Item7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our audited financial statements and the related notes that appear elsewhere in this Annual Report on Form 10-K.

This discussion and analysis generally covers our financial condition and results of operations for the year ended December 31, 2022, including year-over-year comparisons versus the year ended December 31, 2021. Our Annual Report on Form 10-K for the year endedDecember31, 2021includes a discussion and analysis of our financial condition and results of operations for the year endedDecember31, 2020in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” This discussion and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties, such as statements regarding our plans, objectives, expectations, intentions, and projections. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in “Part I, Item 1A – Risk Factors” of this Annual Report on Form 10-K.

Overview

We are a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for use in medically supervised settings. Our portfolio consists of nafamostat product candidates and pre-filled syringe product candidates, as further described in “Item 1. Business.” We have signed an agreement with Alora to divest our sufentanil sublingual products (DSUVIA and DZUVEO) with the right to receive sales-based milestone and other payments, which we expect to close in April 2023. We do not have plans to further develop any sufentanil sublingual product candidates.

On January 7, 2022, we acquired Lowell Therapeutics, Inc., or Lowell, a privately held company, pursuant to the Agreement and Plan of Merger, dated as of November 14, 2021, or the Merger Agreement, in a transaction for consideration of approximately $32.5 million plus net cash acquired and certain other adjustments, and which includes up to approximately $26.0 million of contingent consideration payable in cash or stock at AcelRx’s option, upon the achievement of regulatory and sales-based milestones, or the Merger Agreement. In connection with the Merger Agreement we acquired Niyad and LTX-608 (lyophilized vials of nafamostat for injection into the extracorporeal circuit or direct IV infusion to the patient, respectively), an in-process research and development, or IPR&D, asset. For additional information regarding the Merger Agreement, see Note 4, “Asset Acquisition” to the consolidated financial statements in this Annual Report on Form 10-K for additional information.

On July 14, 2021, we entered into a License and Commercialization Agreement, or the PFS Agreement, with Laboratoire Aguettant, or Aguettant, pursuant to which we obtained the exclusive right to develop and, subject to FDA approval, commercialize in the United States (i) an ephedrine pre-filled syringe containing 10 ml of a solution of 3 mg/ml ephedrine hydrochloride for injection and (ii) a phenylephrine pre-filled syringe containing 10 ml of a solution of 50 mcg/ml phenylephrine hydrochloride for injection. Aguettant will supply us with the products for use in commercialization and, if they are approved in the U.S., Aguettant is entitled to receive up to $24 million in sales-based milestone payments. In connection with our and Aguettant’s agreement to enter into the Amended DZUVEO Agreement (as defined below) and the Amended and Restated Supply Agreement (as defined below), we will enter into an amendment to the PFS Agreement with Aguettant pursuant to which, effective on the later of the closing of the transaction contemplated under the DSUVIA Agreement (as defined below) and April 1, 2023, (a) Aguettant will pay us a complementary payment in the amount of €1.5 million, and (b) the maximum amount in sales-based milestone payments that Aguettant is entitled to receive will reduce to $21 million.

On July 14, 2021, we also entered into a License and Commercialization Agreement, or the DZUVEO Agreement, with Aguettant pursuant to which Aguettant obtained the exclusive right to develop and commercialize DZUVEO in the European Union, Norway, Iceland, Liechtenstein, Andorra, Vatican City, Monaco, Switzerland and the United Kingdom, or the DZUVEO Territory, for the management of acute moderate to severe pain in adults in medically monitored settings. We supply Aguettant with primary packaged product and Aguettant then completes secondary packaging of the finished product. Pursuant to the DSUVIA Agreement (as defined below), as a condition of the transaction contemplated thereunder, we and Aguettant will enter into an amendment to the DZUVEO Agreement, or the Amended DZUVEO Agreement, and an amendment and restatement to the supply agreement with respect to the manufacture and supply of DZUVEO, or the Amended and Restated Supply Agreement, in each case, in a form reasonably acceptable to Alora. The rights and obligations under the Amended DZUVEO Agreement and the Amended and Restated Supply Agreement will be assumed by Alora, as part of the DSUVIA asset divestment agreement. We received €2.5 million, or approximately $2.9 million, in 2021 under the DZUVEO Agreement. Refer to Note 6, “In-License Agreement”, Note 7, “Out-License Agreements—DZUVEO” and Note 20, “Subsequent Events” to the consolidated financial statements in this Annual Report on Form 10-K for additional information.

On March 12, 2023, we entered into an asset purchase agreement, or the DSUVIA Agreement, with Alora pursuant to which Alora will acquire certain assets and assume certain liabilities relating to DSUVIA or DZUVEO, or any other single-dose pharmaceutical product for use in medically supervised settings containing a sublingual tablet that includes sufentanil as the sole active ingredient, as a 30 mcg tablet or other dosage form or strength as reasonably necessary for lifecycle management, or the Product. The Product expressly excludes Zalviso, any other multi-dose administration system containing sufentanil sublingual tablets (whether as the sole active ingredient or in combination with other active ingredients), and any single-dose formulation of sufentanil for use outside of a medically supervised setting. Subject to closing of the transaction contemplated under the DSUVIA Agreement, we will be entitled to receive quarterly payments in an amount equal to 15% of net Product sales to all customers excluding net sales to the Department of Defense and sales by or on behalf of Aguettant, and quarterly payments in an amount equal to 75% of net Product sales to the Department of Defense. Subject to closing of the transaction contemplated under the DSUVIA Agreement, we will also be entitled to receive sales milestones up to $116.5 million based on the achievement of Alora attaining certain levels of annual sales and 20% of any consideration, other than royalty payments, received by Alora and its affiliates in connection with a grant to any third party of a license related to any Product, or by Alora and its affiliates and equityholders in connection with a sale or transfer to any third party of an ownership interest in any assets acquired by Alora under the DSUVIA Agreement. We expect the transaction to close in April 2023 and we expect to support the transition to Alora under a Transition Services Agreement signed at or prior to the closing of the transaction contemplated under the DSUVIA Agreement. In addition, at or prior to the closing, we and Alora will enter into an intellectual property agreement pursuant to which Alora will grant fully-paid, royalty-free and perpetual licenses to us under certain specified intellectual property rights acquired by Alora under the DSUVIA Agreement for, among other things, the development, manufacture, commercialization and exploitation of certain products, including Zalviso. Refer to Note 20, “Subsequent Events” in the accompanying notes to the consolidated financial statements for additional information.

Our strategy is focused on developing, obtaining approval, and commercializing our product candidates, Niyad and the pre-filled syringes. Accordingly, we plan to divest DSUVIA to Alora in April 2023, who will continue to commercialize the product and pay us sales-based milestone and other payments. We believe this will maximize the value of DSUVIA as Alora has more available resources to invest on DSUVIA commercialization and as a result can execute a more robust commercial plan to support DSUVIA sales expansion, while we further reduce our operating costs. We have no plans on further developing or commercializing any of our other sufentanil sublingual products that were previously our product candidates. We are focused on achieving an Emergency Use Authorization, or EUA, for Niyad in 2023, and if successful, we expect to begin commercialization, while also initiating the clinical study for full regulatory approval.

On October 25, 2022, we filed a certificate of amendment to our amended and restated certificate of incorporation to effect a 1-for-20 reverse stock split of our outstanding common stock, effective as of 5:01 p.m. Eastern Time on October 25, 2022, or the Reverse Stock Split. Unless expressly stated herein, all share amounts of our common stock presented in this Annual Report have been adjusted to reflect the Reverse Stock Split. See Note 1 to the consolidated financial statements in this Annual Report on Form 10-K for additional information.

Product Development Programs

Our product development portfolio features Niyad (a regional anticoagulant for the dialysis circuit), two innovative therapies for the treatment of acute pain, two ready-to-use pre-filled syringe product candidates (Fedsyra and phenylephrine), and LTX-608 (a proprietary nafamostat formulation for direct IV infusion for disseminated intravascular coagulation, or DIC, for acute respiratory distress syndrome, or ARDS, as an anti-viral treatment for COVID-19, and for acute pancreatitis). Please refer to “Part I. Item 1. Business—Our Portfolio” for a detailed discussion of our approved products and product candidates.

General Trends and Outlook

COVID-19-related

Government-mandated orders and related safety policies on account of the COVID-19 pandemic have prevented us from operating our business in the normal course. We continue to adhere to the various and diverse orders issued by government officials in the jurisdictions in which we operate. In addition, some hospitals, ambulatory surgery centers and other healthcare facilities have barred visitors that are not caregivers or mission-critical and otherwise restricted access to such facilities. As a result, the educational and promotional efforts of our commercial and medical affairs personnel have been substantially reduced, and in some cases, stopped. Cancellation or delays of formulary committee meetings and delays of elective surgeries have also affected the pace of formulary approvals and, consequently, the rate of adoption and use of DSUVIA.

As a result of COVID-19 and related international travel restrictions, in addition to the testing requirements of our vendor, the timing for testing and acceptance of the installed DSUVIA automated packaging line, and subsequent FDA approval, was delayed. Refer to Note 20, “Subsequent Events” to the consolidated financial statements in this Annual Report on Form 10-K for additional information.

We will continue to engage with various elements of our supply chain and distribution channel, including our customers, contract manufacturers, and logistics and transportation providers, to meet demand for products and to remain informed of any challenges within our supply chain. We continue to monitor demand and intend to adapt our plans as needed to continue to drive our business and meet our obligations during the evolving COVID-19 pandemic. However, if the COVID-19 pandemic continues and persists for an extended period of time, we may face disruptions to our supply chain and operations, and associated delays in the manufacturing and supply of our products. Such supply disruptions may adversely impact our ability to generate sales of and revenues from our products and our business, financial condition, results of operations and growth prospects could be adversely affected.

As the global pandemic of COVID-19 continues to rapidly evolve, it could result in a significant long-term disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. The extent to which the COVID-19 pandemic continues to impact our business, our ability to generate sales of and revenues from our approved products, and our future clinical development and regulatory efforts will depend on future developments that are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions, quarantines and social distancing requirements in the United States and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the virus.

Inflation

We do not believe that inflation has had a material impact on our business or operating results during the periods presented. However, inflation, led by supply chain constraints, federal stimulus funding, increases to household savings, and the sudden macroeconomic shift in activity levels arising from the loosening or removal of many government restrictions and the broader availability of COVID-19 vaccines, has had, and may continue to have, an impact on overhead costs and transportation costs and may in the future adversely affect our operating results. In addition, increased inflation has had, and may continue to have, an effect on interest rates. Increased interest rates may adversely affect our borrowing rate and our ability to obtain, or the terms under which we can obtain, any potential additional funding.

Department of Defense

In April 2020, DSUVIA achieved Milestone C approval by the Department of Defense, or DoD, a decision that clears the path for the DoD to begin placing orders for DSUVIA for inclusion in all Army Sets, Kits, and Outfits, or SKOs, for deployed/deploying troops. This SKO fulfillment is dependent on the Army’s completion of their product information package including instructions on fulfillment and training which remains in process. In September 2020, we announced that DSUVIA was added to the DoD Joint Deployment Formulary, a core list of pharmaceutical products that are designated for deploying military units across all service branches. Also in September 2020, the U.S. Army awarded AcelRx with an initial contract of up to $3.6 million over four years for the purchase of DSUVIA to support a DoD-sponsored study, which is currently underway, to aid the development of clinical practice guidelines. Since the fourth quarter of 2020, DSUVIA orders are being fulfilled for the Army Prepositioned Stock Program, or APS. The aforementioned clinical and APS orders are separate from the planned SKO fulfillment. Upon closing of the transaction contemplated under the DSUVIA Agreement, Alora will be responsible for commercializing DSUVIA except that we will retain the responsibility for driving the demand within the Department of Defense, and we will receive quarterly payments in an amount equal to 75% of net Product sales to the Department of Defense. Refer to Note 20, “Subsequent Events” to the consolidated financial statements in this Annual Report on Form 10-K for additional information.

