SEC Filing | AcelRx Pharmaceuticals, Inc.

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acrx20200630_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2020

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

For the transition period from to

Commission File Number: 001-35068

ACELRX PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

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

351 Galveston Drive

Redwood City, CA 94063

(650) 216-3500

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

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class:	Trading symbol(s)	Name of Each Exchange on Which registered:
Common Stock, $0.001 par value	ACRX	The Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	Smaller reporting company	☒

Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2) Yes ☐ No ☒

As of August 3, 2020, the number of outstanding shares of the registrant’s common stock was 90,324,147.

ACELRX PHARMACEUTICALS, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED June 30, 2020

Table of Contents

		Page
Part I. Financial Information		3

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019 (unaudited)	3

	Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2020 and 2019 (unaudited)	4

	Condensed Consolidated Statements of Stockholders’ (Deficit) Equity for the three and six months ended June 30, 2020 and 2019 (unaudited)	5

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 (unaudited)	6

	Notes to Condensed Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28

Item 4.	Controls and Procedures	28

Part II. OTHER Information		29

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	30

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60

Item 3.	Defaults Upon Senior Securities	60

Item 4.	Mine Safety Disclosures	60

Item 5.	Other Information	60

Item 6.	Exhibits	61

Unless the context indicates otherwise, the terms “AcelRx,” “AcelRx Pharmaceuticals,” “we,” “us” and “our” refer to AcelRx Pharmaceuticals, Inc., and its consolidated subsidiaries. “DZUVEO” is a trademark, and “ACELRX”, “DSUVIA” and “Zalviso” are registered trademarks, all owned by AcelRx Pharmaceuticals, Inc. This report also contains trademarks and trade names that are the property of their respective owners.

Forward-Looking Statements

This Quarterly Report on Form 10-Q, or Form 10-Q, contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the “safe harbor” created by that section. The forward-looking statements in this Form 10-Q are contained principally under “Part I. Financial Information - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II. Other Information - Item 1A. Risk Factors”. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements involve risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Form 10-Q, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Many important factors affect our ability to achieve our objectives, including:

•

the accuracy of our estimates regarding the sufficiency of our cash resources, future revenues, expenses, capital requirements and needs for additional financing, and our ability to obtain additional financing.

•

the uncertainties and impact arising from the worldwide COVID-19 pandemic, including restrictions on the ability of our sales force to contact and communicate with target customers and resulting delays and challenges to our commercial sales of DSUVIA^®(sufentanil sublingual tablet, 30 mcg);

•

our success in commercializing DSUVIA in the United States, including the marketing, sales, and distribution of the product, whether alone or with contract sales organizations and other collaborators, such as Zimmer Biomet Dental;

•

the expected benefits of the co-promotion agreement with Tetraphase Pharmaceuticals, Inc.;

•

the size and growth potential of the markets for DSUVIA, and Zalviso^® (sufentanil sublingual tablet system), if approved in the United States, and our ability to serve those markets;

•

our ability to maintain regulatory approval of DSUVIA in the United States, including effective management of and compliance with the DSUVIA Risk Evaluation and Mitigation Strategies, or REMS, program;

•

acceptance of DSUVIA by physicians, patients and the healthcare community, including the acceptance of pricing and placement of DSUVIA on payers’ formularies;

•

the integration and performance of any businesses we acquire;

•

our ability to develop sales and marketing capabilities in a timely fashion, whether alone through recruiting qualified employees, by engaging a contract sales organization, or with potential future collaborators;

•

successfully establishing and maintaining commercial manufacturing with third parties;

•

our ability to manage effectively, and the impact of any costs associated with, potential governmental investigations, inquiries, regulatory actions or lawsuits that may be brought against us;

•

continued demonstration of an acceptable safety profile of DSUVIA;

•

effectively competing with other medications for the treatment of moderate-to-severe acute pain in medically supervised settings, including IV-opioids and any subsequently approved products;

•

our ability to maintain regulatory approval of DZUVEO™ in the European Union, or EU, and enter into a collaboration agreement with a strategic partner for the commercialization of DZUVEO in Europe;

•

our ability to manufacture and supply DZUVEO in Europe to any future strategic partner;

•

the impact of the termination of the Collaboration and License Agreement and the Manufacture and Supply Agreement with Grünenthal GmbH, or Grünenthal, both of which will terminate on or about November 14, 2020;

•

our ability to manufacture and supply Zalviso to Grünenthal in accordance with their forecast and the Manufacture and Supply Agreement through the remaining term of the agreement;

•

the impact of the termination of the Grünenthal agreements on our obligations under the Purchase and Sale Agreement with PDL BioPharma, Inc., or PDL, including our obligation to use commercially reasonable efforts to negotiate a replacement license agreement with a third party;

•

our ability to successfully execute the pathway towards a resubmission of the Zalviso New Drug Application, or NDA, and subsequently obtain and maintain regulatory approval of Zalviso in the United States and comply with any related restrictions, limitations, and/or warnings in the label of Zalviso, if approved;

•

the outcome of any potential FDA Advisory Committee meeting held for Zalviso;

•

our ability to successfully commercialize Zalviso, if approved in the United States;

•

the rate and degree of market acceptance of Zalviso, if approved in the United States;

•

our ability to obtain adequate government or third-party payer reimbursement;

•

our ability to attract additional collaborators with development, regulatory and commercialization expertise;

•

our ability to successfully retain our key commercial, scientific, engineering, medical or management personnel and hire new personnel as needed;

•

regulatory developments in the United States and foreign countries;

•

the performance of our third-party suppliers and manufacturers, including any supply chain impacts or work limitations resulting from shelter-in-place orders related to COVID-19;

•

the success of competing therapies that are or become available;

•

our liquidity and capital resources; and

•

our ability to obtain and maintain intellectual property protection for DSUVIA/DZUVEO and Zalviso.

In addition, you should refer to “Part II. Other Information - Item 1A. Risk Factors” in this Form 10-Q for a discussion of these and other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Form 10-Q will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. Also, forward-looking statements represent our estimates and assumptions only as of the date of this Form 10-Q. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AcelRx Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

	June 30, 2020 (Unaudited)			December 31, 2019⁽¹⁾
Assets
Current Assets:
Cash and cash equivalents	$	21,789		$	14,684
Short-term investments		21,897			51,453
Accounts receivable, net		195			432
Inventories, net		2,639			3,295
Prepaid expenses and other current assets		2,099			1,824
Total current assets		48,619			71,688
Operating lease right-of-use assets		3,509			3,928
Property and equipment, net		14,488			14,552
Other assets		784			1,188
Total Assets	$	67,400		$	91,356
Liabilities and Stockholders’ Deficit
Current Liabilities:
Accounts payable	$	2,395		$	1,720
Accrued liabilities		3,749			5,528
Long-term debt, current portion		8,707			4,630
Deferred revenue, current portion		343			411
Operating lease liabilities, current portion		1,076			970
Liability related to the sale of future royalties, current portion		160			352
Total current liabilities		16,430			13,611
Long-term debt, net of current portion		17,324			20,517
Deferred revenue, net of current portion		—			2,833
Operating lease liabilities, net of current portion		3,092			3,640
Liability related to the sale of future royalties, net of current portion		90,042			91,683
Other long-term liabilities		644			490
Total liabilities		127,532			132,774
Commitments and Contingencies
Stockholders’ Deficit:
Common stock, $0.001 par value—200,000,000 shares authorized as of June 30, 2020 and December 31, 2019; 80,890,185 and 79,573,101 shares issued and outstanding as of June 30, 2020 and December 31, 2019		80			79
Additional paid-in capital		360,425			356,609
Accumulated deficit		(420,637	)		(398,106	)
Total stockholders’ deficit		(60,132	)		(41,418	)
Total Liabilities and Stockholders’ Deficit	$	67,400		$	91,356

⁽¹⁾	The condensed consolidated balance sheet as of December 31, 2019 has been derived from the audited financial statements as of that date included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

See notes to condensed consolidated financial statements.

