value—beginning of period	$	288		$	412
Change in fair value of PIPE warrants		612			352
Change in fair value of contingent put option associated with Amended Loan Agreement		(53	)		83
Fair value—end of period	$	847		$	847

XML

Note 3 - Inventories

9 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Inventory Disclosure [Text Block]

3.

Inventories

Inventories consist of raw materials and work in process and are stated at the lower of cost or net realizable value and consist of the following (in thousands):

	Balance as of
	September 30 , 2018		December 31, 2017
Raw materials	$	585	$	702
Work-in-process		271		254
Total	$	856	$	956

XML

Note 4 - Adoption of ASC Topic 606, Revenue From Contracts With Customers

9 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Revenue from Contract with Customer [Text Block]

4

.

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 of

January 1, 2018.

Results for reporting periods beginning after

January 1, 2018,

are presented under Topic

606,

while prior period amounts are

not

adjusted and continue to be reported in accordance with the Company’s historical accounting under Topic

605.

The adoption of the new revenue recognition guidance 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 with Grünenthal related to Zalviso. At

September 30, 2018,

approximately

$3.5

million of the transaction price under the Amended Agreements is allocated to the 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 Significant Accounting Policies - Revenue Recognition.”

The following table presents changes in the Company’s contract liabilities for the

nine

months ended

September 30, 2018:

	Balance at Beginning of the Period		Additions		Deductions			Balance at the end of the Period
	(in thousands)
Contract liability:
Deferred revenue	$	3,825	$	-	$	(272	)	$	3,553

During the

three

and

nine

months ended

September 30, 2018,

the Company recognized the following revenue (in thousands):

	Three months ended September 30, 2018		Nine months ended September 30, 2018
Amounts included in contract liabilities at the beginning of the period:
Performance obligations satisfied – Amended Agreements	$	90	$	272
New activities in the period from performance obligations satisfied:
Performance obligations satisfied – Amended Agreements		—		237
Total revenue from performance obligations satisfied		90		509
Royalty revenue		87		293
Contract and other		200		736
Total revenue	$	377	$	1,538

XML

Note 5 - U.S. Department of Defense

9 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Long-term Contracts or Programs Disclosure [Text Block]

5

. U.S. Department of Defense

On

May 11, 2015,

the Company entered into an award contract (referred to as the DoD Contract) supported by the Clinical and Rehabilitative Medicine Research Program, or CRMRP, of the United States Army Medical Research and Materiel Command, or the USAMRMC, within 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 (sufentanil sublingual tablet,

30

mcg), a proprietary, non-invasive, single-use tablet in a disposable, pre-filled single-dose applicator, or SDA, for the treatment of moderate-to-severe acute pain. Under the terms of the DoD Contract, the DoD has and continues to reimburse 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. The period 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 DoD Contract and provide additional funding for the research. On

March 2, 2016,

the DoD Contract was amended to approve enrollment of additional patients in 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 absorbed within the current DoD Contract value. On

March 9, 2017,

the DoD Contract was amended to incorporate additional activities including the development and testing of packaging changes; additional stability testing; and preparation for any FDA advisory committee meeting for DSUVIA. The amendment also extends the DoD Contract period of performance by

11

months through

February 28, 2018

to accommodate these additional activities. At

December 31, 2017,

the additional activities as outlined under the DoD Contract through

February 28, 2018

were substantially complete. On

February 28, 2018,

the DoD contract was amended to incorporate additional services in the amount of

$0.5

million and to extend the contract period by

twelve

months through

February 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 forth in the agreement. Revenue attributable to the research and development performed under the DoD Contract, recorded as contract and other revenue in the condensed consolidated statements of comprehensive loss, was

$0.2

million and

$0.7

million for the

three

and

nine

months ended

September 30, 2018,

respectively, and

$0.3

million and

$0.8

million for the

three

and

nine

months ended

September 30, 2017,

respectively.

XML

Note 6 - Collaboration Agreement

9 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Collaborative Arrangement Disclosure [Text Block]

6

. Collaboration

Agreement

As described in Note 

1

“Organization and Summary of Significant Accounting Policies,” the Company has entered into the Amended Agreements with Grünenthal related to Zalviso.

Amended License Agreement

Under the Amended License Agreement, the Company is 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 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 fee payments, will be paid to PDL in connection with the Royalty Monetization. For additional information on the Royalty Monetization with PDL, see Note

8

“Liability Related to Sale of Future Royalties”. Unless earlier terminated, the Amended License Agreement continues in effect until the expiration of the obligation of Grünenthal to make royalty and supply and trademark fee payments, which supply and trademark fee continues for so long as the Company continues 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 for convenience.