Financial Overview

Although the termination of the Royalty Monetization resulted in net income for the year ended December 31, 2022, we have incurred net losses and generated negative cash flows from operations since inception and expect to incur losses in the future as we continue commercialization activities to support the U.S. launch of DSUVIA, support European sales of DZUVEO by Aguettant, and fund any future research and development activities needed to support the FDA regulatory review of our product candidates.

Our net income was $47.8 million for the year ended December 31, 2022, and our net loss was $35.1 million for the year ended December 31, 2021. As of December 31, 2022, we had an accumulated deficit of $425.8 million. As of December 31, 2022, we had cash, cash equivalents, short-term investments and restricted cash totaling $20.8 million compared to $51.6 million as of December 31, 2021.

Critical Accounting Estimates

The accompanying discussion and analysis of our financial condition and results of operations are based upon our consolidated 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. Note 1, “Organization and Summary of Significant Accounting Policies” to the consolidated financial statements in this Annual Report on Form 10-K describes the significant accounting policies used in the preparation of the financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.

A critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates have the following attributes: (i) we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and (ii) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations.

We believe the following policies to be the most critical to an understanding of our financial condition and results of operations because they require us to make estimates, assumptions and judgments about matters that are inherently uncertain. Management has discussed the development, selection and disclosure of the following estimates with the Audit Committee.

Revenue from Contracts with Customers

We follow the provisions of Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers. The guidance provides a unified model to determine how revenue is recognized. We recognize revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We sell our products primarily through wholesale and specialty distributors.

In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under our agreements, we perform the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are 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) we satisfy each performance obligation.

Product sales revenue

We sell our product primarily through distributors. Revenues from product sales are recognized when distributors obtain control of our product, which occurs at a point in time, upon delivery to such distributors. These distributors subsequently resell the product to certified medically supervised healthcare settings. In addition to distribution agreements with these customers, we enter into arrangements with group purchasing organizations, or GPOs, and other certified medically supervised healthcare settings that provide for privately negotiated discounts with respect to the purchase of our products. For revenue recognition under bill-and-hold arrangements, wherein the customer agrees to buy product from us but requests delivery at a later date, we deem that control passes to the customer when the product is ready for delivery. We recognize revenue under these types of arrangements when a signed agreement is in place, the transaction is billable, the customer has significant risk and rewards for the product and the ability to direct the asset, the product has been set aside specifically for the customer, and the product cannot be redirected to another customer. Revenue from product sales is recorded at the transaction price, net of estimates for variable consideration consisting of chargebacks, government rebates, returns, distribution fees and GPO fees. Variable consideration is recorded at the time product sales are recognized resulting in a reduction in product revenue. The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Variable consideration is estimated using the most-likely amount method, which is the single-most likely outcome under a contract and is typically at the stated contractual rate. Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted in accordance with the expected value method under ASC Topic 606 for relevant factors. These factors include current contractual and statutory requirements, specific known market events and trends, industry data, and/or forecasted customer buying and payment patterns. Actual amounts of consideration ultimately received may differ from our estimates. If actual results vary materially from our estimates, we will adjust these estimates, which will affect revenue from product sales and earnings in the period such estimates are adjusted. These estimates include:

Chargebacks – Our customers subsequently resell our product to qualified healthcare providers. In addition to distribution agreements with customers, we enter into arrangements with qualified healthcare providers that provide discounts with respect to the purchase of our product. Chargebacks represent the estimated obligations resulting from contractual commitments to sell product to qualified healthcare providers at prices lower than the list prices charged to customers who directly purchase the product from us. Customers charge us for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue-related accrued liabilities on the consolidated balance sheets. Chargeback amounts are determined at the time of resale to the qualified healthcare providers by customers, and we issue credits for such amounts generally within a few weeks of the customer’s notification to us of the resale. Reserves for chargebacks consists of credits that we expect to issue for units that remain in the distribution channel inventories at each reporting period end that we expect will be sold to the qualified healthcare providers, and chargebacks for units that our customers have sold to the qualified healthcare providers, but for which credits have not been issued.

Government Rebates – We are subject to discount obligations under state Medicaid programs. We estimate our Medicaid rebates and record them in the same period the related product revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability that is included in accrued liabilities on the consolidated balance sheets.

Returns –We allow our distributors to return product for credit 6 months prior to, and up to 12 months after, the product expiration date. As such, there may be a significant period of time between the time the product is shipped and the time the credit is issued on returned product.

Distribution Fees – Distribution fees include fees paid to certain customers for sales order management, data and distribution services. Distribution fees are recorded as a reduction of revenue in the period the related product revenue is recognized.

GPO Fees – We pay administrative fees to GPOs for services and access to data. These fees are based on contracted terms and are paid after the quarter in which the product was purchased by the GPOs’ members.

Trade Discounts and Allowances – We provide our customers with discounts which include early payment incentives that are explicitly stated in our contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized.

We believe our estimated allowances for chargebacks, government rebates and product returns require a high degree of judgment and are subject to change based on our limited experience and certain quantitative and qualitative factors. We believe our estimated allowances for distribution fees, GPO fees and trade discounts and allowances do not require a high degree of judgment because the amounts are settled within a relatively short period of time. We will continue to assess our estimates of variable consideration as we accumulate additional historical data and will adjust these estimates accordingly. Changes in product revenue allowance estimates could materially affect our results of operations and financial position.

Contract and other collaboration revenue

We generate 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. Product sales related revenue under these collaboration agreements is classified as product sales revenue, while other revenue generated from collaboration agreements is classified as contract and other collaboration revenue.

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. Our performance obligations include delivering product to our distributors, commercialization license rights, development services, services associated with the regulatory approval process, joint steering committee services, demonstration devices, manufacturing services, material rights for discounts on manufacturing services, and product supply.

We have optional additional items in contracts, which are considered marketing offers and are accounted for as separate contracts when the 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 our discretion are generally considered as options. We assess if these options provide a material right to the licensee and if so, such material rights are accounted for as separate performance obligations. If we are 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

We have 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. We allocate 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, we evaluate whether the milestones are considered probable of being achieved and estimate 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 us) is included in the transaction price. Milestone payments that are not within our control, such as approvals from regulators, are not considered probable of being achieved until those approvals are received.

For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize 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, we 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, we use a cost-plus margin approach.

Timing of Recognition

Significant management judgment is required to determine the level of effort required under an arrangement and the period over which we expect to complete our performance obligations under the arrangement. We estimate the performance period or measure of progress at the inception of the arrangement and re-evaluate 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 we cannot reasonably estimate when our performance obligations either are completed or become inconsequential, then revenue recognition is deferred until we 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 we expect to be entitled to in exchange for those product sales, which is typically once the product physically arrives at the customer, and for licenses of functional intellectual property at the point in time the customer can use and benefit from the license. For performance obligations that are services, revenue is recognized over time proportionate to the costs that we have incurred to perform the services using the cost-to-cost input method.

Inventories

Inventories are valued at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method for all inventories. Inventory includes the cost of the active pharmaceutical ingredients, or API, raw materials and third-party contract manufacturing and packaging services. Indirect overhead costs associated with production and distribution are allocated to the appropriate cost pool and then absorbed into inventory based on the units produced or distributed, assuming normal capacity, in the applicable period. Indirect overhead costs in excess of normal capacity are recorded as period costs in the period incurred. Prior to FDA approval, all manufacturing costs for our product candidates are expensed to research and development. Upon FDA approval, manufacturing costs for our approved products manufactured for commercial sale are capitalized.

Our policy is to write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of expected requirements. We periodically evaluate the carrying value of inventory on hand for potential excess amount over demand using the same lower of cost or net realizable value approach as that used to value the inventory. Because the predetermined, contractual transfer prices we received from Grünenthal GmbH, or Grünenthal, were less than the direct costs of manufacturing, all Zalviso inventories were carried at net realizable value.

Non-Cash Interest Expense on Liability Related to Sale of Future Royalties

In September 2015, we sold certain royalty and milestone payment rights from the sales of Zalviso in the European Union by our former commercial partner, Grünenthal pursuant to the Collaboration and License Agreement, dated as of December 16, 2013, as amended, to PDL BioPharma, Inc., or PDL, for an upfront cash purchase price of $65.0 million. Under the relevant accounting guidance, because of our significant continuing involvement, the Royalty Monetization was accounted for as a liability that was amortized using the effective interest method over the life of the arrangement. In order to determine the amortization of the liability, we were required to estimate the total amount of future royalty and milestone payments to be received by ARPI LLC and paid to PDL, up to a capped amount of $195.0 million, over the life of the arrangement. The aggregate future estimated royalty and milestone payments (subject to the capped amount), less the $61.2 million of net proceeds we received, were to be recorded as interest expense over the life of the liability. Consequently, we imputed interest on the unamortized portion of the liability and recorded interest expense related to the Royalty Monetization accordingly.

During the three months ended June 30, 2020, Grünenthal notified us that it was terminating the Amended License Agreement, effective November 13, 2020. The terms of the Grünenthal Agreements were extended to May 2021 to enable Grünenthal to sell down its Zalviso inventory, a right it had under the Grünenthal Agreements. The rights to market and sell Zalviso in the Territory reverted back to us in May 2021.

There was a continuing obligation on our part, through the term of the Royalty Monetization, to use commercially reasonable efforts to negotiate a replacement license agreement, or New Arrangement. However, without a New Arrangement to commercialize Zalviso in Europe, we were unable to reliably estimate the future payments to SWK Funding LLC, or SWK, (assignee of PDL) over the remaining life of the Royalty Monetization. Due to the significant judgments and factors related to the estimates of future payments under the Royalty Monetization, there were significant uncertainties surrounding the amount and timing of future payments and the probability of realization of any estimated contingent gain. While the expected payments under the Royalty Monetization were lower than the gross proceeds of $65.0 million received, we deferred recognition of any probable contingent gain until the Royalty Monetization liability expired.

On May 31, 2022, we entered into a Termination Agreement with SWK to fully terminate the Royalty Monetization for which we paid cash consideration of $0.1 million, and neither PDL nor SWK retains any further interest in the Royalty Monetization. Accordingly, effective May 31, 2022, the Royalty Monetization is no longer reflected on our financial statements or other records as a sale of assets to PDL or SWK and all security interests and other liens of every type held by the parties to the Royalty Monetization have been terminated and automatically released without further action by any party. The $84.1 million gain on extinguishment of the liability related to the sale of future royalties is recognized in the consolidated statements of operations as other income.

We recorded non-cash royalty revenues and non-cash interest (income) expense within our consolidated statements of operations over the term of the Royalty Monetization.

Acquisitions

We evaluate acquisitions of assets and other similar transactions to assess whether or not the transaction should be accounted for as a business combination or asset acquisition by first applying a screen test to determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If so, the transaction is accounted for as an asset acquisition. If not, further determination is required as to whether or not we have acquired inputs and processes that have the ability to create outputs, which would meet the definition of a business. Significant judgment is required in the application of the screen test to determine whether an acquisition is a business combination or an acquisition of assets.

Acquisitions meeting the definition of business combinations are accounted for using the acquisition method of accounting, which requires that the purchase price be allocated to the net assets acquired at their respective fair values. In a business combination, any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.