AcelRx Pharmaceuticals, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(In thousands, except share and per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Revenue:
Product sales	$	303		$	768		$	577		$	894
Contract and other collaboration		2,621			173			2,733			312
Total revenue		2,924			941			3,310			1,206

Operating costs and expenses:
Cost of goods sold		1,370			1,810			2,881			3,040
Research and development		813			1,163			2,225			2,540
Selling, general and administrative		7,575			11,329			20,886			21,305
Total operating costs and expenses		9,758			14,302			25,992			26,885
Loss from operations		(6,834	)		(13,361	)		(22,682	)		(25,679	)
Other income (expense):
Interest expense		(872	)		(500	)		(1,727	)		(876	)
Interest income and other (expense) income, net		270			456			205			1,083
Non-cash interest income (expense) on liability related to future sale of royalties		834			996			1,677			(611	)
Total other income (expense)		232			952			155			(404	)
Net loss before income taxes		(6,602	)		(12,409	)		(22,527	)		(26,083	)
Provision for income taxes		(4	)		(3	)		(4	)		(3	)
Net loss	$	(6,606	)	$	(12,412	)	$	(22,531	)	$	(26,086	)
Comprehensive loss	$	(6,606	)	$	(12,412	)	$	(22,531	)	$	(26,086	)
Net loss per share of common stock, basic and diluted	$	(0.08	)	$	(0.16	)	$	(0.28	)	$	(0.33	)
Shares used in computing net loss per share of common stock, basic and diluted – See Note 12		80,661,853			78,902,470			80,359,679			78,845,944

See notes to condensed consolidated financial statements.

AcelRx Pharmaceuticals, Inc.

Condensed Consolidated Statements of Stockholders’ (Deficit) Equity

(Unaudited)

(in thousands, except share data)

	Common Stock				Additional Paid-in Capital			Accumulated Deficit			Total Stockholders’ Equity (Deficit)
	Shares		Amount
Balance as of December 31, 2019		79,573,101	$	79	$	356,609		$	(398,106	)	$	(41,418	)
Stock-based compensation		—		—		1,146			—			1,146
Restricted stock units vested		216,399		—		—			—			—
Tax payments related to shares withheld for restricted stock units vested		—		—		(86	)		—			(86	)
Net proceeds from issuance of common stock in connection with equity financings		431,800		1		783			—			784
Issuance of common stock upon ESPP purchase		194,451		—		218			—			218
Net loss		—		—		—			(15,925	)		(15,925	)

Balance as of March 31, 2020		80,415,751	$	80	$	358,670		$	(414,031	)	$	(55,281	)
Stock-based compensation		—		—		1,090			—			1,090
Restricted stock units vested		29,434		—		—			—			—
Net proceeds from issuance of common stock in connection with equity financings		445,000		—		665			—			665
Net loss		—		—		—			(6,606	)		(6,606	)
Balance as of June 30, 2020		80,890,185	$	80	$	360,425		$	(420,637	)	$	(60,132	)

	Common Stock				Additional Paid-in Capital		Accumulated Deficit			Total Stockholders’ Equity (Deficit)
	Shares		Amount
Balance as of December 31, 2018		78,757,930	$	78	$	349,194	$	(345,019	)	$	4,253
Cumulative effect adjustment for adoption of ASU No. 2016-02		—		—		—		153			153
Stock-based compensation		—		—		1,107		—			1,107
Issuance of common stock upon exercise of stock options		13,583		—		31		—			31
Issuance of common stock upon ESPP purchase		85,135		1		238		—			239
Net loss		—		—		—		(13,674	)		(13,674	)

Balance as of March 31, 2019		78,856,648	$	79	$	350,570	$	(358,540	)	$	(7,891	)
Stock-based compensation		—		—		1,346		—			1,346
Issuance of common stock upon exercise of stock options		57,522		—		155		—			155
Issuance of warrants related to debt financing		—		—		383		—			383
Net loss		—		—		—		(12,412	)		(12,412	)
Balance as of June 30, 2019		78,914,170	$	79	$	352,454	$	(370,952	)	$	(18,419	)

See notes to condensed consolidated financial statements.

AcelRx Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	Six Months Ended June 30,
	2020			2019
Cash flows from operating activities:
Net loss	$	(22,531	)	$	(26,086	)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash royalty revenue related to royalty monetization		(121	)		(118	)
Non-cash interest (income) expense on liability related to royalty monetization		(1,677	)		611
Depreciation and amortization		979			734
Non-cash interest expense related to debt financing		558			234
Stock-based compensation		2,236			2,453
Other		341			(212	)
Changes in operating assets and liabilities:
Accounts receivable		237			(172	)
Inventories		277			(1,990	)
Prepaid expenses and other assets		94			(946	)
Accounts payable		675			559
Accrued liabilities		(1,779	)		(164	)
Operating lease liabilities		(442	)		(313	)
Deferred revenue		(2,901	)		(149	)
Net cash used in operating activities		(24,054	)		(25,559	)
Cash flows from investing activities:
Purchase of property and equipment		(170	)		(1,790	)
Purchase of investments		(28,807	)		(28,156	)
Proceeds from maturities of investments		58,555			19,700
Net cash provided by (used in) investing activities		29,578			(10,246	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		—			25,000
Payment of costs in connection with refinancing of long-term debt		—			(190	)
Payment of long-term debt		—			(3,470	)
Extinguishment of debt		—			(8,864	)
Net proceeds from issuance of common stock in connection with equity financings		1,449			—
Net proceeds from issuance of common stock through equity plans		218			425
Payment of employee tax obligations related to vesting of restricted stock units		(86	)		—
Net cash provided by financing activities		1,581			12,901
Net increase (decrease) in cash and cash equivalents		7,105			(22,904	)
Cash and cash equivalents—Beginning of period		14,684			87,975
Cash and cash equivalents—End of period	$	21,789		$	65,071

See notes to condensed consolidated financial statements.

AcelRx Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(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., and in January 2006, the Company changed its name to AcelRx Pharmaceuticals, Inc. The Company’s operations are based in Redwood City, California.

AcelRx is a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for use in medically supervised settings. DSUVIA^®(known as DZUVEO^TM in Europe) and Zalviso^®, areboth focused on the treatment of acute pain, and each utilize sufentanil, delivered via a non-invasive route of sublingual administration, exclusively for use in medically supervised settings. On November 2, 2018, the U.S. Food and Drug Administration, or FDA, approved 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 treatment of patients with moderate-to-severe acute pain in medically monitored settings. AcelRx is further developing a distribution capability and commercial organization to continue to market and sell DSUVIA in the United States. In geographies where AcelRx decides not to commercialize products by itself, the Company may seek to out-license commercialization rights. The Company currently intends to commercialize and promote DSUVIA/DZUVEO outside the United States with one or more strategic partners, although it has not yet entered into any such arrangement. The timing of the resubmission of the Zalviso new drug application, or NDA, is in part dependent upon the finalization of the FDA’s new opioid approval guidelines and process. AcelRx intends to seek regulatory approval for Zalviso in the United States and, if successful, potentially promote Zalviso either by itself or with strategic partners. Zalviso is approved in Europe and is currently being commercialized by Grünenthal GmbH, or Grünenthal.