Amended MSA

Under the terms of the Amended MSA, the Company will manufacture and supply the Product for use in the Field for the Territory exclusively for Grünenthal. The Product will be supplied at prices approximating the Company’s manufacturing cost, subject to certain caps, as defined in the MSA Amendment. The MSA Amendment requires the Company to use commercially reasonable efforts to enter stand-by contracts with

third

parties providing significant supply and manufacturing services and, under certain specified conditions, permits Grünenthal to use a

third

-party back-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 and supply and trademark fee payments or the end of any transition period for manufacturing obligations due to the expiration or termination of the Amended License Agreement. The Amended MSA is subject to earlier termination in connection with certain termination events in the Amended License Agreement, 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 or insolvency of either party.

During the

three

and

nine

months ended

September 30, 2018,

the Company recognized

$0.2

million and

$0.8

million in revenue under the Amended Agreements, respectively, primarily product sales revenue. During the

three

and

nine

months ended

September 30, 2017,

the Company recognized

$1.2

million and

$6.4

million in revenue under the Amended Agreements, respectively, primarily product sales revenue. As of

September 30, 2018,

the Company had current and noncurrent portions of the deferred revenue balance under the Amended Agreements of

$0.3

 million and

$3.2

million, respectively. The deferred revenue balance consists primarily of the significant and incremental discount on manufacturing services, which is being recognized on a straight-line basis over the period such discount is made available to Grünenthal, which began in

February 2016

and is estimated to continue through

2029.

XML

Note 7 - Long-term Debt

9 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Long-term Debt [Text Block]

7

. Long-Term Debt

Amended Loan Agreement

The Company has long-term debt with Hercules under the Amended Loan Agreement that requires equal monthly payments of principal and interest through the scheduled maturity date of

March 1, 2020.

A final payment equal to

6.5%

of the aggregate principal amount of

$20.5

million in loans funded under the Amended Loan Agreement, or the End of Term 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.

The accrued balance due under the Amended Loan Agreement was

$13.9

million at

September 30, 2018

and

$19.1

million at

December 31, 2017.

Interest expense related to the Amended Loan Agreement was

$0.5

million,

$0.2

million of which represented amortization of the debt discount, for the

three

months ended

September 30, 2018,

and

$1.7

million,

$0.5

million of which represented amortization of the debt discount, for the

nine

months ended

September 30, 2018.

Interest expense related to the Amended Loan Agreement was

$0.9

million,

$0.4

million of which represented amortization of the debt discount, for the

three

months ended

September 30, 2017,

and

$2.6

million,

$1.1

million of which represented amortization of the debt discount, for the

nine

months ended

September 30, 2017.

XML

Note 8 - Liability Related to Sale of Future Royalties

9 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Liability Related To Sale Of Future Royalties Disclosure [Text Block]

8

. Liability Related to Sale of Future Royalties

On

September 18, 2015,

the Company entered into the Royalty Monetization with PDL for which it received gross proceeds of

$65.0

million. Under the Royalty Monetization, PDL will receive

75%

of the European royalties under the Amended License Agreement with Grünenthal, as well as

80%

of the

first

four

commercial milestones worth

$35.6

million (or

80%

of

$44.5

million), up to a capped amount of

$195.0

million over the life of the arrangement.

The following table shows the activity within the liability account during the

nine

months ended and the period from inception to

September 30, 2018 (

in thousands):

	Nine months ended September 30 , 2018			Period from inception to September 30 , 2018
Liability related to sale of future royalties — beginning balance	$	83,588		$	—
Proceeds from sale of future royalties		—			61,184
Non-cash royalty revenue		(190	)		(317	)
Non-cash interest expense recognized		8,724			31,255
Liability related to sale of future royalties as of September 30, 2018		92,122			92,122
Less: current portion		(377	)		(377	)
Liability related to sale of future royalties — net of current portion	$	91,745		$	91,745

As royalties are remitted to PDL from the Company’s subsidiary, ARPI LLC, as described in Note 

1

“Organization and Summary of Significant Accounting Policies,” the balance of the liability will be effectively repaid over the life of the agreement. The Company will record non-cash royalty revenues and non-cash interest expense within its condensed consolidated statements of comprehensive loss over the term of the Royalty Monetization.

XML

Note 9 - Warrants

9 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Warrants Disclosure [Text Block]

9

. Warrants

Amended Loan Agreement Warrants

In connection with the Company’s Amended Loan Agreement, warrants to purchase

176,730

shares of common stock at

$3.07

per share were issued to Hercules. As of

September 30, 2018,

these warrants had

not

been exercised and were still outstanding. These warrants expire in

December 2018.

XML

Note 10 - Stock-based Compensation

9 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

1

0

. Stock-Based Compensation

The Company recorded total stock-based compensation expense for stock options, stock awards and the

2011

Employee Stock Purchase Plan, or ESPP, as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	201 8		2017		201 8		2017
Cost of goods sold	$	119	$	80	$	280	$	243
Research and development		769		458		1,578		1,442
General and administrative		920		480		2,078		1,555
Total	$	1,808	$	1,018	$	3,936	$	3,240

As of

September 30, 2018,

there were

1,140,133

shares available for grant,

11,628,345

options outstanding and

no

restricted stock units outstanding under the Company’s

2011

Equity Incentive Plan and

858,889

shares available for grant under the ESPP.