For asset acquisitions, a cost accumulation model is used to determine the cost of an asset acquisition. Direct transaction costs are recognized as part of the cost of an asset acquisition. We also evaluate which elements of a transaction should be accounted for as a part of an asset acquisition and which should be accounted for separately. The cost of an asset acquisition, including transaction costs, is allocated to identifiable assets acquired and liabilities assumed based on a relative fair value basis. Goodwill is not recognized in an asset acquisition. Any difference between the cost of an asset acquisition and the fair value of the net assets acquired is allocated to the non-monetary identifiable assets based on their relative fair values. When a transaction accounted for as an asset acquisition includes an in-process research and development, or IPR&D, asset, the IPR&D asset is only capitalized if it has an alternative future use other than in a particular research and development project. For an IPR&D asset to have an alternative future use: (a) we must reasonably expect that we will use the asset acquired in the alternative manner and anticipate economic benefit from that alternative use, and (b) our use of the asset acquired must not be contingent on further development of the asset subsequent to the acquisition date (that is, the asset can be used in the alternative manner in the condition in which it existed at the acquisition date). Otherwise, amounts allocated to IPR&D that have no alternative use are expensed. Our asset acquisitions typically include contingent consideration arrangements that encompass obligations to make future payments to sellers contingent upon the achievement of future financial targets. Contingent consideration is not recognized until all contingencies are resolved and the consideration is paid or probable of payment, at which point the consideration is allocated to the assets acquired on a relative fair value basis.

Warrants Issued in Connection with Financings

We account for issued warrants as either liability or equity in accordance with ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, or ASC 815-40, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. Under ASC 480-10, warrants are considered liability if they are mandatorily redeemable and they require settlement in cash or other assets, or a variable number of shares. If warrants do not meet liability classification under ASC 480-10, we consider the requirements of ASC 815-40 to determine whether the warrants should be classified as liability or equity. Under ASC 815-40, contracts that may require settlement for cash are liabilities, regardless of the probability of the occurrence of the triggering event. Liability-classified warrants are measured at fair value on the issuance date and at the end of each reporting period. Any change in the fair value of the warrants after the issuance date is recorded in the consolidated statements of operations. If warrants do not require liability classification under ASC 815-40, in order to conclude warrants should be classified as equity, we assess whether the warrants are indexed to our common stock and whether the warrants are classified as equity under ASC 815-40 or other applicable GAAP. Equity-classified warrants are accounted for at fair value on the issuance date with no changes in fair value recognized after the issuance date.

Net Income (Loss) per Share of Common Stock

Basic and diluted net income (loss) per common share, or EPS, are calculated in accordance with the provisions of FASB ASC Topic 260,Earnings per Share.

We apply the two-class method to compute both basic and diluted net income or loss per share. The two-class method is an earnings allocation formula that treats participating securities as having rights to earnings that would otherwise have been available to common stockholders (including pre-funded warrants). Shares of common stock into which the pre-funded warrants may be exercised are considered outstanding for the purposes of computing net loss per share because the shares may be issued for little or no consideration and are exercisable after the original issuance date. In addition, we are required to calculate diluted net income or loss per share under the two-class method if the effect is more dilutive than the application of another dilutive method of calculating diluted EPS (i.e., the treasury stock, if-converted, or contingently issuable share method). In periods where there is a net loss, no allocation of undistributed net loss to the participating securities is performed if the holders of these securities are not contractually obligated to participate in our losses. Our participating securities include the November 2021 Financing Warrants and 2022 Warrants and the Series A Redeemable Convertible Preferred Stock.

For additional information regarding the net income (loss) per share, see Note 16, “Net Income (Loss) per Share of Common Stock” to the consolidated financial statements in this Annual Report on Form 10-K.

Results of Operations

We have realigned our cost structure from a focus on commercialization to a focus on advancing our recently acquired late-stage development pipeline. In 2022, we reduced our headcount-related expenses, primarily within the commercial organization. In the beginning of 2022, we employed 43 full-time employees. As of December 31, 2022, we employed 19 full-time employees. These reductions have resulted in, and will continue to result in, decreased operating expenses in 2022 and beyond. Our results of operations have fluctuated from period to period and may continue to fluctuate in the future, based upon our research and development efforts, variations in the level of expenditures related to development efforts and debt service obligations during any given period, and the uncertainty as to the extent and magnitude of the impact from the COVID-19 pandemic. 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.

Years Ended December31, 2022 and 2021

Revenue

Product Sales Revenue

Product sales revenue consists of sales of DSUVIA in the U.S. and, prior to May 13, 2021, Zalviso in Europe.

Product sales revenue by product for the years ended December 31, 2022 and 2021, was as follows (in thousands, except percentages):

Years Ended

December 31, $ Change % Change

The increase in DSUVIA product sales revenue for the year ended December 31, 2022, as compared to the year ended December 31, 2021, was primarily the result of increased sales volume and prices for DSUVIA and DZUVEO, partially due to purchases from our distributors in advance of our October 1, 2022 price increase. We expect inventory levels to decrease at these distributors over the next quarter or two and do not expect any returned product as a result of these sales. For the year ended December 31, 2021, there was an approximate $0.3 million reduction in revenue related to product returns and $0.3 million in product sales revenue of Zalviso by Grünenthal. In May 2020, Grünenthal terminated the Collaboration and License Agreement and the Manufacture and Supply Agreement, or together, the Grünenthal Agreements, accordingly the rights to market and sell Zalviso in Europe reverted back to us on May 12, 2021. In July 2022, the European Marketing Authorization for Zalviso was withdrawn.

Contract and Other Collaboration Revenue

Contract and other collaboration revenue included revenue under the Grünenthal Agreements, related to research and development services, non-cash royalty revenue related to the sale of the majority of our royalty rights and certain commercial sales milestones to SWK under the Royalty Monetization, and royalty revenue for sales of Zalviso in Europe.

On July 14, 2021, we granted Aguettant the license rights to DZUVEO in the European Union. Accordingly, for the year ended December 31, 2021, we recognized $1.7 million of the $2.9 million upfront fee as license revenue under the DZUVEO Agreement. Total contract and other collaboration revenue for the year ended December 31, 2021 was $1.8 million. For the year ended December 31, 2022, we did not record any contract and other collaboration revenue. As of December 31, 2022, we had deferred revenue of $1.2 million, $0.1 million of which represented the current portion, for the portion of the upfront fee received under the DZUVEO Agreement allocated to the material right for discounted price on future optional product supply which has not yet been satisfied. Refer to Note 20, “Subsequent Events” to the consolidated financial statements in this Annual Report on Form 10-K for additional information.

Cost of goods sold

Total costs of goods sold for the years ended December 31, 2022 and 2021, were as follows (in thousands, except percentages):

Years Ended

December 31, $ Change % Change

Direct costs from contract manufacturers for DSUVIA totaled $0.6 million in the year ended December 31, 2022, while direct costs from contract manufacturers for DSUVIA and Zalviso totaled $1.2 million in the year ended December 31, 2021. Direct cost of goods sold for DSUVIA and Zalviso 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.

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 year ended December 31, 2021, we recorded inventory impairment charges of $0.8 million, primarily as a result of DSUVIA inventory that may expire before being sold. There was no such inventory impairment for the year ended December 31, 2022.

The indirect costs to manufacture DSUVIA totaled $2.0 million in the year ended December 31, 2022, while the indirect costs to manufacture DSUVIA and Zalviso totaled $2.5 million in the year ended December 31, 2021. Indirect costs include internal personnel and related costs for purchasing, supply chain, quality assurance, depreciation and related expenses. Indirect costs declined primarily due to the reduction in personnel expenses attributed to DSUVIA and Zalviso production.

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:

• payments to third party manufacturers;

• costs for equipment and laboratory and other supplies.

We expect to incur future research and development expenditures to support the FDA regulatory review of our product candidates and anticipated activities required for the development of our nafamostat product candidates, and the preparation and submission of the NDAs for our two in-licensed pre-filled syringe, or PFS, product candidates from Aguettant.

We track external development expenses on a program-by-program basis. Our development resources are shared among all 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 for the years ended December 31, 2022 and 2021 (in thousands, except percentages):

Years Ended

December 31, $ Change % Change

Other product candidates 58 49 9 18 %

Research and development expenses during the year ended December 31, 2022, as compared to the year ended December 31, 2021, increased by $1.1 million primarily due to PFS and Niyad development activities, increased DSUVIA manufacturing-related development costs, depreciation expense and compensation costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consisted primarily of salaries, benefits and stock-based compensation for personnel engaged in commercialization, administration, finance and business development activities. Other significant expenses included allocated facility costs and professional fees for general legal, audit and consulting services.

Total selling, general and administrative expenses for the years ended December 31, 2022 and 2021, were as follows (in thousands, except percentages):

Years Ended

December 31, $ Change % Change

Selling, general and administrative expenses decreased by $5.3 million during the year ended December 31, 2022, as compared to the year ended December 31, 2021. The decrease is primarily due to a decline of $3.2 million in personnel-related expenses (primarily commercial personnel), $2.3 million in DSUVIA-related selling expenses, and $1.4 million in non-cash stock-based compensation expense. This was partially offset by $1.6 million in financing transaction related costs, $0.8 million of which were cash transaction costs, with the remaining $0.8 million attributed to the accounting for the warrant issued in the December 2022 financing.

Impairment of Property and Equipment

We have decided to not focus any development resources on Zalviso in the United States and do not expect to resubmit the Zalviso NDA in the foreseeable future. In addition, we do not expect any revenues from Zalviso in Europe in the foreseeable future. Accordingly, we determined that it is no longer probable that we will realize the future economic benefit associated with the costs of the Zalviso-related purchased equipment and manufacturing-related facility improvements we have made at our contract manufacturer and, therefore, recorded a non-cash impairment charge of $4.9 million to the Zalviso-related assets for the year ended December 31, 2022.

Other Income

Total other income for the years ended December 31, 2022 and 2021, was as follows (in thousands, except percentages):

Years Ended

December 31, $ Change % Change

Interest expense consisted primarily of interest accrued or paid on our debt obligation agreements and amortization of debt discounts. Interest expense decreased for the year ended December 31, 2022, as compared to the year ended December 31, 2021, primarily as a result of a lower average outstanding loan balance. As of December 31, 2022, the outstanding balance due under the Loan Agreement with Oxford was $5.4 million. Refer to Note 9, “Long-Term Debt” to the consolidated financial statements in this Annual Report on Form 10-K for additional information.

Interest income and other income for the years ended December 31, 2022 and 2021 primarily consisted of interest earned on our investments and the change in the fair value of our contingent put option. The increase in interest income and other income in the year ended December 31, 2022, compared to the year ended December 31, 2021, was primarily due to higher yields on our investments and the change in the fair value of our contingent put option.

The non-cash interest income on the liability related to the sale of future royalties is attributable to the Royalty Monetization that we completed in September 2015. As described in Note 11, “Liability Related to Sale of Future Royalties” to the consolidated financial statements in this Annual Report on Form 10-K, the Royalty Monetization has been recorded as debt under the applicable accounting guidance. The effective interest income rate for the years ended December 31, 2022 and 2021, was approximately 3.2% and 3.5%, respectively.

On May 31, 2022, we entered into a Termination Agreement with SWK to fully terminate the Royalty Monetization and we recognized an $84.1 million gain on extinguishment of the liability related to the sale of future royalties.