The Company has incurred recurring operating losses and negative cash flows from operating activities since inception. Although Zalviso was approved for sale in Europe on September 18, 2015, the Company sold the majority of the royalty rights and certain commercial sales milestones it is entitled to receive under the Amended License Agreement with Grünenthal to PDL BioPharma, Inc., or PDL, in a transaction referred to as the Royalty Monetization. In consideration of the expected termination of the Amended License Agreement, under the Royalty Monetization, the Company must use commercially reasonable efforts to negotiate a replacement license agreement with a third party. The FDA approved DSUVIA in November 2018 and the Company began its commercial launch of DSUVIA in the first quarter of 2019. The Company expects to continue to incur operating losses and negative cash flows until such time as DSUVIA has gained market acceptance and generated significant revenues.

DSUVIA/DZUVEO

DSUVIA, known as DZUVEO in Europe, approved by the FDA in November 2018 and approved by the EC in June 2018, is indicated 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. DSUVIA was designed to provide rapid analgesia via a non-invasive route and to eliminate dosing errors associated with IV administration. DSUVIA is a single-strength solid dosage form administered sublingually via a single-dose applicator, or SDA, by healthcare professionals. Sufentanil is an opioid analgesic currently marketed for intravenous, or IV, and epidural anesthesia and analgesia. The sufentanil pharmacokinetic profile when delivered sublingually avoids the high peak plasma levels and short duration of action observed with IV administration.

DSUVIA was approved with a Risk Evaluation and Mitigation Strategy, or REMS, which restricts distribution to certified medically supervised healthcare settings in order to prevent respiratory depression resulting from accidental exposure. DSUVIA is only distributed to facilities certified in the DSUVIA REMS program following attestation by an authorized representative to comply with appropriate dispensing and use restrictions of DSUVIA. To become certified, a healthcare setting is required to train their healthcare professionals on the proper use of DSUVIA and have the ability to manage respiratory depression. DSUVIA is not available in retail pharmacies or for outpatient use. As part of the REMS program, the Company monitors distribution and audits wholesalers’ data, evaluates proper usage within the healthcare settings and monitors for any diversion and abuse. AcelRx will de-certify healthcare settings that are non-compliant with the REMS program.

Zalviso

Zalviso delivers 15 mcg sufentanil sublingually through a non-invasive delivery route via a pre-programmed, patient-controlled analgesia, or PCA, system. Zalviso is approved in Europe and is in late-stage development in the United States. The Company had initially submitted to the FDA an NDA seeking approval for Zalviso in September 2013 but received a complete response letter, or CRL, on July 25, 2014. Subsequently, the FDA requested an additional clinical study, IAP312, designed to evaluate the effectiveness of changes made to the functionality and usability of the Zalviso device and to take into account comments from the FDA on the study protocol. In the IAP312 study, for which top-line results were announced in August 2017, Zalviso met safety, satisfaction and device usability expectations. These results will supplement the three Phase 3 trials already completed in the Zalviso NDA resubmission.

Termination of Grünenthal Amended 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 grants Grünenthal rights to commercialize the Zalviso PCA system, or the Product, in the 28 European Union, or EU, member states, at the time of the agreement, plus Switzerland, Liechtenstein, Iceland, Norway and Australia (collectively, the Territory) for human use in pain treatment within, or dispensed by, hospitals, hospices, nursing homes and other medically supervised settings, (collectively, the Field). In September 2015, the EC approved the marketing authorization application, or MAA, previously submitted to the EMA, for Zalviso for the management of acute moderate-to-severe post-operative pain in adult patients. On December 16, 2013, AcelRx and Grünenthal, entered into a Manufacture and Supply Agreement, or the MSA, and together with the License Agreement, the Agreements. Under the MSA, the Company will exclusively manufacture and supply the Product to Grünenthal for the Field in the Territory. On July 22, 2015, the Company and Grünenthal amended the MSA, or the Amended MSA, effective as of July 17, 2015. The Amended MSA and the Amended License Agreement are referred to as the Amended Agreements.

On May 18, 2020, the Company received a notice from Grünenthal that it is exercising its right to terminate the Amended Agreements between the Company and Grünenthal, effective on or about November 14, 2020. Upon termination, the rights to market and sell Zalviso in the European Union, Switzerland, Liechtenstein, Iceland, Norway and Australia, or the Territory, will revert immediately back to the Company, although Grünenthal has the right to sell down its existing Zalviso inventory.

On May 20, 2020, the Company agreed to provide a right of first negotiation for a license agreement to replace the Grünenthal Amended License Agreement to a third party with which the Company is currently negotiating a license agreement for DZUVEO for the European market.

Termination of Proposed Acquisition of Tetraphase Pharmaceuticals, Inc.

On March 15, 2020, the Company entered into the Agreement and Plan of Merger (as amended on May 27, 2020 and May 29, 2020, the Merger Agreement) with Tetraphase Pharmaceuticals, Inc., or Tetraphase, and Consolidation Merger Sub, Inc., a Delaware corporation and indirect wholly-owned subsidiary of the Company, or Merger Sub, which provided for the merger of Merger Sub with and into Tetraphase, with Tetraphase continuing as the surviving corporation and an indirect wholly-owned subsidiary of AcelRx.

On June 4, 2020, Tetraphase terminated the Merger Agreement pursuant to its terms and paid AcelRx a termination fee of approximately $1.8 million.

Co-Promotion Agreement

On March 15, 2020, the Company entered into the Co-Promotion Agreement with Tetraphase, or the Co-Promotion Agreement, to co-promote DSUVIA and Tetraphases’s XERAVA™ (eravacycline). Under the terms of the Co-Promotion Agreement, each company is responsible for maintaining compliance under the agreed marketing and promotion plan and achieving a minimum number of sales calls for each product. Either party can terminate the agreement with 15 months written notice. In the event of a change of control, or CoC, of either party, the CoC party will be subject to meeting certain performance standards, and if these performance standards are not met, then a royalty of 10% of net sales on the CoC party’s product will be payable to the non-CoC party until the end of the agreement. The non-CoC party will also be able to solicit the employees of the CoC party in the event of a change of control and have the right to terminate the agreement with one month’s written notice. On July 28, 2020, Tetraphase was acquired by La Jolla Pharmaceutical Company, and as a result, Tetraphase became a CoC party under the Co-Promotion Agreement. There were no material revenues or expenses related to the Co-Promotion Agreement in the three and six months ended June 30, 2020.

Principles of Consolidation

The Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries, ARPI LLC, which was formed in September 2015 for the sole purpose of facilitating the Royalty Monetization, and Merger Sub and AcelRx Intermediate Sub, Inc., both of which were formed in connection with the Merger Agreement. All intercompany accounts and transactions have been eliminated in consolidation. Refer to Note 7 “Liability Related to Sale of Future Royalties” for additional information.

Reclassifications

Certain prior year amounts in the Condensed Consolidated Financial Statements have been reclassified to conform to the current year's presentation.