XML

Note 11 - Stockholders' Equity

9 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Stockholders' Equity Note Disclosure [Text Block]

1

1

. Stockholders’ Equity

Common Stock

2018

Underwritten Public Offering

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 the public. On

August 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 were approximately

$23.0

million with net proceeds to the Company of

$21.7

million after deducting the underwriting discounts and commissions and other offering expenses payable by the Company.

2016

A

TM

Agreement 

During the

nine

months ended

September 30, 2018,

the Company issued and sold

2.3

million shares of common stock pursuant to the

2016

ATM Agreement, for which the Company received net proceeds of approximately

$7.4

million, after deducting commissions, fees and expenses of

$0.2

million.  

XML

Note 12 - Net Loss Per Share of Common Stock

9 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Earnings Per Share [Text Block]

1

2

. 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 common stock outstanding for the period. The diluted net loss per share of common stock is computed by giving effect to all potential common stock equivalents outstanding for the period determined using the treasury stock method. For purposes of this calculation, options to purchase common stock and warrants to purchase common stock were considered to be common stock equivalents. In periods with a reported net loss, common stock equivalents are excluded from the calculation of diluted net loss per share of common stock if their effect is antidilutive.

The following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have been antidilutive:

	September 30 ,
	201 8		201 7
ESPP and stock options to purchase common stock		12,003,600		8,922,456
Common stock warrants		176,730		689,186

XML

Note 13 - Subsequent Event

9 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Subsequent Events [Text Block]

13.

Subsequent Event

On

November 2, 2018,

the FDA approved the resubmitted NDA for DSUVIA (sufentanil sublingual tablet,

30

mcg) for use in adults in a certified medically supervised healthcare setting, such as hospitals, surgical centers, and emergency departments, for the management of acute pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate.

XML

Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2018

Accounting Policies [Abstract]

Consolidation, Policy [Policy Text Block]

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, ARPI LLC, which was formed in

September 2015

for the sole purpose of facilitating the monetization transaction with PDL of the expected royalty stream and milestone payments due from the sales of Zalviso in Europe by the Company’s commercial partner, Grünenthal, pursuant to the Amended License Agreement, or the Royalty Monetization. All intercompany accounts and transactions have been eliminated in consolidation. Refer to Note

8

“Liability Related to Sale of Future Royalties” for additional information.

Basis of Accounting, Policy [Policy Text Block]

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission, or SEC. Accordingly, they do

not

include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

Operating results for the

three

and

nine

months ended

September 30, 2018,

are

not

necessarily indicative of the results that

may

be expected for the year ending

December 

31,

2018.

The condensed consolidated balance sheet as of

December 31, 2017,

was derived from the Company’s audited financial statements as of

December 31, 2017,

included in the Company’s Annual Report on Form

10

-K filed with the SEC. These financial statements should be read in conjunction with the Company’s Annual Report on Form

10

-K for the year ended

December 31, 2017,

which includes a broader discussion of the Company’s business and the risks inherent therein.

Use of Estimates, Policy [Policy Text Block]

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Management evaluates its estimates on an ongoing basis including critical accounting policies. Estimates are based on historical experience and on various other market-specific and other relevant assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are

not

readily apparent from other sources. Actual results could differ from those estimates.

Revenue Recognition, Policy [Policy Text Block]

Revenue Recognition

Beginning

January 

1,

2018,

the Company has followed the provisions of ASC Topic

606,

 

Revenue from Contracts with Customers

. The guidance provides 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, cost reimbursements 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 contracts provide for the reimbursement of qualified expenses for research and development activities. Revenue under these arrangements is recognized when the related qualified research expenses are incurred. The Company is entitled to reimbursement of overhead costs associated with the study costs under the DoD arrangements. The Company estimates this overhead rate by utilizing forecasted expenditures. Final reimbursable overhead expenses are dependent on 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 following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue 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.

The Company’s performance obligations include commercialization license rights, development services, services associated with the regulatory approval process, joint steering committee services, demo devices, manufacturing services, material rights for discounts on manufacturing services, and product supply.

The Company has optional additional items in contracts, which are considered marketing offers and are accounted for as separate contracts when the customer elects such options. Arrangements that include a promise for future commercial product supply and optional research and development services at the customer’s or the Company’s discretion are generally considered as options. The Company assesses if these options provide a material right to the licensee and if so, such material rights are accounted for as separate performance obligations. If the Company is entitled to additional payments when the customer 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, while milestone payments are identified as variable consideration when determining the transaction price. Funding of research and development activities is considered variable until such costs are reimbursed at which point they are considered fixed. The Company allocates the total transaction price to each performance 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 being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal 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 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 the predominant item to which the royalties relate, the Company recognizes revenue at the later of (a) when the related sales occur, or (b) when the performance obligation 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, the Company must develop assumptions that require judgment to determine the stand-alone selling price of each performance obligation identified in the contract. Estimated selling prices for license rights and material rights for discounts on manufacturing services are calculated using an income approach model and can include the following key assumptions: the development timeline, sales forecasts, costs of product sales, commercialization expenses, discount rate, the time which the manufacturing services are expected to be performed, and probabilities of technical 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 Company expects to complete its performance obligations under the arrangement. The Company estimates the performance period or measure of progress at the inception of the arrangement and re-evaluates it each reporting period. This re-evaluation

may

shorten or lengthen the period over which revenue is recognized. Changes to these estimates are recorded on a cumulative catch up basis. If the Company cannot reasonably estimate when its performance obligations 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 for products 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 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 customer can use and benefit from the license. For performance obligations that are services, revenue is recognized over time proportionate to the costs that the Company has incurred to perform the services using the cost-to-cost input method.