Liquidity and Capital Resources

Liquidity and Going Concern

The termination of the Royalty Monetization resulted in net income for the year ended December 31, 2022; however, before this, we had incurred losses and generated negative cash flows from operations since inception and we expect to continue to incur operating losses and negative cash flows in the future. These conditions raise substantial doubt about our ability to continue as a going concern. Considering our current cash resources and current and expected levels of operating expenses for the next twelve months, we expect to need additional capital to fund our planned operations prior to the twelve-month anniversary of the filing date of this Annual Report on Form 10-K. We may seek to raise such additional capital through public or private equity offerings, including under the Controlled Equity OfferingSM Sales Agreement, or the ATM Agreement, with Cantor Fitzgerald & Co., or Cantor, debt securities, monetize or securitize certain assets, refinance our loan agreement, enter into product development, license or distribution agreements with third parties, or divest any of our product candidates. While we believe our plans to raise additional funds will alleviate the conditions that raise substantial doubt about our ability to continue as a going concern, these plans are not entirely within our control and cannot be assessed as being probable of occurring. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available, we may be required to further reduce our workforce, reduce the scope of, or cease, the development of our product candidates in advance of the date on which our cash resources are exhausted to ensure that we have sufficient capital to meet its obligations and continue on a path designed to preserve stockholder value. In addition, if we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish rights to our technologies, future revenue streams or product candidates, or to grant licenses on terms that may not be favorable to us.

We have funded our operations primarily through issuance of equity securities, borrowings, payments from Grünenthal, monetization of certain future royalties and commercial sales milestones from the European sales of Zalviso by Grünenthal, funding of approximately $22.6 million from the DoD, and more recently with revenues from sales of DSUVIA since the commercial launch in the first quarter of 2019 and the upfront payment under the DZUVEO Agreement with Aguettant.

As of December 31, 2022, we had cash, cash equivalents and investments totaling $20.8 million, compared to $51.6 million as of December 31, 2021. The decrease was primarily due to cash required to fund our continuing operations, including debt service, development activities for our newly acquired late-stage pipeline product candidates, commercialization activities for DSUVIA, including installation of the automated packaging line for DSUVIA, and business development activities. Our existing capital resources will not be sufficient to fund our operations until such time as we may be able to generate sufficient revenues to sustain our operations.

On December 29, 2022, we completed a registered direct offering with an institutional investor, or the Purchaser, in which we issued and sold 748,744 shares of our common stock, pre-funded warrants exercisable for an aggregate of 2,632,898 shares of common stock, and common warrants exercisable for an aggregate of 4,227,052 shares of common stock. The shares of common stock and accompanying common warrants were sold at a combined offering price of $2.22625 per share and accompanying common warrant, and the pre-funded warrants and accompanying common warrants were sold at a combined offering price of $2.22615 per pre-funded warrant and accompanying common warrant. The pre-funded warrants were immediately exercisable following closing of the offering, have an unlimited term, and have an exercise price of $0.0001 per share. The common warrants will not be exercisable until after the six-month anniversary of the closing of the offering, will have an exercise price of $2.07 per share and will expire on December 29, 2028. Total net proceeds from the offering were approximately $6.6 million, after deducting fees payable to the placement agent and other estimated offering expenses payable by us, excluding the proceeds, if any, from the exercise of the pre-funded warrants and the common warrants. As of December 31, 2022, the 2,632,898 pre-funded warrants and the 4,227,052 common warrants remain outstanding.

On August 3, 2022, we entered into a securities purchase agreement with Lincoln Park Capital Fund, LLC, or LPC, pursuant to which we issued, in a private placement transaction, 3,000 shares of Series A Redeemable Convertible Preferred Stock, par value $0.001 per share, with $100 per share stated value, together with a warrant to purchase up to an aggregate of 81,150 shares of common stock at an exercise price of $4.07 per share (subject to adjustment for stock splits, reverse stock splits and similar recapitalization events), for $0.3 million, and became immediately exercisable and has a term ending on February 3, 2028. Upon the closing of the December 29, 2022 registered direct offering, we modified the previously issued warrant to LPC to reduce the exercise price to $2.07 per share in accordance with the warrant’s down round feature. As of December 31, 2022, this warrant had not been exercised and was still outstanding.

On November 17, 2021, we completed a registered direct offering in which we issued and sold 875,000 shares of our common stock at a price of $16.00 per share and warrants exercisable for an aggregate of 875,000 shares of our common stock at a price of $20.00 per share. The total net proceeds from this offering were approximately $13.9 million. Upon the closing of the December 29, 2022 registered direct offering, we agreed to amend a previously issued warrant held by the Purchaser to purchase up to 750,000 shares of common stock in this November 17, 2021 registered direct offering to reduce the exercise price to $2.07 per share and to extend the expiration date to December 29, 2028. The remaining warrants issued in the November 17, 2021 registered direct offering for 125,000 shares of our common stock are currently exercisable at a price of $20.00 per share and expire on November 15, 2026. All of the warrants exercisable for a total of 875,000 shares of our common stock issued in connection with this registered direct offering remain outstanding at December 31, 2022.

On January 22, 2021, we completed an underwritten public offering in which we issued and sold 725,000 shares of our common stock to the underwriter at a price of $35.25 per share. On January 27, 2021, the underwriters exercised their option in full and purchased an additional 108,750 shares at a price of $35.25 per share. The total net proceeds from this offering of an aggregate 833,750 shares were approximately $28.9 million.

We entered into a Controlled Equity OfferingSM Sales Agreement, or, as amended, the ATM Agreement, with Cantor Fitzgerald & Co., or Cantor, as agent, pursuant to which we may offer and sell, from time to time through Cantor, shares of our common stock. During the year ended December 31, 2022, we issued and sold approximately 0.1 million shares of common stock pursuant to the ATM Agreement and received net proceeds of $0.5 million, after deducting fees and expenses. During the year ended December 31, 2021, we had issued and sold an aggregate of approximately 0.2 million shares of common stock pursuant to the ATM Agreement, for which we had received net proceeds of approximately $7.5 million, after deducting fees and expenses. As of December 31, 2022, we had the ability to sell approximately $35.6 million of our common stock under the ATM Agreement.

On May 30, 2019, we entered into the Loan Agreement with Oxford. Under the Loan Agreement, we borrowed an aggregate principal amount of $25.0 million under a term loan. After deducting all loan initiation costs and outstanding interest on the prior loan agreement with Hercules, we received $15.9 million in net proceeds. As of December 31, 2022, the outstanding balance under the Loan Agreement was $5.4 million. For more information, see Note 9, “Long-Term Debt” to the consolidated financial statements in this Annual Report on Form 10-K for additional information.

Our cash and investment balances are held in a variety of interest-bearing instruments, including obligations of commercial paper, corporate debt securities, U.S. government sponsored enterprise debt securities and money market funds. Cash in excess of immediate requirements is invested with a view toward capital preservation and liquidity. We do not expect COVID-19 to have a material impact on our high quality, short-dated investments.

Cash Flows

Years Ended December 31,

Net cash used in operating activities $ (28,331 ) $ (30,002 )

Net cash provided by/(used in) investing activities 36,450 (26,123 )

Net cash (used in)/provided by financing activities (507 ) 41,514

Cash Flows from Operating Activities

The primary use of cash for our operating activities during these periods was to fund commercial activities for DSUVIA. Our cash used in 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 income (expense) related to the sale of future royalties and interest expense related to our debt financings.

Cash used in operating activities of $28.3 million during the year ended December 31, 2022, reflected net income of $47.8 million, offset by aggregate non-cash items of $74.7 million and an approximate $1.4 million net change in our operating assets and liabilities. Non-cash inflows included an $84.2 million gain on the termination of the Royalty Monetization, partially offset by a $4.9 million charge for the impairment of Zalviso-related property and equipment, $2.9 million in stock-based compensation expense and $1.7 million in depreciation and amortization expense. The net change in our operating assets and liabilities included a $1.6 million decrease in accrued liabilities.

Cash used in operating activities of $30.0 million during the year ended December 31, 2021, reflected a net loss of $35.1 million, partially offset by aggregate non-cash charges of $4.9 million and included an approximate $0.2 million net change in our operating assets and liabilities. Non-cash charges included $4.6 million for stock-based compensation expense, $3.0 million in non-cash interest income on the liability related to the Royalty Monetization, and $2.0 million in depreciation and amortization expense. The net change in our operating assets and liabilities included a $1.2 million increase in deferred revenue and a $0.9 million increase in prepaid expenses and other assets.

Cash Flows from Investing Activities

Our investing activities have consisted primarily of our capital expenditures and purchases and sales and maturities of our available-for-sale investments.

During the year ended December 31, 2022, cash provided by investing activities of $36.5 million was primarily the net result $46.4 million in proceeds from maturity of investments partially offset by $7.9 million for purchases of investments and $1.7 million in cash paid for the Lowell asset acquisition, net of cash acquired.

During the year ended December 31, 2021, cash used in investing activities of $26.1 million was primarily the net result of $70.5 million for purchases of investments, $1.8 million for purchases of property and equipment, and $0.8 million in asset acquisition costs related to our acquisition of Lowell, partially offset by $47.0 million in proceeds from the sale and maturity of investments.

Cash Flows from Financing Activities

Cash flows from financing activities primarily reflect proceeds from the sale of our securities and payments made on debt financings.

During the year ended December 31, 2022, cash used in financing activities of $0.5 million was primarily due to $8.4 million in long-term debt payments, including $8.3 million under the Loan Agreement with Oxford, partially offset by $7.9 million in net proceeds received in connection with equity financings.

During the year ended December 31, 2021, cash provided by financing activities of $41.5 million was primarily due to $50.3 million in net proceeds received in connection with equity financings, including the issuance of warrants and shares sold under our ATM Agreement, partially offset by $8.8 million used for payment of long-term debt.

Capital Commitments and Capital Resources

Our current operating plan includes expenditures related to the development of our product candidates. In addition, on January 7, 2022, we acquired Lowell in a transaction for consideration of approximately $32.5 million plus net cash acquired and certain other adjustments, inclusive of approximately $26.0 million of contingent consideration payable in cash or stock at AcelRx’s option, upon the achievement of regulatory and sales-based milestones. For additional information regarding the acquisition of Lowell, see Note 4, “Asset Acquisition” to the consolidated financial statements in this Annual Report on Form 10-K for additional information. Our operating plan includes anticipated activities required for the development and supply of our nafamostat product candidates, and the preparation and submission of the NDAs for our two in-licensed PFS product candidates from Aguettant. These assumptions may change as a result of many factors. We will continue to evaluate the work necessary to gain approval of our product candidates in the United States and intend to update our cash forecasts accordingly. Considering our current cash resources and current and expected levels of operating expenses for the next twelve months, we expect to need additional capital to fund our planned operations for at least the next twelve months.

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

• the ability to retain the listing of our common stock on the Nasdaq exchange;

• delays that may be caused by changing regulatory requirements;

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

• the expenses associated with litigation.

In the long-term, our existing capital resources will not be sufficient to fund our operations until such time as we may be able to generate sufficient revenues to sustain our operations. 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 sustain our operations and continue our development programs.

Please see “Part II., Item 1A. Risk Factors—Risks Related to Our Financial Condition and Need for Additional Capital.”

We have material cash requirements and other contractual obligations related to our Loan Agreement with Oxford (as described in Note 9, “Long-Term Debt”), contract manufacturing services and office rent (as described in Note 10, “Leases” to the consolidated financial statements in this Annual Report on Form 10-K).

Item7A. Quantitative and Qualitative Disclosures about Market Risk

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are not required to provide the information specified under this item.

Item8. Financial Statements and Supplementary Data

The financial statements required by this item are attached to this Form 10-K beginning with page F-1.

Item9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item9A. Controls and Procedures

We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a–15(e) and 15d-15(e)) 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 SEC’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

We have carried out an evaluation, under the supervision, and with the participation, of management including our principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e)) of the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this Annual Report on Form 10–K. Based on the evaluation of our disclosure controls and procedures as of December 31, 2022, our chief executive officer and principal financial officer have concluded that our disclosure controls and procedures were not effective to ensure that the information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, due to the material weakness in our internal control over financial reporting described below.