Basis of Presentation

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

Operating results for the three and six months ended June 30, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The Condensed Consolidated Balance Sheet as of December 31, 2019, was derived from the Company’s audited financial statements as of December 31, 2019, included in the Company’s Annual Report on Form 10-K filed with the SEC. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, which includes a broader discussion of the Company’s business and the risks inherent therein.

Use of Estimates

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

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.

On March 16, 2020, in connection with entering into the Co-Promotion Agreement, the Company initiated a reduction in headcount, designed to eliminate the overlap with the Tetraphase commercial team in order to more efficiently commercialize DSUVIA alongside the Tetraphase commercial team and reduce operating expenses. The Company eliminated 30 positions, primarily within the commercial organization. For the six months ended June 30, 2020, the Company incurred and paid $0.5 million in employee termination benefits related to this restructuring.

The headcount reduction was completed in the first quarter of 2020. No additional expenses are anticipated in connection with this cost reduction plan.

Significant Accounting Policies

The Company’s significant accounting policies are detailed in its Annual Report on Form 10-K for the year ended December 31, 2019. There have been no significant changes to the Company’s significant accounting policies during the six months ended June 30, 2020, from those previously disclosed in its 2019 Annual Report on Form 10-K.

Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2016-13, “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments,” or ASU 2016-13. ASU 2016-13 replaces the incurred loss impairment model in current GAAP with a model that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. ASU 2016-13 is effective for the Company beginning January 1, 2023, with early adoption allowed beginning January 1, 2020. In May 2019, the FASB issued ASU 2019-05, “Financial Instruments – Credit Losses,” or ASU 2019-05, to allow entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. The new effective dates and transition align with those of ASU 2016-13. Management is currently assessing the date of adoption and the impact ASU 2016-13 and ASU 2019-05 will have on the Company, but it does not anticipate adoption of these new standards to have a material impact on the Company’s financial position, results of operations and cash flows.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The amendments provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is currently evaluating its contracts and the optional expedients provided by the new standard.

2. Investments and Fair Value Measurement

Investments

The Company classifies its marketable securities as available-for-sale and records its investments at fair value. Available-for-sale securities are carried at estimated fair value based on quoted market prices or observable market inputs of almost identical assets, with the unrealized holding gains and losses included in accumulated other comprehensive income (loss). Marketable securities which have maturities beyond one year as of the end of the reporting period are classified as non-current.

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

	As of June 30, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Cash and cash equivalents:
Cash	$	4,660	$	—	$	—	$	4,660
Money market funds		1,334		—		—		1,334
U.S. government agency securities		5,999		—		—		5,999
Commercial paper		9,796		—		—		9,796
Total cash and cash equivalents		21,789		—		—		21,789

Short-term investments:
U.S. government agency securities		13,052		—		—		13,052
Commercial paper		8,845		—		—		8,845
Total short-term investments		21,897		—		—		21,897
Total cash, cash equivalents and short-term investments	$	43,686	$	—	$	—	$	43,686

	As of December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Cash and cash equivalents:
Cash	$	1,957	$	—	$	—	$	1,957
Money market funds		598		—		—		598
Commercial paper		12,129		—		—		12,129
Total cash and cash equivalents		14,684		—		—		14,684

Short-term investments:
U.S. government agency securities		14,268		—		—		14,268
Commercial paper		27,131		—		—		27,131
Corporate debt securities		10,054		—		—		10,054
Total short-term investments		51,453		—		—		51,453
Total cash, cash equivalents and short-term investments	$	66,137	$	—	$	—	$	66,137

There were no other-than-temporary impairments for these securities at June 30, 2020 or December 31, 2019. No gross realized gains or losses were recognized on the available-for-sale securities and, accordingly, there were no amounts reclassified out of accumulated other comprehensive income (loss) to earnings during the three and six months ended June 30, 2020 and June 30, 2019.

As of June 30, 2020 and December 31, 2019, the contractual maturity of all investments held was less than one year.

Fair Value Measurement

The Company’s financial instruments consist of Level I and II assets and Level III liabilities. Money market funds are highly liquid investments and are actively traded. The pricing information on these investment instruments are readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy. For Level II instruments, the Company estimates fair value by utilizing third party pricing services in developing fair value measurements where fair value is based on valuation methodologies such as models using observable market inputs, including benchmark yields, reported trades, broker/dealer quotes, bids, offers and other reference data. Such Level II instruments typically include U.S. treasury, U.S. government agency securities and commercial paper. As of June 30, 2020, and December 31, 2019, the Company held, in addition to Level II assets, a contingent put option liability associated with the Loan Agreement with Oxford. See Note 5 “Long-Term Debt” for further description. The Company’s estimate of fair value of the contingent put option liability was determined by using a risk-neutral valuation model, wherein the fair value of the underlying debt facility is estimated both with and without the presence of the default provisions, holding all other assumptions constant. The resulting difference between the two estimated fair values is the estimated fair value of the default provisions, or the contingent put option, which is included under other long-term liabilities on the Condensed Consolidated Balance Sheets. Changes to the estimated fair value of this liability is recorded in interest income and other income (expense), net in the Condensed Consolidated Statements of Comprehensive Loss. The fair value of the underlying debt facility is estimated by calculating the expected cash flows in consideration of an estimated probability of default and expected recovery rate in default and discounting such cash flows back to the reporting date using a risk-free rate.

The following table sets forth the fair value of the Company’s financial assets and liabilities by level within the fair value hierarchy (in thousands):

	As of June 30, 2020
	Fair Value		Level I		Level II		Level III
Assets
Money market funds	$	1,334	$	1,334	$	—	$	—
U.S. government agency securities		19,051		—		19,051		—
Commercial paper		18,641		—		18,641		—
Total assets measured at fair value	$	39,026	$	1,334	$	37,692	$	—

Liabilities
Contingent put option liability	$	591	$	—	$	—	$	591
Total liabilities measured at fair value	$	591	$	—	$	—	$	591

	As of December 31, 2019
	Fair Value		Level I		Level II		Level III
Assets
Money market funds	$	598	$	598	$	—	$	—
U.S. government agency securities		14,268		—		14,268		—
Commercial paper		39,260		—		39,260		—
Corporate debt securities		10,054		—		10,054		—
Total assets measured at fair value	$	64,180	$	598	$	63,582	$	—

Liabilities
Contingent put option liability	$	437	$	—	$	—	$	437
Total liabilities measured at fair value	$	437	$	—	$	—	$	437

The following tables set forth a summary of the changes in the fair value of the Company’s Level III financial liabilities for the three and six months ended June 30, 2020 and June 30, 2019 (in thousands):

	Three Months Ended June 30, 2020			Six Months Ended June 30, 2020
Fair value—beginning of period	$	746		$	437
Fair value of contingent put option associated with the Loan Agreement		(155	)		154
Fair value—end of period	$	591		$	591

	Three Months Ended June 30, 2019			Six Months Ended June 30, 2019
Fair value—beginning of period	$	98		$	121
Fair value of contingent put option associated with the Loan Agreement		657			657
Change in fair value of contingent put option associated with the Prior Agreement		(98	)		(121	)
Fair value—end of period	$	657		$	657

3. Inventories, net

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

	Balance as of
	June 30, 2020		December 31, 2019
Raw materials	$	693	$	1,153
Work-in-process		—		593
Finished goods		1,946		1,549
Total	$	2,639	$	3,295

During the three and six months ended June 30, 2020, the Company recorded inventory impairment charges of $0.3 million and $0.4 million, respectively. In the six months ended June 30, 2020, $0.3 million of these charges related to the termination of the Amended Agreements, while $0.1 million related to DSUVIA inventory that may expire before being sold.