Significant Accounting Policies

The Company’s significant accounting policies are detailed in its Annual Report on Form

10

-K for the year ended

December 31, 2017.

Aside from the adoption of ASC Topic

606

described below under “Recently Adopted Accounting Standards” and explained more fully above in “Revenue Recognition,”and in Note

4

“Adoption of ASC Topic

606,

Revenue from Contracts with Customers

” below, there have been

no

significant changes to the Company’s significant accounting policies during the

three

and

nine

months ended

September 30, 2018,

from those previously disclosed in its

2017

Annual Report on Form

10

-K.

New Accounting Pronouncements, Policy [Policy Text Block]

Recently Adopted Accounting Standards

In

May 2014,

the FASB issued ASU

No.

2014

-

09,

Revenue from Contracts with Customers (Topic

606

)

, to provide guidance on revenue recognition. In

August 2015

and

March,

April,

May

and

December 2016,

the FASB issued additional amendments to the new revenue guidance relating to reporting revenue on a gross versus net basis, identifying performance obligations, licensing arrangements, collectability, noncash consideration, presentation of sales tax, transition, and clarifying examples. Collectively these are referred to as ASC Topic

606,

which replaces all legacy GAAP guidance on revenue recognition and eliminates all industry-specific guidance. The new revenue recognition guidance provides a unified model to determine how revenue is recognized. The core principal of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount 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 the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each distinct performance obligation. ASC Topic

606

is effective for interim and annual reporting periods beginning after

December 15, 2017,

with early adoption permitted

one

year earlier.

The Company adopted the new standard effective

January 1, 2018

under the modified retrospective transition method, applying the new guidance in the

first

quarter of

2018

to those contracts which were

not

completed as of

January 1, 2018.

For contracts which were modified before the adoption date, the Company has elected to treat the contracts and their modifications as combined contracts. Upon adoption, there was

no

change to the units of accounting previously identified under legacy GAAP, which are now considered performance obligations under the new guidance, and there was

no

change to the revenue recognition pattern for each performance obligation. Therefore, the adoption of the new standard resulted in

no

cumulative effect to the opening accumulated deficit balance.

In

May 2017,

the FASB issued ASU

2017

-

09,

Compensation - Stock Compensation (Topic

718

):

Scope of Modification Accounting

, to clarify which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under ASC

718.

Under the new guidance, an entity will

not

apply modification accounting to a share-based payment award if all of the following remain unchanged immediately before and 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. Early adoption 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

not

have 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 reduce diversity in practice in the classification and presentation of changes in restricted cash on the condensed consolidated statement of cash flows. The ASU requires that the condensed consolidated statement of cash flows explain the change in total cash and equivalents and amounts generally described as restricted cash or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. The ASU also requires a reconciliation between the total of cash and equivalents and restricted cash presented on the condensed consolidated statement of cash flows and the cash and equivalents balance presented on the condensed consolidated balance sheet. The Company adopted ASU

No.

2016

-

18,

and the guidance has been retrospectively applied to all periods presented. The adoption of the guidance did

not

have an impact on the Company’s condensed 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 Cash Payments,

 addressing

eight

specific cash flow issues in an effort to reduce diversity in practice. The amended guidance is effective for fiscal years beginning after

December 15, 2017,

and for interim periods within those years. The adoption of ASU

2016

-

15

effective

January 1, 2018,

did

not

have a material impact on the Company’s condensed consolidated statements of cash flows.

Recently Issued Accounting Standards

In

August 2018,

the FASB issued ASU

No.

2018

-

15,

Intangibles—Goodwill and Other—Internal-Use Software (Subtopic

350

-

40

): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

. ASU

No.

2018

-

15

provides new guidance on a customer’s accounting for implementation, set-up and other upfront costs incurred in a cloud computing arrangement that is hosted by a vendor, i.e., a service contract. The new guidance aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license under ASU

No.

2015

-

05,

Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement

. The new guidance also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures. ASU

2018

-

15

is effective for fiscal years beginning after

December 15, 2019,

and interim periods within those fiscal years, with early adoption permitted. Entities can choose to adopt the new guidance (

1

) prospectively to eligible costs incurred on or after the date this guidance is

first

applied or (

2

) retrospectively. The Company is currently evaluating the method of adoption and the impact of adopting ASU

2018

-

15

on its condensed consolidated financial statements and disclosures.