Management’s Annual Report on Internal Control over Financial Reporting

The following report is provided by management in respect of AcelRx Pharmaceuticals’ internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act):

Management has concluded that there is a material weakness in the review procedures related to the technical accounting review and analysis over earnings per share calculations that were insufficient to prevent or detect errors in the calculation. Specifically, the error was due to management’s failure to identify warrants issued in November 2021 as participating securities and consequently attribute earnings to these securities as part of a two-class EPS calculation. This material weakness resulted in the restatement of our unaudited condensed consolidated financial statements for the quarterly periods ended June 30, 2022 and September 30, 2022. Additionally, this material weakness could result in a misstatement of the calculation of earnings per share and related disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. As a result, our previously issued unaudited condensed consolidated financial statements for the quarterly periods ended June 30, 2022 and September 30, 2022 have been restated. Based on this assessment, management believes that our internal control over financial reporting was not effective as of December 31, 2022.

This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to the rules of the Securities and Exchange Commission applicable to smaller reporting companies that permit us to provide only management’s report in this Annual Report.

Changes in Internal Control over Financial Reporting

Except for the material weakness noted above, there has been no change in the Company's internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) that occurred during the quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Remediation Plan for Material Weakness

Management has actively initiated remediation efforts to address the material weakness. Specifically, we have enhanced our processes to identify and appropriately apply applicable accounting requirements related to the earnings per share calculation to better evaluate and understand the nuances of the complex accounting standards that apply to our financial statements. Our plans at this time include to continue to provide access to accounting literature, research materials and documents, enhance the review and analysis process around the earnings per share calculation and increase communications among our personnel and third-party professionals with whom we consult regarding complex accounting applications. The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects.

Limitations on the Effectiveness of Controls.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within an organization have been detected. Accordingly, our disclosure controls and procedures and our internal control over financial reporting are designed to provide reasonable, not absolute, assurance that the objectives of the control system are met. We continue to implement, improve and refine our disclosure controls and procedures and our internal control over financial reporting.

Item9B. Other Information

In connection with the Company’s year-end financial statement close and preparation of its Annual Report on Form 10-K for the year ended December 31, 2022, an error in the earnings per share calculations was identified in the interim financial statements (the “Prior Period Financial Statements”) for the three and six months ended June 30, 2022 and nine months ended September 30, 2022 (the “Interim Periods”). The error in the earnings per share calculation was due to the Company not properly applying the two-class method of calculating earnings per share with respect to, or disclose that, the warrants issued in November 2021 are participating securities. The financial statements for the year ended December 31, 2021 and the three months ended March 31, 2022, did not require the application of the two-class method of calculating earnings per share, and therefore were not impacted by the issuance of the warrants in November 2021.

The error has no impact on the Company’s cash balance, liquidity, revenues, operating expenses, or total net income. Further, there is no impact to the Company’s balance sheet accounts or cash flows.

On March 30, 2023, the Company’s management and the Audit Committee of the Company, in discussion with the Company’s independent registered accounting firm, WithumSmith+Brown PC, determined that the Company’s Prior Period Financial Statements for the Interim Periods, should no longer be relied upon because of the error in the earnings per share calculations. The Company’s management and the Audit Committee concluded that it is appropriate to restate the Prior Period Financial Statements for the Interim Periods noted above.

Item9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

Not applicable.

PART III

Item10. Directors, Executive Officers and Corporate Governance

Information regarding our directors and executive officers set forth under the headings “Proposal No.1—Election of Directors,” “Information Regarding the Board of Directors and Corporate Governance,” and “Executive Officers of the Registrant” of the 2023 Proxy Statement is incorporated herein by reference.

Information regarding our Audit Committee, including the members of our Audit Committee, set forth under the heading “Information Regarding the Board of Directors and Corporate Governance—Audit Committee” of the 2023 Proxy Statement is incorporated herein by reference.

Information regarding the procedures by which our shareholders may recommend nominees to our Board of Directors set forth under the heading “Information Regarding the Board of Directors and Corporate Governance—Nominating and Corporate Governance Committee” of the 2023 Proxy Statement is incorporated herein by reference.

Information regarding our Code of Business Conduct and Ethics set forth under the heading “Information Regarding the Board of Directors and Corporate Governance—Code of Business Conduct and Ethics” of the 2023 Proxy Statement is incorporated herein by reference.

Item11. Executive Compensation

Information regarding executive compensation and director compensation set forth under the headings “Executive Compensation” and “Director Compensation,” respectively, of the 2023 Proxy Statement is incorporated herein by reference.

Item12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information contained in the sections captioned “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” of the 2023 Proxy Statement is incorporated herein by reference.

Item13. Certain Relationships and Related Transactions and Director Independence

Information contained in the section captioned “Related Person Transactions and Indemnification” of the 2023 Proxy Statement is incorporated herein by reference.

Information regarding director independence set forth under the heading “Information Regarding the Board of Directors and Corporate Governance” of the 2023 Proxy Statement is incorporated herein by reference.

Item14. Principal Accounting Fees and Services

Information regarding our independent auditor fees and services in the section captioned “Proposal No. 2—Ratification of Selection of Independent Registered Public Accounting Firm” of the 2023 Proxy Statement is incorporated herein by reference.

PART IV

Item15. Exhibits and Financial Statement Schedules

(a) The following documents are filed as part of this Form 10-K:

1. Financial Statements:

See Index to Financial Statements in Item 8 of this Form 10-K.

2. Financial Statement Schedules:

Reference is made to the financial statement schedules included under Item 8 of Part II hereof. All other schedules are omitted because they are not applicable, not required or the information is shown in the financial statements or the notes thereto.

(b) Exhibits

Incorporation By Reference

Exhibit Number Exhibit Description Form SEC File No. Exhibit Filing Date

4.2 Reference is made to Exhibits 3.1 through 3.3.

Incorporation By Reference

Exhibit Number Exhibit Description Form SEC File No. Exhibit Filing Date

Incorporation By Reference

Exhibit Number Exhibit Description Form SEC File No. Exhibit Filing Date

Incorporation By Reference

Exhibit Number Exhibit Description Form SEC File No. Exhibit Filing Date

24.1 Power of Attorney (included in signature page).

101.SCH Inline XBRL Taxonomy Schema Document

101.CAL Inline XBRL Taxonomy Calculation Linkbase Document

101.DEF Inline XBRL Taxonomy Definition Linkbase Document

101.LAB Inline XBRL Taxonomy Label Linkbase Document

101.PRE Inline XBRL Taxonomy Presentation Linkbase Document

+ Indicates management contract or compensatory plan.

Item16. Form 10-K Summary

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: March 31, 2023 AcelRx Pharmaceuticals, Inc.

(Registrant)

/s/ Vincent J. Angotti

/s/ Raffi Asadorian

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Vincent J. Angotti and Raffi Asadorian, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution for him or her, and in his or her name in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and any of them, his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

Signature Title Date

/s/ Vincent J. Angotti Chief Executive Officer and Director March 31, 2023

Vincent J. Angotti (Principal Executive Officer)

/s/ Raffi Asadorian Chief Financial Officer March 31, 2023

Raffi Asadorian (Principal Financial and Accounting Officer)

/s/ Adrian Adams Chairman March 31, 2023

Adrian Adams

/s/ Richard Afable, M.D. Director March 31, 2023

Richard Afable, M.D.

/s/ Marina Bozilenko Director March 31, 2023

Marina Bozilenko

/s/ Jill Broadfoot Director March 31, 2023

Jill Broadfoot

/s/ Stephen J. Hoffman, Ph.D., M.D. Director March 31, 2023

Stephen J. Hoffman, Ph.D., M.D.

/s/ Pamela P. Palmer, M.D., Ph.D. Director March 31, 2023

Pamela P. Palmer, M.D., Ph.D.

/s/ Howard B. Rosen Director March 31, 2023

Howard B. Rosen

/s/ Mark Wan Director March 31, 2023

Mark Wan

ACELRX PHARMACEUTICALS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Consolidated Balance Sheets at December 31, 2022 and 2021 F-4

Notes to Consolidated Financial Statements F-8

Financial Statement Schedule II F-52

F-1

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of

AcelRx Pharmaceuticals, Inc.

Hayward, California

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of AcelRx Pharmaceuticals, Inc. (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations, changes in redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the two years in the period ended December 31, 2022, and the related notes and schedule II (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring operating losses and negative cash flows from operating activities since inception, and expects to continue incurring operating losses and negative cash flows in the future. These matters raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Emphasis of the Matter – Restatement of Unaudited Interim Financial Statements

As disclosed in Note 21 of the consolidated financial statements, the unaudited interim financial statements as of and for the periods ended June 30, 2022 and September 30, 2022 have been restated to correct an error within the earnings per share calculation.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

F-2

Product Revenue Allowances for Chargebacks, Government Rebates and Product Returns

Description of the Matter

As described in Note 1 to the consolidated financial statements, revenue from product sales is recognized net of estimates for variable consideration consisting of chargebacks, government rebates, returns, distribution fees, GPO fees and product returns. This variable consideration is recorded in the same period that the related revenue is recognized and creates variability for the consideration that the Company expects to receive. Liabilities related to government rebates and rebate programs of managed healthcare organizations involve the use of significant assumptions and judgments that include consideration of legal interpretations of applicable laws and regulations, historical claims experience, the payer channel mix, current contract prices, unbilled claims, claims submission time lags, and inventory levels in the distribution channel. Estimates for product returns consider existing return policies with customers, historical sales and return rates, inventory levels in the distribution channel, and product shelf lives.

Management’s estimated allowance for chargebacks, government rebates, and product returns requires a high degree of judgment and is subject to change based on various quantitative and qualitative factors. Accordingly, extensive audit effort and a high degree of auditor judgment were needed to evaluate management’s estimates and assumptions used in the determination of chargebacks, government rebates, and product returns.

How We Addressed the Matter in Our Audit

We obtained an understanding of and evaluated the design of controls relating to the Company’s processes for estimating chargebacks, government rebates, and product returns.

We evaluated the significant accounting policies relating to chargebacks, government rebates, and product returns, as well as management’s application of the policies, for appropriateness and reasonableness.

To test management’s estimates of chargebacks, rebates and returns, we obtained management’s calculations for the respective estimates and performed one or more of the following procedures: clerically tested the calculation, agreed relevant inputs to the terms of relevant contracts, performed retrospective reviews, performed a sensitivity analysis on the inputs and assumptions used in the estimates and assessed subsequent events, evaluated the methodologies and assumptions used and the underlying data used by the Company, evaluated the assumptions used by management against historical trends, evaluated the change in estimated accruals from the prior periods, and assessed the historical accuracy of the Company’s estimates against actual results.

/s/ WithumSmith+Brown, PC

We have served as the Company's auditor since 2015.

San Francisco, California

March 31, 2023

PCAOB ID Number 100

F-3

AcelRx Pharmaceuticals, Inc.

Consolidated Balance Sheets

(in thousands, except share data)

Assets

Current Assets:

Restricted cash 5,000 —

Accounts receivable, net 309 160

Prepaid expenses and other current assets 2,309 2,588

Operating lease right-of-use assets 3,595 4,302

In-process research and development asset 8,819 —

Restricted cash, net of current portion — 5,000

Liabilities and Stockholders’ Equity (Deficit)

Current Liabilities:

Accrued and other liabilities 4,266 6,524

Long-term debt, current portion 5,763 8,796

Operating lease liabilities, current portion 1,701 1,068

Long-term debt, net of current portion — 5,007

Deferred revenue, net of current portion 1,036 1,151

Operating lease liabilities, net of current portion 2,959 3,750

Warrant liability 7,098 —

Liability related to the sale of future royalties — 85,288

Other long-term liabilities 810 81

Commitments and Contingencies

Stockholders’ Equity (Deficit)*:

Total stockholders’ equity (deficit) 21,814 (35,893 )

Total Liabilities and Stockholders’ Equity (Deficit) $ 47,487 $ 77,893

* Adjusted to give retroactive effect to a 1-for-20 reverse stock split effective as of 5:01 p.m. Eastern Time on October 25, 2022.