4. Revenue from Contracts with Customers

The following table summarizes revenue from contracts with customers for the three and six months ended June 30, 2020 and 2019 into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors (in thousands):

	Three Months Ended June 30, 2020		Six Months Ended June 30, 2020
Product sales:
DSUVIA	$	2	$	157
Zalviso		301		420
Total product sales		303		577
Contract and other collaboration:
Non-cash royalty revenue related to Royalty Monetization (See Note 7)		37		121
Royalty revenue		12		40
Other revenue		2,572		2,572
Total revenues from contract and other collaboration		2,621		2,733
Total revenue	$	2,924	$	3,310

	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Product sales:
DSUVIA	$	55	$	102
Zalviso		713		792
Total product sales		768		894
Contract and other collaboration:
Non-cash royalty revenue related to Royalty Monetization (See Note 7)		118		203
Royalty revenue		40		67
Other revenue		15		42
Total revenues from contract and other collaboration		173		312
Total revenue	$	941	$	1,206

For additional details on the Company’s accounting policy regarding revenue recognition, refer to Note 1 “Organization and Summary of Significant Accounting Policies - Revenue from Contracts with Customers” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Product Sales

The Company’s commercial launch of DSUVIA in the United States occurred in the first quarter of 2019. Zalviso has been sold in Europe by the Company’s collaboration partner, Grünenthal. Grünenthal has exercised its right to terminate the Amended Agreements, effective on or about November 14, 2020.

Contract and Other Collaboration

Amended License Agreement

Under the Amended License Agreement with Grünenthal, the Company is eligible to receive approximately $194.5 million in additional milestone payments, based upon successful regulatory and product development efforts ($28.5 million) and net sales target achievements ($166.0 million). Grünenthal will also make tiered royalty and supply and trademark fee payments in the mid-teens up to the mid-twenties percent range, depending on the level of sales achieved, on net sales of Zalviso. A portion of the tiered royalty payment, exclusive of the supply and trademark fee payments, will be paid to PDL BioPharma, Inc. or PDL, in connection with the Royalty Monetization. For additional information on the Royalty Monetization, see Note 7 “Liability Related to Sale of Future Royalties”.

Amended MSA

Under the terms of the Amended MSA with Grünenthal, the Company will manufacture and supply the Product for use in the Field for the Territory exclusively for Grünenthal. The Product will be supplied at prices approximating the Company’s manufacturing cost, subject to certain caps, as defined in the MSA Amendment. The MSA Amendment requires the Company to use commercially reasonable efforts to enter stand-by contracts with third parties providing significant supply and manufacturing services and, under certain specified conditions, permits Grünenthal to use a third-party back-up manufacturer to manufacture the Product for Grünenthal’s commercial sale in the Territory.

As mentioned above, Grünenthal has exercised its right to terminate the Amended Agreements, effective on or about November 14, 2020. In May 2020, upon notification of early termination by Grünenthal, the Company recognized approximately $2.6 million of deferred revenue for the future significant and incremental discount on Zalviso manufacturing services which are no longer a performance obligation.

Contract Liability

At June 30, 2020, approximately $0.3 million of deferred revenue, all of which represented the current portion, was attributable to the significant and incremental discount on Zalviso manufacturing services for Grünenthal under the Amended Agreements. This deferred revenue is being recognized on a straight-line basis over the period such discount is made available to Grünenthal, which will continue until the contract termination date on or about November 14, 2020.

The following table presents changes in the Company’s contract liability for the six months ended June 30, 2020 (in thousands):

	Balance at Beginning of the Period		Additions		Deductions			Balance at the end of the Period
Contract liability:
Deferred revenue – Amended Agreements	$	3,148	$	—	$	(2,805	)	$	343
Deferred revenue – Other		96		—		(96	)		—
Deferred revenue	$	3,244	$	—	$	(2,901	)	$	343

For the three and six months ended June 30, 2020 and 2019, the Company recognized the following revenue from performance obligations satisfied or eliminated under the Amended Agreements (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Amounts included in contract liabilities at the beginning of the period:
Performance obligations satisfied	$	154	$	79	$	233	$	158
Performance obligations eliminated upon termination		2,572		—		2,572		—
New activities in the period from performance obligations satisfied:
Performance obligations satisfied		147		649		187		676
Total revenue from performance obligations satisfied or eliminated	$	2,873	$	728	$	2,992	$	834

5. Long-Term Debt

Loan Agreement with Oxford

On May 30, 2019, the Company entered into the Loan Agreement with Oxford Finance LLC, or Oxford, as the Lender. Under the Loan Agreement, the Lender made a term loan to the Company in an aggregate principal amount of $25.0 million, or the Loan, which was funded on May 30, 2019. The Company used approximately $8.9 million of the proceeds from the Loan to repay its outstanding obligations under the Prior Agreement, as described above. After deducting all loan initiation costs and outstanding interest on the Prior Agreement, the Company received $15.9 million in net proceeds.

In connection with the Loan Agreement, on May 30, 2019, the Company issued warrants to the Lender and its affiliates, or the Warrants, which are exercisable for an aggregate of 176,679 shares of the Company’s common stock with a per share exercise price of $2.83. The Warrants have been classified within stockholders’ deficit and accounted for as a discount to the loan by allocating the gross proceeds on a relative fair value basis. For further discussion, see Note 9 “Warrants”.

As of June 30, 2020, the accrued balance due under the Loan Agreement with Oxford was $24.7 million. Interest expense related to the Loan Agreement was $0.9 million, $0.3 million of which represented amortization of the debt discount, for the three months ended June 30, 2020, and $1.7 million, $0.5 million of which represented amortization of the debt discount, for the six months ended June 30, 2020.

Non-Interest Bearing Payments for the Construction of Leasehold Improvements

In August 2019, the Company entered into a Site Readiness Agreement, or SRA, with Catalent Pharma Solutions, LLC, or Catalent, in contemplation of entering into a commercial supply agreement for its product DSUVIA at a future date. Under the SRA, the Company is building out a suite within Catalent’s production facility in Kansas City. If additional equipment and facility modifications are required to meet the Company’s product needs, the Company may be required to contribute to the cost of such additional equipment and facility modifications. The Company has determined that it is the owner of the leasehold improvements related to the build-out which will be paid for in four installments of $0.5 million through July 2022. The leasehold improvements are recorded as property and equipment, net, in our Condensed Consolidated Balance Sheets. As of June 30, 2020, $1.7 million of these leasehold improvements have been capitalized. The total obligation under the SRA is $2.0 million all of which was incurred as of March 31, 2020. The effective interest rate related to the payments at June 30, 2020 was 14.35%.

6. Leases

The Company leases office and laboratory space for its corporate headquarters, located at 301 – 351 Galveston Drive, Redwood City, California, and has entered into an agreement to sublease approximately 47% of this office and laboratory space. In addition, the Company has entered into an agreement for commercial supply manufacturing services related to the Company’s Zalviso drug product with a contract manufacturing organization, which it accounts for as an operating lease.