In

February 2016,

the FASB issued ASU

No.

2016

-

02,

Leases (Topic

842

)

, which establishes a new lease accounting model for lessees. In

July 2018,

the FASB issued ASU

No.

2018

-

11,

Leases (Topic

842

): Targeted Improvements

which provides an optional transition method that allows entities to elect to apply the standard prospectively at its effective date, versus recasting the prior periods presented. The Company is currently in the process of evaluating the transition method. Unlike current GAAP which requires only capital leases to be recognized on the balance sheet, the new guidance will require both types of leases (i.e. operating and capital leases) to be recognized on the balance sheet. The FASB lessee accounting model will continue to account for both types of leases. The capital lease will be accounted for in substantially the same manner as capital leases are accounted for under existing GAAP. The operating lease will be accounted for in a manner similar to operating leases under existing GAAP, except that lessees will recognize a lease liability and a lease asset for all of those leases. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after

December 15, 2018,

with early adoption permitted. The Company expects to adopt this standard beginning in

2019.

The Company does

not

expect that this standard will have a material impact on its condensed consolidated statements of comprehensive loss; however, the Company does expect that upon adoption, this standard will impact the carrying value of its assets and liabilities on its condensed consolidated balance sheets as a result of the requirement to record right-of-use assets and corresponding lease obligations for current operating leases. The Company is still evaluating whether there are other existing contracts that

may

become leases under the new lease standard, and the impact of the adoption of this standard on its condensed consolidated financial statements and disclosures. The Company will continue to monitor additional modifications, clarifications or interpretations undertaken by the FASB that

may

impact its current conclusions, and will expand its analysis to include any new lease arrangements initiated prior to adoption. 

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Reconciliation of Cash, Cash Equivalents, and Restricted Cash (Tables)

9 Months Ended

Sep. 30, 2018

Notes Tables

Schedule of Cash and Cash Equivalents [Table Text Block]

	September 30 ,		September 30 ,
	2018		2017
Cash and cash equivalents		57,566		67,936
Restricted cash		178		178
Cash, cash equivalents and restricted cash shown in the statement of cash flows		57,744		68,114

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Note 2 - Investments and Fair Value Measurement (Tables)

9 Months Ended

Sep. 30, 2018

Notes Tables

Cash, Cash Equivalents and Investments [Table Text Block]

	As of September 30 , 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Cash and cash equivalents:
Cash	$	394	$	—	$	—	$	394
Money market funds		32,168		—		—		32,168
U.S. government agency securities		25,004		—		—		25,004
Total cash and cash equivalents	$	57,566	$	—	$	—	$	57,566
Marketable securities:
U.S. government agency securities	$	5,995	$	—	$	—	$	5,995
Total marketable securities	$	63,561	$	—	$	—	$	63,561
Total cash, cash equivalents and investments	$	63,561	$	—	$	—	$	63,561

	As of December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Cash and cash equivalents:
Cash	$	29,765	$	—	$	—	$	29,765
U.S. government agency securities		23,137		—		—		23,137
Total cash and cash equivalents	$	52,902	$	—	$	—	$	52,902
Marketable securities:
U.S. government agency securities	$	7,567	$	—	$	—	$	7,567
Total marketable securities	$	7,567	$	—	$	—	$	7,567
Total cash, cash equivalents and investments	$	60,469	$	—	$	—	$	60,469

Fair Value Measurements, Recurring and Nonrecurring [Table Text Block]

	As of September 30 , 2018
	Fair Value		Level I		Level II		Level III
Assets
Money market funds	$	32,168	$	32,168	$	—	$	—
U.S. government agency obligations		30,999		—		30,999		—
Total assets measured at fair value	$	63,167	$	32,168	$	30,999	$	—
Liabilities
Contingent put option liability	$	144	$	—	$	—	$	144
Total liabilities measured at fair value	$	144	$	—	$	—	$	144

	As of December 31, 2017
	Fair Value		Level I		Level II		Level III
Assets
U.S. government agency obligations	$	30,704	$	—	$	30,704	$	—
Total assets measured at fair value	$	30,704	$	—	$	30,704	$	—
Liabilities
Contingent put option liability	$	207	$	—		—	$	207
Total liabilities measured at fair value	$	207	$	—	$	—	$	207

Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation [Table Text Block]

	Three Months Ended September 30, 2018			Nine Months Ended September 30, 2018
Fair value—beginning of period	$	166		$	207
Change in fair value of contingent put option associated with Amended Loan Agreement		(22	)		(63	)
Fair value—end of period	$	144		$	144

	Three Months Ended September 30, 2017			Nine Months Ended September 30, 2017
Fair value—beginning of period	$	288		$	412
Change in fair value of PIPE warrants		612			352
Change in fair value of contingent put option associated with Amended Loan Agreement		(53	)		83
Fair value—end of period	$	847		$	847

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Note 3 - Inventories (Tables)

9 Months Ended

Sep. 30, 2018

Notes Tables

Schedule of Inventory, Current [Table Text Block]