See notes to consolidated financial statements.

F-4

AcelRx Pharmaceuticals, Inc.

Consolidated Statements of Operations

(in thousands, except share and per share data)

Year Ended December 31,

Revenue:

Contract and other collaboration — 1,813

Operating costs and expenses:

Impairment of property and equipment 4,948 —

Other income:

Interest income and other income, net 366 124

Net income (loss) before provision for income taxes 47,768 (35,094 )

Provision for income taxes 13 5

Income allocated to participating securities (5,240 ) —

Net income (loss) per share of common stock, basic $ 5.73 $ (5.86 )

Net income (loss) per share of common stock, diluted $ 5.72 $ (5.86 )

See notes to consolidated financial statements.

F-5

AcelRx Pharmaceuticals, Inc.

Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(in thousands, except share data)

1-for-20 reverse stock split reflected for all years presented

Shares Amount Shares Amount

Stock-based compensation — — — — 4,609 — 4,609

Issuance of common stock upon exercise of stock options — — 969 — 17 — 17

Issuance of common stock upon ESPP purchase — — 14,897 — 301 — 301

Stock-based compensation — — — — 2,889 — 2,889

Modification of equity-classified warrants — — — — 822 — 822

Issuance of common stock upon ESPP purchase — — 10,941 — 74 — 74

See notes to consolidated financial statements.

F-6

AcelRx Pharmaceuticals, Inc.

Consolidated Statements of Cash Flows

(in thousands)

Year Ended December 31,

CASH FLOWS FROM OPERATING ACTIVITIES:

Non-cash royalty revenue related to royalty monetization — (83 )

Depreciation and amortization 1,647 1,973

Non-cash interest expense related to debt financing 393 761

Non-cash issuance costs for warrant liability 775 —

Impairment of property and equipment 4,948 —

Inventory impairment charge — 810

Changes in operating assets and liabilities:

Prepaid expenses and other assets 299 (908 )

Accrued liabilities (1,613 ) 79

Operating lease liabilities (285 ) (447 )

Net cash used in operating activities (28,331 ) (30,002 )

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of property and equipment (364 ) (1,827 )

Cash paid for asset acquisition, net of cash acquired (1,687 ) (821 )

Proceeds from sale of investments — 2,996

Proceeds from maturities of investments 46,362 43,988

Net cash provided by (used in) investing activities 36,450 (26,123 )

CASH FLOWS FROM FINANCING ACTIVITIES:

Payment of long-term debt (8,433 ) (8,833 )

Redemption of Series A Redeemable Convertible Preferred Stock (315 ) —

Net proceeds from issuance of common stock through equity plans 74 318

Net cash (used in) provided by financing activities (507 ) 41,514

CASH, CASH EQUIVALENTS AND RESTRICTED CASH —Beginning of year 12,663 27,274

CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of year $ 20,275 $ 12,663

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid for interest $ 824 $ 1,595

Income taxes paid $ 13 $ 5

NONCASH INVESTING AND FINANCING ACTIVITIES:

Equity issuance costs in accounts payable and accrued expenses $ 51 $ —

Issuance of common stock in connection with asset acquisition $ 5,511 $ —

Asset acquisition costs in accounts payable and accrued expenses $ — $ 1,087

Establishment of right-of-use asset and lease liability $ 127 $ 4,669

Write-off of right-of-use asset and lease liability $ — $ (3,128 )

Gain on termination of sublease $ — $ 522

See notes to consolidated financial statements.

F-7

AcelRx Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements

(In thousands, except where otherwise noted)

1. Organization and Summary of Significant Accounting Policies

The Company

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

AcelRx is a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for use in medically supervised settings. DSUVIA®(known as DZUVEO® in Europe) is focused on the treatment of acute pain, and utilizes 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 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. The commercial launch of DSUVIA in the United States occurred in the first quarter of 2019. In June 2018, the European Commission, or EC, granted marketing approval of DZUVEO for the management of acute moderate to severe pain in adults in medically monitored settings. Zalviso was approved in Europe and was commercialized by Grünenthal GmbH, or Grünenthal, through May 12, 2021 (see Termination of Grünenthal Agreements below). In July 2022, the European Marketing Authorization for Zalviso was withdrawn.

On March 12, 2023, the Company entered into an asset purchase agreement, or the DSUVIA Agreement, with Vertical Pharmaceuticals, LLC, a wholly owned subsidiary of Alora Pharmaceuticals, LLC, or together Alora, pursuant to which Alora will acquire certain assets and assume certain liabilities relating to DSUVIA or DZUVEO, or any other single-dose pharmaceutical product for use in medically supervised settings containing a sublingual tablet that includes sufentanil as the sole active ingredient, as a 30 mcg tablet or other dosage form or strength as reasonably necessary for lifecycle management, or the Product. See Note 20, “Subsequent Events” below.

In July 2021, the Company entered into a License and Commercialization Agreement with Laboratoire Aguettant, or Aguettant, for Aguettant to commercialize DZUVEO in the European Union, Norway, Iceland, Liechtenstein, Andorra, Vatican City, Monaco, Switzerland and the United Kingdom, or the DZUVEO Agreement. See Note 20, “Subsequent Events” below.

In July 2021, the Company also entered into a separate License and Commercialization Agreement with Aguettant, or the PFS Agreement, pursuant to which the Company obtained the exclusive right to develop and, subject to FDA approval, commercialize in the United States (i) an ephedrine pre-filled syringe containing 10 ml of a solution of 3 mg/ml ephedrine hydrochloride for injection, and (ii) a phenylephrine pre-filled syringe containing 10 ml of a solution of 50 mcg/ml phenylephrine hydrochloride for injection. Aguettant will supply the Company with the products for use in commercialization and, if they are approved in the U.S., Aguettant is entitled to receive up to $24 million in sales-based milestone payments. See Note 20, “Subsequent Events” below.

On January 7, 2022, the Company acquired Lowell Therapeutics, Inc., or Lowell, a privately held company (see Note 4, “Asset Acquisition” below), and, as a result acquired NiyadTM, a regional anticoagulant for the dialysis circuit during continuous renal replacement therapy, or CRRT, for acute kidney injury, or AKI, patients in the hospital, and for chronic kidney disease patients undergoing intermittent hemodialysis, or IHD, in dialysis centers. The Company plans to study Niyad, which has received Breakthrough Device Designation status from the FDA and an ICD-10 procedural code from the U.S. Centers for Medicare & Medicaid Services, under an investigational device exemption. While not approved for commercial use in the United States, the active drug component of Niyad, nafamostat, has been approved in Japan and South Korea as a regional anticoagulant for the dialysis circuit, disseminated intravascular coagulation, and acute pancreatitis. Niyad is a lyophilized formulation of nafamostat, a broad-spectrum, synthetic serine protease inhibitor, which has a half-life of 8 minutes, with anticoagulant, anti-inflammatory and potential anti-viral activities. In addition, the Company acquired LTX-608, a proprietary nafamostat formulation for direct IV infusion that it intends to develop for the treatment of acute respiratory distress syndrome, or ARDS, and disseminated intravascular coagulation, or DIC.

F-

Termination of Grünenthal Agreements

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 granted Grünenthal rights to commercialize Zalviso in Europe. In September 2015, the European Commission granted marketing approval for the marketing authorization application, or MAA, 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 Manufacture and Supply Agreement, or the MSA, which was amended effective July 15, 2015, or the Amended MSA, and together with the Amended License Agreement, the Grünenthal Agreements. Under the Amended MSA, the Company exclusively manufactured and supplied Zalviso for Grünenthal’s European sales.

On May 18, 2020, the Company received a notice from Grünenthal that it had exercised its right to terminate the Grünenthal Agreements, effective November 13, 2020. The terms of the Grünenthal Agreements were extended to May 12, 2021 to enable Grünenthal to sell down its Zalviso inventory, a right it had under the Grünenthal Agreements. The rights to market and sell Zalviso in the Zalviso Territory reverted back to the Company on May 12, 2021. In July 2022, the European Marketing Authorization for Zalviso was withdrawn.

Termination of Royalty Monetization

On September 18, 2015, the Company sold the majority of the royalty rights and certain commercial sales milestones it was 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. On August 31, 2020, PDL announced it sold its royalty interest for Zalviso to SWK Funding, LLC, or SWK. On May 31, 2022, the Company entered into a Termination Agreement with SWK to fully terminate the Royalty Monetization for which the Company paid cash consideration of $0.1 million. Neither PDL nor SWK retains any further interest in the Royalty Monetization. Accordingly, effective May 31, 2022, the Royalty Monetization is no longer reflected on the Company’s consolidated financial statements or other records as a sale of assets to PDL or SWK, and all security interests and other liens of every type held by the parties to the Royalty Monetization have been terminated and automatically released without further action by any party. The $84.1 million gain on extinguishment of the liability related to the sale of future royalties is recognized in the consolidated statements of operations as other income.

Liquidity and Going Concern

The consolidated financial statements for the year ended December 31, 2022 were prepared on the basis of a going concern, which contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of business. The termination of the Royalty Monetization resulted in net income for the year ended December 31, 2022; however, before this, the Company had incurred recurring operating losses and negative cash flows from operating activities since inception and expects to continue to incur operating losses and negative cash flows in the future. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Considering the Company’s current cash resources and its current and expected levels of operating expenses for the next twelve months, management expects to need additional capital to fund its planned operations prior to the 12 month anniversary of the date this Annual Report on Form 10-K is filed with the United States Securities and Exchange Commission, or the SEC. Management may seek to raise such additional capital through public or private equity offerings, including under the Controlled Equity OfferingSM Sales Agreement, or the ATM Agreement, with Cantor Fitzgerald & Co., or Cantor, debt securities, monetize or securitize certain assets, refinance its loan agreement, enter into product development, license or distribution agreements with third parties, or divest DSUVIA in the United States, DZUVEO in Europe, or any of the Company’s product candidates. While management believes its plans to raise additional funds will alleviate the conditions that raise substantial doubt about the Company’s ability to continue as a going concern, these plans are not entirely within the Company’s control and cannot be assessed as being probable of occurring. Additional funds may not be available when the Company needs them on terms that are acceptable to the Company, or at all. If adequate funds are not available, the Company may be required to further reduce its workforce, reduce the scope of, or cease, the commercial launch of DSUVIA, or delay the development of its regulatory filing plans for its product candidates in advance of the date on which the Company’s cash resources are exhausted to ensure that the Company has sufficient capital to meet its obligations and continue on a path designed to preserve stockholder value. In addition, if additional funds are raised through collaborations, strategic alliances or licensing arrangements with third parties, the Company may have to relinquish rights to its technologies, future revenue streams or product candidates, or to grant licenses on terms that may not be favorable to the Company.