The components of lease expense are presented in the following table (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Operating lease costs	$	269		$	340		$	609		$	680
Sublease income		(149	)		(150	)		(299	)		(296	)
Net lease costs	$	120		$	190		$	310		$	384

The weighted average remaining lease term and discount rate related to the operating leases are presented in the following table:

	June 30, 2020
Weighted-average remaining term – operating lease (years)		3.58
Weighted-average discount rate – operating lease		11.72	%

Future minimum lease payments as of June 30, 2020 are presented in the following table (in thousands):

Year:
2020 (remaining six months)	$	634
2021		1,364
2022		1,345
2023		1,386
2024		116
Total future minimum lease payments		4,845
Less imputed interest		(677	)
Total	$	4,168

Reported as:

Operating lease liabilities	$	1,076
Operating lease liabilities, net of current portion		3,092
Total lease liability	$	4,168

Future minimum sublease payments as of June 30, 2020 are presented in the following table (in thousands):

Year:
2020 (remaining six months)	$	297
2021		610
2022		629
2023		648
2024		54
Total future minimum sublease payments	$	2,238

The rent receivable balance is reported in the balance sheet as follows (in thousands):

Reported as:
Prepaid expenses and other current assets	$	87
Other assets		307
Total rent receivable	$	394

7. Liability Related to Sale of Future Royalties

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

The Company periodically assesses the expected royalty and milestone payments using a combination of historical results, internal projections and forecasts from external sources. To the extent such payments are greater or less than the Company’s initial estimates or the timing of such payments is materially different than its original estimates, the Company will prospectively adjust the amortization of the liability and the effective interest rate. During the three months ended June 30, 2019, the Company made a material revision to its estimates which resulted in an interest income rate on the Royalty Monetization liability balance at a prospective average rate of approximately 4.2%, which will be applied over the remaining term of the agreement. The change in estimate of future payments to PDL was a result of lower projected European royalties and milestones from sales of Zalviso over the life of the liability. The change in estimate results in interest income being recognized prospectively, over the remaining term of the agreement, as the estimated expected payments are less than the $65.0 million in gross proceeds received. During the three months ended June 30, 2020, Grünenthal notified the Company that it was terminating the Amended License Agreement, effective on or about November 14, 2020. There is a continuing obligation on the Company’s 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 the Territory, the Company is currently unable to estimate the future payments to PDL over the remaining life of the Royalty Monetization. If the Company is unable to find a New Arrangement, a contingent gain of up to approximately $65 million may be recognized when it is realized upon expiration of the liability at the end of the Royalty Monetization term. Due to the significant judgments and factors related to the estimates of future payments under the Royalty Monetization, there are significant uncertainties surrounding the amount and timing of future payments and the probability of realization of the estimated contingent gain.

The change in estimate reduced the effective interest rate over the life of the liability to 0% by recording interest income over the remaining term of the arrangement as an offset to the interest expense that was recognized in prior periods. The effective interest income rates for both the three and six months ended June 30, 2020 was approximately 4.0%. The change in estimate during the three months ended June 30, 2019, resulted in a decrease of $2.7 million to the net loss and a decrease of $0.03 to the net loss per share of common stock, basic and diluted, for both the three and six months ended June 30, 2019. The effective interest income rate for the three months ended June 30, 2019 was approximately 4.2%. The effective interest expense rate for the six months ended June 30, 2019 was 1.4%.

The following table shows the activity within the liability account for the six months ended and the period from inception to June 30, 2020 (in thousands):

	Six months ended June 30, 2020			Period from inception to June 30, 2020
Liability related to sale of future royalties — beginning balance	$	92,035		$	—
Proceeds from sale of future royalties		—			61,184
Non-cash royalty revenue		(156	)		(840	)
Non-cash interest (income) expense recognized		(1,677	)		29,858

Liability related to sale of future royalties as of June 30, 2020		90,202			90,202
Less: current portion		(160	)		(160	)
Liability related to sale of future royalties — net of current portion	$	90,042		$	90,042

As royalties are remitted to PDL from ARPI LLC, as described in Note 1 “Organization and Summary of Significant Accounting Policies - Non-Cash Interest Income (Expense) on Liability Related to Sale of Future Royalties” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, the balance of the liability will be effectively repaid over the life of the agreement. The Company will record non-cash royalty revenues and non-cash interest expense within its Condensed Consolidated Statements of Comprehensive Loss over the term of the Royalty Monetization.

8. Legal Proceedings

As previously disclosed, several lawsuits were filed in connection with the Company’s proposed acquisition of Tetraphase. Following termination of the Merger Agreement, each of the merger-related complaints naming the Company as a defendant were voluntarily dismissed on or about June 9, 2020.

9. Warrants

Loan Agreement Warrants

In connection with the Loan Agreement, on May 30, 2019, the Company issued warrants to the Lender and its affiliates, which are exercisable for an aggregate of 176,679 shares of the Company’s common stock with a per share exercise price of $2.83, or the Warrants. As of June 30, 2020, warrants to purchase 176,679 shares of common stock issued to the Lender and its affiliates had not been exercised and were still outstanding. These warrants expire in May 2029.

10. Stockholders’ Equity

Common Stock

ATM Agreement

The Company has entered into a Controlled Equity Offering^SM Sales Agreement, or the ATM Agreement, with Cantor Fitzgerald & Co., or Cantor, as agent, pursuant to which the Company may offer and sell, from time to time through Cantor, shares of the Company’s common stock having an aggregate offering price of up to $40.0 million. On May 9, 2019, the Company increased the aggregate offering amount of shares of the Company’s common stock which may be offered and sold under the ATM Agreement by $40.0 million, for a total of $80.0 million.

During the three and six months ended June 30, 2020, the Company issued and sold 445,000 and 876,800 shares of common stock pursuant to the ATM Agreement, respectively, for which the Company received net proceeds of approximately $0.7 million and $1.5 million, respectively. As of June 30, 2020, the Company has the ability to sell $43.8 million of the Company’s common stock under the ATM Agreement.

New and Amended Stock Plans

2020 Equity Incentive Plan

On June 16, 2020, at the 2020 Annual Meeting of Stockholders of the Company, the Company’s stockholders, upon the recommendation of the Company’s Board of Directors, approved the Company’s 2020 Equity Incentive Plan, or the 2020 EIP.

As of June 16, 2020, no more awards may be granted under the 2011 Equity Incentive Plan, or the 2011 EIP, although all outstanding stock options and other stock awards previously granted under the 2011 EIP will continue to remain subject to the terms of the 2011 EIP.

The initial aggregate number of shares of the Company’s common stock issuable pursuant to stock awards under the 2020 EIP was 5,500,000 shares. In addition, the share reserve will be increased by the number of returning shares, if any, as such shares become available from time to time under the 2006 Plan and the 2011 EIP, for an additional number of shares not to exceed 14,892,170 shares. The term of any option granted under the 2020 EIP is determined on the date of grant but shall not be longer than 10 years. The Company issues new shares for settlement of vested restricted stock units and exercises of stock options. The Company does not have a policy of purchasing its shares relating to its stock-based programs.

Amended and Restated 2011 Employee Stock Purchase Plan

Additionally, on June 16, 2020, the Company’s stockholders, upon the recommendation of the Company’s Board of Directors, approved the Amended and Restated 2011 Employee Stock Purchase Plan, or the Amended 2011 ESPP, which increased the aggregate number of shares of the Company’s common stock reserved for issuance under the 2011 Employee Stock Purchase Plan, or ESPP, to 4,900,000 shares, subject to adjustment for certain changes in the Company’s capitalization, and removed the “evergreen” provision from the ESPP.