	Balance as of
	September 30 , 2018		December 31, 2017
Raw materials	$	585	$	702
Work-in-process		271		254
Total	$	856	$	956

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Note 4 - Adoption of ASC Topic 606, Revenue From Contracts With Customers (Tables)

9 Months Ended

Sep. 30, 2018

Notes Tables

Contract with Customer, Asset and Liability [Table Text Block]

	Balance at Beginning of the Period		Additions		Deductions			Balance at the end of the Period
	(in thousands)
Contract liability:
Deferred revenue	$	3,825	$	-	$	(272	)	$	3,553

Disaggregation of Revenue [Table Text Block]

	Three months ended September 30, 2018		Nine months ended September 30, 2018
Amounts included in contract liabilities at the beginning of the period:
Performance obligations satisfied – Amended Agreements	$	90	$	272
New activities in the period from performance obligations satisfied:
Performance obligations satisfied – Amended Agreements		—		237
Total revenue from performance obligations satisfied		90		509
Royalty revenue		87		293
Contract and other		200		736
Total revenue	$	377	$	1,538

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Note 8 - Liability Related to Sale of Future Royalties (Tables)

9 Months Ended

Sep. 30, 2018

Notes Tables

Other Liabilities [Table Text Block]

	Nine months ended September 30 , 2018			Period from inception to September 30 , 2018
Liability related to sale of future royalties — beginning balance	$	83,588		$	—
Proceeds from sale of future royalties		—			61,184
Non-cash royalty revenue		(190	)		(317	)
Non-cash interest expense recognized		8,724			31,255
Liability related to sale of future royalties as of September 30, 2018		92,122			92,122
Less: current portion		(377	)		(377	)
Liability related to sale of future royalties — net of current portion	$	91,745		$	91,745

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Note 10 - Stock-based Compensation (Tables)

9 Months Ended

Sep. 30, 2018

Notes Tables

Schedule of Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Table Text Block]

	Three Months Ended September 30,				Nine Months Ended September 30,
	201 8		2017		201 8		2017
Cost of goods sold	$	119	$	80	$	280	$	243
Research and development		769		458		1,578		1,442
General and administrative		920		480		2,078		1,555
Total	$	1,808	$	1,018	$	3,936	$	3,240

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Note 12 - Net Loss Per Share of Common Stock (Tables)

9 Months Ended

Sep. 30, 2018

Notes Tables

Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share [Table Text Block]

	September 30 ,
	201 8		201 7
ESPP and stock options to purchase common stock		12,003,600		8,922,456
Common stock warrants		176,730		689,186

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Reconciliation of Cash, Cash Equivalents, and Restricted Cash - Schedule of Cash, Cash Equivalents, and Restricted Cash (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017		Sep. 30, 2017	Dec. 31, 2016
Cash and cash equivalents	$ 57,566	$ 52,902	[1]	$ 67,936
Restricted cash	178			178
Cash, cash equivalents and restricted cash shown in the statement of cash flows	$ 57,744	$ 53,080		$ 68,114	$ 80,488

[1] The condensed consolidated balance sheet as of December 31, 2017 has been derived from the audited financial statements as of that date included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

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Note 2 - Investments and Fair Value Measurement (Details Textual) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017
Available-for-sale Securities, Gross, Unrealized Gain (Loss) Accumulated In Investments	$ 0		$ 0		$ 0
Other than Temporary Impairment Losses, Investments, Available-for-sale Securities, Total			0		$ 0
Available-for-sale Securities, Gross Realized Gain (Loss), Total	0	$ 0	0	$ 0
Other Comprehensive Income (Loss), Transfers from Held-to-maturity to Available-for-Sale Securities, Net of Tax	$ 0	$ 0	$ 0	$ 0

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Note 2 - Investments and Fair Value Measurement - Summary of Cash, Cash Equivalents and Investments (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Amortized Cost	$ 63,561	$ 60,469
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value	63,561	60,469
Cash and Cash Equivalents [Member]
Amortized Cost	57,566	52,902
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value	57,566	52,902
Cash and Cash Equivalents [Member] | Cash [Member]
Amortized Cost	394	29,765
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value	394	29,765
Cash and Cash Equivalents [Member] | Money Market Funds [Member]
Amortized Cost	32,168
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value	32,168
Cash and Cash Equivalents [Member] | U.S. Government Agency Securities [Member]
Amortized Cost	25,004	23,137
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value	25,004	23,137
Marketable Securities [Member]
Amortized Cost	63,561	7,567
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value	63,561	7,567
Marketable Securities [Member] | U.S. Government Agency Securities [Member]
Amortized Cost	5,995	7,567
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value	$ 5,995	$ 7,567