F-

Reverse Stock Split

On September 23, 2022, at a special meeting of stockholders, the Company's stockholders authorized the Company’s Board of Directors to effect a reverse stock split of all outstanding shares of common stock in a range of 1-for-10 to 1-for-30. The Board of Directors subsequently approved a reverse stock split with a ratio of 1-for-20, or the Reverse Stock Split. On October 25, 2022, following the filing of a certificate of amendment to the Company’s amended and restated certificate of incorporation, every 20 shares of the Company's common stock that were issued and outstanding automatically converted into one outstanding share of common stock. The Reverse Stock Split affected all shares of common stock outstanding immediately prior to the effective time of the Reverse Stock Split, as well as the number of shares of common stock available for issuance under the Company's equity incentive and employee stock purchase plans. Outstanding stock options, restricted stock units and warrants were proportionately reduced and the respective exercise prices, if applicable, were proportionately increased. The Reverse Stock Split affected all holders of common stock uniformly and did not affect any stockholder's percentage of ownership interest. The par value of the Company's common stock remained unchanged at $0.001 per share and the number of authorized shares of common stock remained the same after the Reverse Stock Split.

As the par value per share of the Company's common stock remained unchanged at $0.001 per share, the change in the common stock recorded at par value has been reclassified to additional paid-in capital on a retroactive basis. All references to shares of common stock, stock options, restricted stock units and warrants and per share data for all periods presented in the accompanying consolidated financial statements and notes thereto have been adjusted to reflect the Reverse Stock Split on a retroactive basis.

Basis of Presentation

The preparation of financial statements in conformity with accounting principles generally accepted in the United States, or GAAP, requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.

Reclassifications

Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the current year's presentation. In particular, the restricted cash classified as “Cash and cash equivalents” has been reclassified to “Restricted cash, net of current portion” in the consolidated balance sheets as of December 31, 2021 and in the consolidated statement of cash flows as of December 31, 2022 and December 31, 2021. See “—Cash, Cash Equivalents and Restricted Cash” below.

F-

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes its most significant accounting estimates relate to revenue recognition, inventory valuation and the liability related to the sale of future royalties. 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.

Cash, Cash Equivalents, Restricted Cash and Short-Term Investments

The Company considers all highly liquid investments with an original maturity (at date of purchase) of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks.

On May 30, 2019, the Company entered into a Loan Agreement with Oxford Finance LLC, or Oxford, or the Lender. The Loan Agreement requires that the Company always maintain unrestricted cash of not less than $5.0 million in accounts subject to control agreements in favor of the Lender, tested monthly as of the last day of the month. The Company has classified these unrestricted funds as restricted cash on the consolidated balance sheets.

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

Balance as of

Restricted cash 5,000 —

Restricted cash, net of current portion — 5,000

Total cash, cash equivalents, and restricted cash $ 20,275 $ 12,663

All marketable securities are classified as available for sale and consist of commercial paper, U.S. government sponsored enterprise debt securities and corporate debt securities. These securities are carried at estimated fair value, which is based on quoted market prices or observable market inputs of almost identical assets, with unrealized gains and losses included in accumulated other comprehensive income (loss). The amortized cost of securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in interest income or expense. The cost of securities sold is based on specific identification. The Company’s investments are subject to a periodic impairment review for other-than-temporary declines in fair value. The Company’s review includes the consideration of the cause of the impairment including the creditworthiness of the security issuers, the number of securities in an unrealized loss position, the severity and duration of the unrealized losses and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in the market value. When the Company determines that the decline in fair value of an investment is below its accounting basis and this decline is other than temporary, it reduces the carrying value of the security it holds and records a loss in the amount of such decline.

F-

Fair Value of Financial Instruments

The Company measures and reports its cash equivalents, investments and financial liabilities at fair value. Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:

Level I—Unadjusted quoted prices in active markets for identical assets or liabilities;

Level II—Inputs other than quoted prices included within Level I that are observable, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level III—Unobservable inputs that are supported by little or no market activity for the related assets or liabilities.

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Segment Information

The Company operates in a single segment, the development and commercialization of innovative therapies for use in medically supervised settings. The Company’s product sales revenue consists of sales of DSUVIA in the United States, DZUVEO in Europe by Aguettant, and, through May 2021, sales of Zalviso in Europe by Grünenthal. The Company’s contract and collaboration revenue consists of non-cash royalty revenue, royalty revenue, and other revenue under the Grünenthal Agreements and license revenue under the DZUVEO Agreement. See Note 8, “Revenue from Contracts with Customers” below.

Concentration of Risk

The Company invests cash that is currently not being used for operational purposes in accordance with its investment policy in debt securities of U.S. government sponsored agencies, commercial paper and overnight deposits. The Company is exposed to credit risk in the event of default by the institutions holding the cash equivalents and available-for-sale securities to the extent recorded on the consolidated balance sheets. The Company has significant cash balances at financial institutions which throughout the year regularly exceed the federally insured limit of $250,000. Any loss incurred or a lack of access to such funds could have a significant adverse impact on the Company's financial condition, results of operations, and cash flows.

The Company relies on a single third-party supplier for the supply of sufentanil, the active pharmaceutical ingredient in DSUVIA and various sole-source third-party contract manufacturer organizations to manufacture the DSUVIA single-dose applicator, or SDA.

DSUVIA sales are concentrated with the DoD and with a limited number of wholesalers in the United States. Zalviso was sold in Europe by Grünenthal through May 2021. In July 2021, Aguettant was granted an exclusive license to commercialize DZUVEO in Europe. DZUVEO sales in Europe by Aguettant have recently commenced.

Revenue and accounts receivable have been concentrated with these customers.

F-

Revenues from customers that accounted for 10% or more of the Company’s total revenues during the years ended December 31, 2022 and 2021 were as follows:

Year Ended December 31,

Grünenthal 0 % 12 %

Wholesaler A 25 % 16 %

Wholesaler B 12 % 8 %

Distributor A 28 % 5 %

Distributor B 12 % 2 %

Accounts Receivable, Net

The need for a bad debt allowance is evaluated each reporting period based on the Company’s assessment of the creditworthiness of its customers or any other potential circumstances that could result in bad debt.

The Company believes that the entire accounts receivable balance as of December 31, 2022 is collectible, and there was no bad debt allowance provided as of December 31, 2022 or 2021.

Accounts receivable, net from customers that accounted for 10% or more of the Company’s total accounts receivable balance as of December 31, 2022 and 2021 were as follows:

As of December 31,

Percent of Accounts Receivable, Net 2022 2021

Customer A 58 % 0 %

Customer C 15 % 9 %

Inventories, Net

The Company's policy is to write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of expected requirements. The Company periodically evaluates the carrying value of inventory on hand for potential excess amount over demand using the same lower of cost or net realizable value approach as that used to value the inventory.

Property and Equipment, Net

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, generally three to five years. Leasehold improvements are amortized over the shorter of the estimated useful life of the improvements or the remaining lease term. Expenditures for repairs and maintenance, which do not extend the useful life of the property and equipment, are expensed as incurred. Upon retirement, the asset cost and related accumulated depreciation are relieved from the accompanying consolidated balance sheets. Gains and losses associated with dispositions are reflected as a component of interest income and other income, net in the accompanying consolidated statements of operations.

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Impairment of Long-Lived Assets

The Company periodically assesses the impairment of long-lived assets and, if indicators of asset impairment exist, the Company assesses the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through an analysis of the undiscounted future expected operating cash flows. If impairment is indicated, the Company records the amount of such impairment for the excess of the carrying value of the asset over its estimated fair value. See Note 5, “Property and Equipment, Net” below.

Acquisitions

The Company evaluates acquisitions of assets and other similar transactions to assess whether or not the transaction should be accounted for as a business combination or asset acquisition by first applying a screen test to determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If so, the transaction is accounted for as an asset acquisition. If not, further determination is required as to whether or not the Company has acquired inputs and processes that have the ability to create outputs, which would meet the definition of a business. Significant judgment is required in the application of the screen test to determine whether an acquisition is a business combination or an acquisition of assets.

For asset acquisitions, a cost accumulation model is used to determine the cost of an asset acquisition. Direct transaction costs are recognized as part of the cost of an asset acquisition. The Company also evaluates which elements of a transaction should be accounted for as a part of an asset acquisition and which should be accounted for separately. The cost of an asset acquisition, including transaction costs, is allocated to identifiable assets acquired and liabilities assumed based on a relative fair value basis. Goodwill is not recognized in an asset acquisition. Any difference between the cost of an asset acquisition and the fair value of the net assets acquired is allocated to the non-monetary identifiable assets based on their relative fair values. When a transaction accounted for as an asset acquisition includes an in-process research and development, or IPR&D, asset, the IPR&D asset is only capitalized if it has an alternative future use other than in a particular research and development project. For an IPR&D asset to have an alternative future use (a) the Company must reasonably expect that it will use the asset acquired in the alternative manner and anticipate economic benefit from that alternative use, and (b) the Company’s use of the asset acquired is not contingent on further development of the asset subsequent to the acquisition date (that is, the asset can be used in the alternative manner in the condition in which it existed at the acquisition date). Otherwise, amounts allocated to IPR&D that have no alternative use are expensed. Asset acquisitions may include contingent consideration arrangements that encompass obligations to make future payments to sellers contingent upon the achievement of future financial targets. Contingent consideration is not recognized until all contingencies are resolved and the consideration is paid or probable of payment, at which point the consideration is allocated to the assets acquired on a relative fair value basis.

Leases

The Company follows the provisions of Accounting Standards Update, or ASU, 2016-02,Leases (Topic 842). At the inception of an arrangement, the Company determines whether the arrangement is, or contains, a lease based on the unique facts and circumstances present. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes its incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.

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Lease expense is recognized over the expected term on a straight-line basis. Operating leases are recognized on the consolidated balance sheets as operating lease right-of-use assets, operating lease liabilities current and operating lease liabilities non-current.

Revenue from Contracts with Customers

The Company follows the provisions of Accounting Standards Codification, or ASC, Topic 606,Revenue from Contracts with Customers. This guidance provides a unified model to determine how revenue is recognized. The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company sells its products primarily through wholesale and specialty distributors.

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.

Product Sales Revenue

The Company sells its product primarily through distributors. Revenues from product sales are recognized when distributors obtain control of the Company’s product, which occurs at a point in time, upon delivery to such distributors. These distributors subsequently resell the product to certified medically supervised healthcare settings. In addition to distribution agreements with these customers, the Company enters into arrangements with group purchasing organizations, or GPOs, and other certified medically supervised healthcare settings that provide for privately negotiated discounts with respect to the purchase of its products. For revenue recognition under bill-and-hold arrangements, wherein the customer agrees to buy product from the Company but requests delivery at a later date, the Company deems that control passes to the customer when the product is ready for delivery. The Company recognizes revenue under these types of arrangements when a signed agreement is in place, the transaction is billable, the customer has significant risk and rewards for the product and the ability to direct the asset, the product has been set aside specifically for the customer, and the product cannot be redirected to another customer. Revenue from product sales is recorded at the transaction price, net of estimates for variable consideration consisting of chargebacks, government rebates, returns, distribution fees, GPO fees and product returns. Variable consideration is recorded at the time product sales are recognized resulting in a reduction in product revenue. The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Variable consideration is estimated using the most-likely amount method, which is the single-most likely outcome under a contract and is typically at the stated contractual rate. Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted in accordance with the expected value method under ASC Topic 606 for relevant factors. These factors include current contractual and statutory requirements, specific known market events and trends, industry data, and/or forecasted customer buying and payment patterns. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results vary materially from the Company’s estimates, the Company will adjust these estimates, which will affect revenue from product sales and earnings in the period such estimates are adjusted. These estimates include:

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Chargebacks – The Company’s customers subsequently resell its product to qualified healthcare providers. In addition to distribution agreements with customers, the Company enters into arrangements with qualified healthcare providers that provide discounts with respect to the purchase of its product. Chargebacks represent the estimated obligations resulting from contractual commitments to sell product to qualified healthcare providers at prices lower than the list prices charged to customers who directly purchase the product from the Company. Customers charge the Company for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue-related accrued liabilities on the consolidated balance sheets. Chargeback amounts are determined at the time of resale to the qualified healthcare providers by customers, and the Company issues credits for such amounts generally within a few weeks of the customer's notification to the Company of the resale. Reserves for chargebacks consists of credits that the Company expects to issue for units that remain in the distribution channel inventories at each reporting period end that the Company expects will be sold to the qualified healthcare providers, and chargebacks for units that the Company’s customers have sold to the qualified healthcare providers, but for which credits have not been issued.