11. Stock-Based Compensation

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Cost of goods sold	$	27	$	68	$	73	$	129
Research and development		184		233		384		457
Selling, general and administrative		879		1,045		1,779		1,867
Total	$	1,090	$	1,346	$	2,236	$	2,453

As of June 30, 2020, there were 5,775,140 shares available for grant, 13,026,080 options outstanding and 1,444,095 restricted stock units outstanding under the Company’s equity incentive plans, and 4,900,000 shares available for grant under the Amended 2011 ESPP.

12. Net Loss per Share of Common Stock

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

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

	June 30,
	2020		2019
ESPP, RSUs and stock options to purchase common stock		14,816,721		14,090,688
Common stock warrants		176,679		176,679

13. Subsequent Event

Registered Direct Offering

On July 23, 2020, the Company completed a registered direct offering in which it issued and sold 9,433,962 shares of its common stock at a price of $1.06 per share. The total net proceeds from this offering were approximately $10.0 million, after deducting estimated expenses payable by the Company of $25,000. No underwriter or placement agent participated in the offering.

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

The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with the audited Consolidated Financial Statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2019, or Annual Report.

About AcelRx Pharmaceuticals, Inc.

We are a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for use in medically supervised settings.

Our Portfolio

The following table summarizes our portfolio.

Product	Description	Target Use	Status
DSUVIA^®	Sufentanil sublingual tablet, 30 mcg	Moderate-to-severe acute pain in a medically supervised setting, administered by a healthcare professional	Received FDA approval in November 2018, commercial launch began first quarter of 2019.

DZUVEO	Sufentanil sublingual tablet, 30 mcg	Moderate-to-severe acute pain in a medically supervised setting, administered by a healthcare professional	Received European Commission, or EC, approval in June 2018.

Zalviso^®	Sufentanil sublingual tablet system, 15 mcg	Moderate-to-severe acute pain in the hospital setting, administered by the patient as needed	In the U.S., positive results from Phase 3 trial, IAP312, announced in August 2017. Currently evaluating the timing of the resubmission of the NDA, which is in part dependent on the finalization of the FDA’s new opioid approval guidelines and process. Approved in the European Union and currently marketed commercially by Grünenthal.

Distribution Agreement

On July 17, 2020, we entered into a distribution agreement, or the Distribution Agreement, with Zimmer Biomet Dental, or ZB Dental, pursuant to which ZB Dental obtained the exclusive right to promote, market, sell, and arrange to distribute DSUVIA in the United States to clinicians, dentists, surgeons and other licensed health care practitioners that perform dental (including specialty dental), oral-maxillofacial, cranio-maxillofacial or oral surgery procedures, or Professionals, and their respective institutions and facilities that are permitted to use DSUVIA.

ZB Dental’s distribution rights are non-exclusive for crossover ambulatory surgery centers and certain government customers, and do not extend to ambulatory care centers outside the class of trade or into hospitals. ZB Dental will conduct any distribution activities in a manner consistent with DSUVIA’s FDA-approved indication and REMS program, and within the parameters established in the Distribution Agreement. ZB Dental has the right to sublicense its distribution rights to its qualified marketing partners but may not otherwise sublicense its distribution rights to any third party without our prior written consent.

Termination of Grünenthal Amended Agreements

On May 18, 2020, we received a notice from Grünenthal GmbH, or Grünenthal, that it is exercising its right to terminate the amended Collaboration and License Agreement, or the Amended License Agreement, and the amended Manufacture and Supply Agreement, or the Amended MSA, together referred to as the Amended Agreements, between AcelRx and Grünenthal, effective on or about November 14, 2020. Upon termination, the rights to market and sell Zalviso in the European Union, Switzerland, Liechtenstein, Iceland, Norway and Australia, or the Territory, will revert immediately back to us, although Grünenthal has the right to sell down its existing Zalviso inventory. We have a continuing obligation to use commercially reasonable efforts to negotiate a replacement license agreement, or New Arrangement; however, we have not yet entered into such an arrangement.

On May 20, 2020, we agreed to provide a right of first negotiation for a license agreement to replace the Grünenthal Amended License Agreement to a third party with which the Company is currently negotiating a license agreement for DZUVEO for the European market.

Termination of Proposed Acquisition of Tetraphase Pharmaceuticals, Inc.

On March 15, 2020, we entered into the Agreement and Plan of Merger (as amended on May 27, 2020 and May 29, 2020, the Merger Agreement) with Tetraphase Pharmaceuticals, Inc., or Tetraphase, and Consolidated Merger Sub, Inc., a Delaware corporation and indirect wholly-owned subsidiary of the Company, or Merger Sub, which provided for the merger of Merger Sub with and into Tetraphase, with Tetraphase continuing as the surviving corporation and an indirect wholly-owned subsidiary of AcelRx.

On June 4, 2020, Tetraphase terminated the Merger Agreement pursuant to its terms and paid AcelRx a termination fee of approximately $1.8 million.

Co-Promotion Agreement

On March 15, 2020, we entered into the Co-Promotion Agreement with Tetraphase to co-promote DSUVIA and Tetraphases’s XERAVA™ (eravacycline), which was subsequently amended on May 26, 2020. Under the terms of this agreement, each company is responsible for maintaining compliance under the agreed marketing and promotion plan and achieving a minimum number of sales calls for each product. On March 16, 2020, in connection with entering into the Co-Promotion Agreement, we initiated a reduction in headcount, designed to eliminate the overlap with the Tetraphase commercial team in order to more efficiently commercialize DSUVIA alongside the Tetraphase commercial team and reduce operating expenses. We eliminated 30 positions, mainly within the commercial organization.

Either party can terminate the Co-Promotion Agreement with 15 months written notice. In the event of a change of control, or CoC, of either party, the CoC party will be subject to meeting certain performance standards, and if these performance standards are not met, then a royalty of 10% of net sales on the CoC party’s product will be payable to the non-CoC party until the end of the agreement. The non-CoC party will also be able to solicit the employees of the CoC party in the event of a change of control and have the right to terminate the agreement with one month’s written notice. On July 28, 2020, Tetraphase was acquired by La Jolla Pharmaceutical Company, and as a result, Tetraphase became a CoC party under the Co-Promotion Agreement.

General Trends and Outlook

COVID-19-related

Government-mandated shelter-in-place orders and related safety policies on account of the COVID-19 pandemic continue to prevent us from operating our business in the normal course. Beginning in March and April of 2020, state and local officials issued orders in response to the pandemic which included, among other things, requirements for residents to shelter in place and for non-essential businesses to cease activities at facilities within certain cities, counties, and states. State and local officials have taken different approaches to these orders, and some have not issued any such orders. Once issued, the orders have been relaxed and then tightened, depending on the rate of COVID-19 cases. As a result of these orders, we implemented a work from home policy for our California-based employees and we continue to adhere to the various and diverse orders issued by government officials in the jurisdictions in which we operate. In addition, 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, and we have no visibility as to when these restrictions will be lifted. As a result, the educational and promotional efforts of our commercial and medical affairs personnel have been substantially reduced, and in some cases, stopped. We expect our near-term sales volumes to be adversely impacted as long as access to healthcare facilities by our commercial and medical affairs personnel continues to be limited. As a result, we also anticipate our operating expenses during this period to be lower than expected, primarily due to reduced travel, educational and promotional activities by our commercial and medical affairs teams. We will continue to evaluate the impact on our revenues and related metrics and operating expenses during this period and assess the need to adjust our expenses and expectations.