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Note 2 - Investments and Fair Value Measurement - Fair Value of Financial Assets and Liabilities by Level Within Fair Value Hierarchy (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Assets, fair value	$ 63,167	$ 30,704
Liabilities, fair value	144	207
Contingent Put Option Liability [Member]
Liabilities, fair value	144	207
Fair Value, Inputs, Level 1 [Member]
Assets, fair value	32,168
Liabilities, fair value
Fair Value, Inputs, Level 1 [Member] | Contingent Put Option Liability [Member]
Liabilities, fair value
Fair Value, Inputs, Level 2 [Member]
Assets, fair value	30,999	30,704
Liabilities, fair value
Fair Value, Inputs, Level 2 [Member] | Contingent Put Option Liability [Member]
Liabilities, fair value
Fair Value, Inputs, Level 3 [Member]
Assets, fair value
Liabilities, fair value	144	207
Fair Value, Inputs, Level 3 [Member] | Contingent Put Option Liability [Member]
Liabilities, fair value	144	207
Money Market Funds [Member]
Assets, fair value	32,168
Money Market Funds [Member] | Fair Value, Inputs, Level 1 [Member]
Assets, fair value	32,168
Money Market Funds [Member] | Fair Value, Inputs, Level 2 [Member]
Assets, fair value
Money Market Funds [Member] | Fair Value, Inputs, Level 3 [Member]
Assets, fair value
U.S. Government Agency Obligations [Member]
Assets, fair value	30,999	30,704
U.S. Government Agency Obligations [Member] | Fair Value, Inputs, Level 1 [Member]
Assets, fair value
U.S. Government Agency Obligations [Member] | Fair Value, Inputs, Level 2 [Member]
Assets, fair value	30,999	30,704
U.S. Government Agency Obligations [Member] | Fair Value, Inputs, Level 3 [Member]
Assets, fair value

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Note 2 - Investments and Fair Value Measurement - Summary of Changes in Fair Value of Level III Financial Liabilities (Details) - Fair Value, Inputs, Level 3 [Member] - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Fair value, Beginning of period	$ 166	$ 288	$ 207	$ 412
Fair value, End of period	144	847	144	847
Change in fair value of PIPE warrants		612		352
Hercules 2011 Loan and Security Agreement [Member]
Change in fair value of contingent put option associated with Amended Loan Agreement	$ (22)	$ (53)	$ (63)	$ 83

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Note 3 - Inventories - Inventory Components (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Raw materials	$ 585	$ 702
Work-in-process	271	254
Total	$ 856	$ 956	[1]

[1] The condensed consolidated balance sheet as of December 31, 2017 has been derived from the audited financial statements as of that date included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

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Note 4 - Adoption of ASC Topic 606, Revenue From Contracts With Customers (Details Textual) $ in Millions	9 Months Ended
	Sep. 30, 2018 USD ($)
Discount on Manufacturing Services	$ 3.5

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Note 4 - Adoption of ASC Topic 606, Revenue From Contracts With Customers - Changes in Contract Liabilities (Details) - USD ($) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2018
Contract Liabilities: Deferred Revenue		$ 3,825
Contract Liabilities: Deferred Revenue, Deductions	$ (90)	(272)
Contract Liabilities: Deferred Revenue	$ 3,553	$ 3,553

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Note 4 - Adoption of ASC Topic 606, Revenue From Contracts With Customers - Disaggregation of Revenue (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Amounts included in contract liabilities at the beginning of the period: Performance obligations satisfied – Amended Agreements	$ 90		$ 272
New activities in the period from performance obligations satisfied: Performance obligations satisfied – Amended Agreements			237
Total revenue from performance obligations satisfied	90		509
Revenue	377	$ 1,487	1,538	$ 7,255
Royalty Revenue [Member]
Revenue	87		293
Contract and Other [Member]
Revenue	$ 200	$ 262	$ 736	$ 811

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Note 5 - U.S. Department of Defense (Details Textual) - USD ($) $ in Thousands				3 Months Ended		9 Months Ended
	Feb. 28, 2018	Mar. 09, 2017	Mar. 02, 2016	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	May 11, 2015
Government Contract Receivable								$ 17,000
Revenue from Contract with Customer, Including Assessed Tax				$ 90		$ 509
Amendment to DoD Contract Incorporate Additional Services [Member]
Government Contract Receivable	$ 500
Award Contract Renewal Term	1 year
Government [Member]
Award Contract Renewal Term		330 days	120 days
Government [Member] | Contract and Other Revenue [Member]
Revenue from Contract with Customer, Including Assessed Tax				$ 200	$ 300	$ 700	$ 800

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Note 6 - Collaboration Agreement (Details Textual) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017	[1]	Jul. 17, 2015
Revenue Recognition Milestone Method Agreed, Additional Amount, Based On Efforts And Targets							$ 194,500
Revenue Recognition, Revenue Allocation On Collaboration Agreement	$ 200	$ 1,200	$ 800	$ 6,400
Deferred Revenue, Current	326		326		$ 362
Deferred Revenue, Noncurrent	$ 3,227		$ 3,227		$ 3,463
Based upon Successful Regulatory and Product Development Efforts [Member]
Revenue Recognition Milestone Method Agreed, Additional Amount, Based On Efforts And Targets							28,500
Based upon Net Sales Target Achievements [Member]
Revenue Recognition Milestone Method Agreed, Additional Amount, Based On Efforts And Targets							$ 166,000