Government Rebates – The Company is subject to discount obligations under state Medicaid programs. The Company estimates its Medicaid rebates, and reserves are recorded in the same period the related product revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability that is included in accrued liabilities on the consolidated balance sheets.

Returns –The Company allows its distributors to return product for credit 6 months prior to, and up to 12 months after, the product expiration date. As such, there may be a significant period of time between the time the product is shipped and the time the credit is issued on returned product.

Distribution Fees –Distribution fees include fees paid to certain customers for sales order management, data and distribution services. Distribution fees are recorded as a reduction of revenue in the period the related product revenue is recognized.

GPO Fees– The Company pays administrative fees to GPOs for services and access to data. These fees are based on contracted terms and are paid after the quarter in which the product was purchased by the GPOs’ members.

Trade Discounts and Allowances - The Company provides its customers with discounts which include early payment incentives that are explicitly stated in its contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized.

The Company believes its estimated allowances for chargebacks, government rebates and product returns require a high degree of judgment and are subject to change based on its limited experience and certain quantitative and qualitative factors. The Company believes its estimated allowances for distribution fees, GPO fees and trade discounts and allowances do not require a high degree of judgment because the amounts are settled within a relatively short period of time. The Company will continue to assess its estimates of variable consideration as it accumulates additional historical data and will adjust these estimates accordingly. Changes in product revenue allowance estimates could materially affect the Company’s results of operations and financial position.

Contract and Other Collaboration Revenue

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. Product sales related revenue under these collaboration agreements is classified as product sales revenue, while other revenue generated from collaboration agreements is classified as contract and other collaboration revenue.

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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 delivering products to its distributors, commercialization license rights, development services, services associated with the regulatory approval process, joint steering committee services, demonstration 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. Variable consideration for product revenue is described as Net product sales in the consolidated statements of operations. For collaboration agreements, 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 collaboration 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.

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Timing of Recognition

Significant management judgment is required to determine the level of effort required under collaboration arrangements 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.

Cost of Goods Sold

Cost of goods sold for product revenue includes third-party manufacturing costs, shipping and handling costs, and indirect overhead costs associated with production and distribution which are allocated to the appropriate cost pool and recognized when revenue is recognized. Indirect overhead costs in excess of normal capacity are recorded as period costs in the period incurred.

Under the Grünenthal Agreements, the Company sold Zalviso to Grünenthal at predetermined, contractual transfer prices that were less than the direct costs of manufacturing and recognized indirect costs as period costs where they were in excess of normal capacity and not recoverable on a lower of cost or net realizable value basis. Cost of goods sold for Zalviso shipped to Grünenthal included the inventory costs of API, third-party contract manufacturing costs, packaging and distribution costs, shipping, handling and storage costs, depreciation and costs of the employees involved with production.

Research and Development Expenses

Research and development costs are charged to expense when incurred. Research and development expenses include salaries, employee benefits, including stock-based compensation, consultant fees, laboratory supplies, costs associated with clinical trials and manufacturing, including contract research organization fees, other professional services and allocations of corporate costs. The Company reviews and accrues clinical trial expenses based on work performed, which relies on estimates of total costs incurred based on patient enrollment, completion of patient studies and other events.

Stock-Based Compensation

Compensation expense for all stock-based payment awards made to employees and directors, including employee stock options and restricted stock units related to the 2020 Equity Incentive Plan, or 2020 EIP, the 2011 Equity Incentive Plan, or 2011 EIP, and employee share purchases related to the Amended and Restated 2011 Employee Stock Purchase Plan, or ESPP, is based on estimated fair values at grant date. The Company determines the grant date fair value of the awards using the Black-Scholes option-pricing model and generally recognizes the fair value as stock-based compensation expense on a straight-line basis over the vesting period of the respective awards. The Company applies the graded-vesting attribution method to awards with market conditions that include graded-vesting features. Additionally, the Company uses the Monte Carlo Simulation model to evaluate the derived service period and fair value of awards with market conditions, including assumptions of historical volatility and risk-free interest rate commensurate with the vesting term.

The Black-Scholes option pricing model requires inputs such as expected term, expected volatility and risk-free interest rate. These inputs are subjective and generally require significant analysis and judgment to develop. The expected term, which represents the period of time that options granted are expected to be outstanding, is derived by analyzing the historical experience of similar awards, giving consideration to the contractual terms of the stock‐based awards, vesting schedules and expectations of future employee behavior. Expected volatilities are estimated using the historical stock price performance over the expected term of the option, which are adjusted as necessary for any other factors which may reasonably affect the volatility of AcelRx’s stock in the future. The risk‐free interest rate is based on the U.S. Treasury yield in effect at the time of the grant for the expected term of the award. The Company recognizes forfeitures when they occur and does not anticipate paying dividends in the near future.

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Warrants Issued in Connection with Financings

The Company accounts for issued warrants as either liability or equity in accordance with ASC 480-10,Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, or ASC 815-40,Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. Under ASC 480-10, warrants are considered liability if they are mandatorily redeemable and they require settlement in cash or other assets, or a variable number of shares. If warrants do not meet liability classification under ASC 480-10, the Company considers the requirements of ASC 815-40 to determine whether the warrants should be classified as liability or equity. Under ASC 815-40, contracts that may require settlement for cash are liabilities, regardless of the probability of the occurrence of the triggering event. Liability classified warrants are measured at fair value on the issuance date and at the end of each reporting period. Any change in the fair value of the warrants after the issuance date is recorded in the consolidated statements of operations. If warrants do not require liability classification under ASC 815-40, in order to conclude warrants should be classified as equity, the Company assesses whether the warrants are indexed to its common stock and whether the warrants are classified as equity under ASC 815-40 or other applicable GAAP. Equity classified warrants are accounted for at fair value on the issuance date with no changes in fair value recognized after the issuance date.

Restructuring Costs

The Company’s restructuring costs consist of employee termination benefit costs. Liabilities for costs associated with the cost reduction plan are recognized when the liability is incurred and are measured at fair value. One-time termination benefits are expensed at the date the Company notifies the employee, unless the employee must provide future service, in which case the benefits are expensed ratably over the future service period.

In May 2022, the Company initiated a reorganization that eliminated approximately 40% of its employees, primarily within the commercial organization. For the year ended December 31, 2022, the Company incurred approximately $0.5 million in employee termination benefits related to this restructuring, all of which has been paid. This headcount reduction was completed in the second quarter of 2022.No additional expenses are anticipated in connection with this cost reduction plan.

Non-Cash Interest Income (Expense) on Liability Related to Sale of Future Royalties

In September 2015, the Company sold certain royalty and milestone payment rights from the sales of Zalviso in the European Union by Grünenthal to PDL for gross proceeds of $65.0 million. Grünenthal terminated the Grünenthal Agreements effective November 13, 2020. The terms of the Grünenthal Agreements were extended to May 2021 to enable Grünenthal to sell down its Zalviso inventory. The rights to market and sell Zalviso in the Territory reverted back to the Company in May 2021.

Under the Royalty Monetization, the Company had a continuing obligation to use commercially reasonable efforts to negotiate a replacement license agreement, or New Arrangement. Under the relevant accounting guidance, because of the Company’s significant continuing involvement, the Royalty Monetization was accounted for as a liability that is being amortized using the effective interest method over the life of the arrangement. In order to determine the amortization of the liability, the Company was required to estimate the total amount of future royalty and milestone payments to be received by ARPI LLC and payments made to PDL, up to a capped amount of $195.0 million, over the life of the arrangement. The aggregate future estimated royalty and milestone payments (subject to the capped amount), less the $61.2 million of net proceeds the Company received, was to be amortized as interest expense over the life of the liability. Consequently, the Company imputed interest on the unamortized portion of the liability and recorded interest expense, or interest income, as these estimates were updated and recorded non-cash royalty revenues and non-cash interest income (expense), net, within its consolidated statements of operations over the term of the Royalty Monetization.

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When the expected payments under the Royalty Monetization were lower than the gross proceeds of $65.0 million received, the Company deferred recognition of any probable contingent gain until the Royalty Monetization liability expired. See Note 11, “Liability Related to Sale of Future Royalties”.

Comprehensive Loss

Comprehensive loss is comprised of net loss and other comprehensive income (loss) and is disclosed in the consolidated statements of operations. For the Company, other comprehensive income (loss) consists of changes in unrealized gains and losses on the Company’s investments.

Income Taxes

Deferred tax assets and liabilities are measured based on differences between the financial reporting and tax basis of assets and liabilities using enacted rates and laws that are expected to be in effect when the differences are expected to reverse. The Company records a valuation allowance for the full amount of deferred assets, which would otherwise be recorded for tax benefits relating to operating loss and tax credit carryforwards, as realization of such deferred tax assets cannot be determined to be more likely than not.

Net Income (Loss) per Share of Common Stock

Basic and diluted net income (loss) per common share, or EPS, are calculated in accordance with the provisions of Financial Accounting Standards Board, or FASB, ASC Topic 260,Earnings per Share.

The Company applies the two-class method to compute basic and , if more dilutive than other methods, diluted net income or loss per share. The two-class method is an earnings allocation formula that treats participating securities as having rights to earnings that would otherwise have been available to common stockholders (including pre-funded warrants). Shares of common stock into which the pre-funded warrants may be exercised are considered outstanding for the purposes of computing net loss per share because the shares may be issued for little or no consideration and are exercisable after the original issuance date. In addition, the Company is required to calculate diluted net income or loss per share under the two-class method if the effect is more dilutive than the application of another dilutive method of calculating diluted EPS (i.e., the treasury stock, if-converted, or contingently issuable share method). In periods where there is a net loss, no allocation of undistributed net loss to participating securities is performed if the holders of these securities are not contractually obligated to participate in the Company’s losses. The Company’s participating securities include the November 2021 Financing Warrants, 2022 Warrants and the Series A Redeemable Convertible Preferred Stock (see Note 12, “Warrants” and Note 14, “Stockholder’s Equity (Deficit)” below).

For additional information regarding the net income (loss) per share, see Note 16, “Net Income (Loss) per Share of Common Stock”.

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Recently Adopted Accounting Pronouncements

TLPH US Equity

TLPH · 10-K · period ended 2022-12-31

Item7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item7A. Quantitative and Qualitative Disclosures about Market Risk

Item8. Financial Statements and Supplementary Data

Item9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item9A. Controls and Procedures

Item9B. Other Information

Item9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

Item10. Directors, Executive Officers and Corporate Governance

Item11. Executive Compensation

Item12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item13. Certain Relationships and Related Transactions and Director Independence

Item14. Principal Accounting Fees and Services

Item15. Exhibits and Financial Statement Schedules

Item16. Form 10-K Summary

TLPH US Equity☆

TLPH · 10-K · period ended 2022-12-31

Item7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item7A. Quantitative and Qualitative Disclosures about Market Risk

Item8. Financial Statements and Supplementary Data

Item9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item9A. Controls and Procedures

Item9B. Other Information

Item9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

Item10. Directors, Executive Officers and Corporate Governance

Item11. Executive Compensation

Item12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item13. Certain Relationships and Related Transactions and Director Independence

Item14. Principal Accounting Fees and Services

Item15. Exhibits and Financial Statement Schedules

Item16. Form 10-K Summary

TLPH US Equity