We have heard from a number of hospital customers and government representatives, and also read numerous media reports about a severe shortage of intravenous sedatives and analgesics, namely fentanyl, which we understand is directly and indirectly attributable to the COVID-19 situation. We remain in discussions with these potential customers as to how AcelRx, and specifically DSUVIA, can support this crisis and the patients requiring appropriate care. In addition, in response to a shortage of intravenous fentanyl and other IV opioids during the COVID-19 pandemic, AcelRx began outreach efforts to health care settings to inform them of how DSUVIA may help with these shortages.

One Zalviso supplier was unable to perform certain services as planned, given government orders impacting their business, and as a result, this supplier provided us with a force majeure notice. We, in turn, provided a force majeure notice to Grünenthal under our Amended MSA. At this time, we believe this halt in production will not have a significant impact on our financial results, but we continue to work with our suppliers and Grünenthal to manage Zalviso production activities until on or about November 14, 2020 when the agreement with Grünenthal will terminate.

As a result of international travel restrictions, the timing for testing and acceptance of our DSUVIA high-volume packaging line has been delayed. Based on our best estimate, we project that the line will be installed and qualification completed in 2021.

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 impacts 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.

Department of Defense

In April 2020, DSUVIA achieved Milestone C approval by the Department of Defense, a decision that clears the path for the Department of Defense to begin placing orders for DSUVIA.

Financial Overview

We have incurred net losses and generated negative cash flows from operations since inception and expect to incur losses in the future as we continue commercialization activities to support the U.S. launch of DSUVIA, support European sales of Zalviso by Grünenthal or any replacement partner, and any future research and development activities needed to support the U.S. approval of Zalviso, once, and if, the NDA is resubmitted. As a result, we expect to continue to incur operating losses and negative cash flows until such time as DSUVIA has gained market acceptance and generated significant revenues.

We will incur capital expenditures related to the installation of our high-volume automated packaging line for DSUVIA, from which we expect to have qualified product being packaged beginning in 2021. We anticipate that the high-volume line for DSUVIA will contribute to a significant decrease in costs of goods sold in 2022 and beyond.

Our net loss for the three and six months ended June 30, 2020 was $6.6 million and $22.5 million, respectively, compared to net losses of $12.4 million and $26.1 million for the three and six months ended June 30, 2019, respectively. As of June 30, 2020, we had an accumulated deficit of $420.6 million. As of June 30, 2020, we had cash, cash equivalents and short-term investments totaling $43.7 million compared to $66.1 million as of December 31, 2019.

Critical Accounting Estimates

The accompanying discussion and analysis of our financial condition and results of operations are based upon our unaudited Condensed 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. Our critical accounting policies and estimates are detailed in our Annual Report.

There have been no significant changes to our critical accounting policies or significant judgements and estimates for the three and six months ended June 30, 2020, from those previously disclosed in our Annual Report.

Results of Operations

Our results of operations have fluctuated from period to period and may continue to fluctuate in the future, based upon the progress of our commercial launch of DSUVIA, our research and development efforts, variations in the level of expenditures related to commercial launch and development efforts 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. In particular, to the extent our commercial and medical affairs personnel continue to be restricted from accessing hospitals and ambulatory surgical centers due to COVID-19, and to the extent government authorities and healthcare providers are continuing to limit elective surgeries, we expect our sales volume to be adversely affected.

Three and Six Months Ended June 30, 2020 and 2019

Revenue

Product Sales Revenue

The Company’s product sales revenue consists of sales of DSUVIA in the U.S. and Zalviso in Europe.

Product sales revenue by product for the three and six months ended June 30, 2020 and 2019 was as follows:

		Three Months Ended June 30,										Six Months Ended June 30,
		2020		2019		$ Change 2020 vs. 2019			% Change 2020 vs. 2019			2020		2019		$ Change 2020 vs. 2019			% Change 2020 vs. 2019
	(In thousands, except percentages)
DSUVIA		$	2	$	55	$	(53	)		(96	)%	$	157	$	102	$	55			54	%
Zalviso			301		713		(412	)		(58	)%		420		792		(372	)		(47	)%
Total product sales revenue		$	303	$	768	$	(465	)		(61	)%	$	577	$	894	$	(317	)		(35	)%

The decrease in DSUVIA product sales revenue for the three months ended June 30, 2020, as compared to the prior year period, is primarily due to the adverse effects of the COVID-19 pandemic on our sales efforts. The increase in DSUVIA product sales revenue for the six months ended June 30, 2020, as compared to the prior year period, is due to the ramp of the commercial launch of DSUVIA in the United States, which began in the first quarter of 2019.

The decrease in Zalviso product sales revenue for the three and six months ended June 30, 2020, as compared to the prior year period, was primarily the result of decreased orders from Grünenthal. During the three months ended June 30, 2020, Grünenthal terminated the Amended Agreements, effective on or about November 14, 2020. As of June 30, 2020, we had current deferred revenue under the Amended Agreements with Grünenthal of $0.3 million.

Contract and Other Collaboration Revenue

Contract and other collaboration revenue includes revenue under the Amended Agreements related to research and development services, non-cash royalty revenue related to the Royalty Monetization and royalty revenue for sales of Zalviso in Europe.

Contract and other collaboration revenue for the three and six months ended June 30, 2020 and 2019 was as follows (in thousands):

	Three Months Ended June 30,										Six Months Ended June 30,
	2020		2019		$ Change 2020 vs. 2019			% Change 2020 vs. 2019			2020		2019		$ Change 2020 vs. 2019			% Change 2020 vs. 2019
	(In thousands, except percentages)
Non-cash royalty revenue related to Royalty Monetization (See Note 7)	$	37	$	118	$	(81	)		(69	)%	$	121	$	203	$	(82	)		(40	)%
Royalty revenue		12		40		(28	)		(70	)%		40		67		(27	)		(40	)%
Other revenue		2,572		15		2,557			17,047	%		2,572		42		2,530			6,024	%
Total contract and other collaboration revenue	$	2,621	$	173	$	2,448			1,415	%	$	2,733	$	312	$	2,421			776	%

As of June 30, 2020, the deferred revenue balance under the Amended Agreements with Grünenthal was $0.3 million, all of which is current due to the contract termination on or about November 14, 2020. The estimated margin we expect to receive on transfer prices under the Amended Agreements was deemed to be a significant and incremental discount on manufacturing services, as compared to market rates for contract manufacturing margin. The deferred revenue balance will decline on a straight-line basis through the contract termination, on or about November 14, 2020, as we recognize product sales revenue under the Amended Agreements.

We estimate and recognize royalty revenue and non-cash royalty revenue on a quarterly basis. Adjustments to estimated revenue are recognized in the subsequent quarter based on actual revenue earned per the royalty reports received from Grünenthal. In addition, under the Royalty Monetization, we sold a portion of the expected royalty stream and commercial milestones from the European sales of Zalviso by Grünenthal to PDL.

Cost of Goods Sold

As mentioned above, we commenced commercial sales of DSUVIA in the first quarter of 2019.

Total cost of goods sold for the three and six months ended June 30, 2020 and 2019 was as follows (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

$ Change

2020 vs. 2019

% Change

2020 vs. 2019

2020

2019

$ Change

2020 vs. 2019

% Change

2020 vs. 2019