[1] The condensed consolidated balance sheet as of December 31, 2017 has been derived from the audited financial statements as of that date included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

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Note 7 - Long-term Debt (Details Textual) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017
Interest Expense, Total	$ 529	$ 919	$ 1,758	$ 2,596
Amortization of Debt Discount (Premium)			$ 489	1,060
Amended and Restated Loan and Security Agreement [Member]
Debt Instrument, Final Payment, Percentage of Aggregate Principal Amount	6.50%		6.50%
Hercules Loan and Security Agreement [Member]
Long-term Line of Credit, Total	$ 13,900		$ 13,900		$ 19,100
Interest Expense, Total	500	900	1,700	2,600
Amortization of Debt Discount (Premium)	200	$ 400	500	$ 1,100
Hercules Loan and Security Agreement [Member] | First Tranche [Member]
Debt Instrument, Face Amount	$ 20,500		$ 20,500

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Note 8 - Liability Related to Sale of Future Royalties (Details Textual) $ in Millions	Sep. 18, 2015 USD ($)
Proceeds From Sale of Royalty and Milestone Rights	$ 65.0
Royalty Arrangment Maximum Payments	$ 195.0
PDL [Member]
Percentage of Royalties and Rights Under Agreement	75.00%
PDL [Member] | First Four Commercial Milestones [Member]
Percentage of Royalties and Rights Under Agreement	80.00%
Commercial Milestones Value Maximum Amount Available	$ 35.6
AcelRX [Member] | First Four Commercial Milestones [Member]
Commercial Milestones Value Maximum Amount Available	$ 44.5

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Note 8 - Liability Related to Sale of Future Royalties - Activity of Liability Related to Sale of Future Royalties (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended		36 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Dec. 31, 2017	[1]
Liability related to sale of future royalties — beginning balance			$ 83,588
Proceeds from sale of future royalties					61,184
Non-cash royalty revenue			(190)		(317)
Non-cash interest expense recognized	$ 2,913	$ 2,768	8,724	$ 7,935	31,255
Liability related to sale of future royalties as of September 30, 2018	92,122		92,122		92,122
Less: current portion	(377)		(377)		(377)	$ (604)
Liability related to sale of future royalties — net of current portion	$ 91,745		$ 91,745		$ 91,745	$ 82,984

[1] The condensed consolidated balance sheet as of December 31, 2017 has been derived from the audited financial statements as of that date included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

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Note 9 - Warrants (Details Textual) - Hercules Warrants [Member] - $ / shares	9 Months Ended
	Sep. 30, 2018	Mar. 02, 2018
Class of Warrant or Right, Number of Securities Called by Warrants or Rights		176,730
Class of Warrant or Right, Exercise Price of Warrants or Rights		$ 3.07
Common Stock Warrants Exercised	0

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Note 10 - Stock-based Compensation (Details Textual)	Sep. 30, 2018 shares
2011 Equity Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant	1,140,133
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Ending Balance	11,628,345
2011 Equity Incentive Plan [Member] | Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Number, Ending Balance	0
Employee Stock Purchase Plan (ESPP) [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant	858,889

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Note 10 - Stock-based Compensation - Stock-based Compensation Expense (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Stock-based compensation expense	$ 1,808	$ 1,018	$ 3,936	$ 3,240
Cost of Sales [Member]
Stock-based compensation expense	119	80	280	243
Research and Development Expense [Member]
Stock-based compensation expense	769	458	1,578	1,442
General and Administrative Expense [Member]
Stock-based compensation expense	$ 920	$ 480	$ 2,078	$ 1,555

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Note 11 - Stockholders' Equity (Details Textual) - USD ($) $ / shares in Units, $ in Thousands			1 Months Ended	9 Months Ended
	Aug. 07, 2018	Jul. 16, 2018	Aug. 07, 2018	Sep. 30, 2018	Sep. 30, 2017
Proceeds from Issuance of Common Stock, Net				$ 29,073	$ 13,120
Underwritten Public Offering [Member]
Stock Issued During Period, Shares, New Issues	1,090,909	7,272,727	8,363,636
Shares Issued, Price Per Share	$ 2.75	$ 2.75	$ 2.75
Proceeds from Issuance of Common Stock			$ 23,000
Proceeds from Issuance of Common Stock, Net			$ 21,700
ATM Agreement 2016 [Member]
Stock Issued During Period, Shares, New Issues				2,300,000
Proceeds from Issuance of Common Stock, Net				$ 7,400
Payments of Stock Issuance Costs				$ 200

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Note 12 - Net Loss Per Share of Common Stock - Common Stock Excluded from Computation of Diluted Net Loss Per Share (Details) - shares	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
ESPP and Employee Stock Options [Member]
Antidilutive securities (in shares)	12,003,600	8,922,456
Warrant [Member]
Antidilutive securities (in shares)	176,730	689,186