Long-Term Debt

Amended

Loan and Security Agreement

December

16,

2013,

AcelRx entered into an Amended and Restated Loan and Security Agreement with Hercules Technology II, L.P. and Hercules Capital, Inc., formerly known as Hercules Technology Growth Capital, Inc., together, the Lenders, or the Original Loan Agreement, under which the Company was provided the ability to borrow up to

$40.0

million in

three

tranches. The loans were represented by secured convertible term promissory notes, collectively, the

2013

Notes. The Original Loan Agreement amended and restated the prior Loan and Security Agreement between the Company and the Lenders dated as of

June

29,

2011.

The Company borrowed the

first

tranche of

$15.0

million upon closing of the transaction on

December

16,

2013,

and the

second

tranche of

$10.0

million on

June 16, 2014

. The Company used approximately

$8.6

million of the proceeds from the

first

tranche to repay its obligations under the prior Loan and Security Agreement with the Lenders. The Company recorded the new debt at an estimated fair value of

$24.9

million as of

December 31, 2014.

In connection with the Original Loan Agreement, the Company issued a warrant to each Lender which, collectively, are exercisable for an aggregate of

176,730

shares of common stock and each carried an exercise price of

$6.79

per share.

September

24,

2014,

the Company entered into Amendment

No.

to the Original Loan Agreement with the Lenders. Amendment

No.

extended the time period under which the Company could draw down the

third

tranche, of up to

$15.0

million, from

March

15,

2015

August

2015,

subject to the Company obtaining approval for ZALVISO from the FDA. The Company did

not

receive FDA approval of ZALVISO by

August 1, 2015

and as such, did

not

have access to the

third

tranche.

September 18, 2015,

concurrently with the closing of the Royalty Monetization, the Company entered into a Consent and Amendment

No.

or Amendment

No.

to the Original Loan Agreement with the

Lenders. Amendment

No.

includes an interest only period from

October 1, 2015

through

March 31, 2016,

with further extension to

September 30, 2016

upon satisfaction of certain conditions. These conditions were satisfied in the

third

quarter of

2015

and the interest only period was extended through

September 30, 2016.

Loans under the Original Loan Agreement were scheduled to mature on

October 1, 2017.

In connection with Amendment

No.

the Company reduced the exercise price of the warrants already held by the Lenders, which are exercisable for an aggregate of

176,730

shares of Common Stock, from the previous exercise price of

$6.79

per share to

$3.88

per share.

September 30, 2016,

the Company entered into Amendment

No.

to the Original Loan Agreement w

ith the Lenders. Among other things, Amendment

No.

extended the interest-only period from

October 1, 2016

April 1, 2017.

In connection with Amendment

No.

the Company reduced the exercise price of the existing warrants held by the Lenders, which are exercisable for an aggregate of

176,730

shares of common stock, from the previous exercise price of

$3.88

per share to

$3.07

per share.

March 2, 2017,

the Company amended and restated the Original Loan Agreement with the Lenders, which is referred to as the Amended Loan Agreement. Pursuant to the Amended Loan Agreement,

the Company borrowed the

first

tranche of approximately

$20.5

million upon closing of the transaction on

March 2, 2017,

which is represented by secured term promissory notes, or the Notes. The Company used all of the proceeds from the

first

tranche to repay its obligations under the Original Loan Agreement, including a final payment of

$1.7

million made on

October 1, 2017.

The interest rate is calculated at a rate equal to the greater of either (i)

9.55%

plus the prime rate as reported from time to time in The Wall Street Journal minus

3.50%,

and (ii)

9.55%.

Payments under the Amended Loan Agreement were interest-only until

October 1, 2017

followed by equal monthly payments of principal and interest through the scheduled maturity date of

March 1, 2020.

A final payment equal to

6.5%

of the aggregate principal amount of loans funded under the Amended Loan Agreement, or End of Term Fee, or EOT Fee, will be due on the earliest of (i) the maturity date, (ii) prepayment in full of the loans (other than by a refinancing with Hercules) or (iii) the date on which the loans under the Amended Loan Agreement become due and payable. The Company’s obligations under the Amended Loan Agreement are secured by a security interest in substantially all of its assets, other than its intellectual property.

If the Company prepays the loans under the Amended Loan Agreement prior to the maturity date, it will pay Hercules a prepayment charge, based on a percentage of the then outstanding principal balance, equal to

if the prepayment occurs prior to

March 2, 2018,

if the prepayment occurs after

March 2, 2018,

but prior to

March 2, 2019,

if the prepayment occurs after

March 2, 2019.

The Amended Loan Agreement includes customary affirmative and restrictive covenants, but does

not

include any financial maintenance covenants, and also includes standard events of default, including payment defaults, breaches of covenants following any applicable cure period, a material impairment in the perfection or priority of Hercules

’ security interest or in the value of the collateral, and events relating to bankruptcy or insolvency. Upon the occurrence of an event of default, a default interest rate of an additional

may

be applied to the outstanding loan balances, and Hercules

may

declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Amended Loan Agreement.

Upon an event of default, including a change of control,

Hercules has the option to accelerate repayment of the Amended Loan Agreement, including payment of any applicable prepayment charges. This option is considered a contingent put option liability, as the holder of the loan has the ability to exercise the option in the event of default, and is considered an embedded derivative, which must be valued and separately accounted for in the Company’s financial statements. As the Original Loan Agreement entered into on

December 16, 2013

was considered an extinguishment, the contingent put option liability associated with the prior Loan and Security Agreement, which had an estimated fair value of

$32

at the time of the amendment, was written off as a part of the loss on extinguishment, and a new contingent put option liability was established. As of

December 31, 2017

and

2016,

the estimated fair value of the contingent put option liability was

$0.2

million and

$0.1

million, respectively, which 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. 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 contingent put option liability is revalued at the end of each reporting period and any change in the fair value is recognized in interest income and

other income (expense), net in the Consolidated Statements of Comprehensive Loss.

The Company

performed an analysis of Amendments

No.

and

No.

to determine if each amendment was a modification or extinguishment of the debt under the Original Loan Agreement. The Company assumed immediate prepayment of both the pre-modification debt and post-modification debt, including the change in the fair value due to the warrant amendments, and concluded that Amendments

No.

and

No.

were each modifications rather than extinguishments of the debt.

The accrued balance due under the

Amended Loan Agreement was

$19.1

million at

December 31, 2017

and was

$21.5

million under the Original Loan Agreement at

December 31, 2016.

Interest expense related to the Amended Loan Agreement was

$3.3

million for the year ended

December 31, 2017

and was

$2.8

million and

$3.0

million under the Original Loan Agreement for the years ended

December 31, 2016

and

2015,

respectively.

Future Payments on Long-Term Debt

The following table summarizes our outstanding future payments associated with the Company

’s long-term debt as of

December

31,

2017

(in thousands):

20 18	$	9,350
2019		9,350
20 20		3,704
Total payments		22,404
Less amount representing interest		(2,420	)
Notes payable, gross		19,984
Unamortized portion of final payment		(741	)
Unamortized discount on notes payable		(147	)
Long-term debt		19,096
Less current portion of notes payable, including unamortized discount		(7,727	)
Long-term debt, current portion	$	11,369