Exhibit 10.10

AMENDED AND RESTATED

LOAN AND SECURITY AGREEMENT

THIS LOAN AND SECURITY AGREEMENT is made and dated as of December 16, 2013 and
is entered into by and between ACELRX PHARMACEUTICALS, INC., a Delaware
corporation, and each of its subsidiaries, (hereinafter collectively referred to
as the “Borrower”), HERCULES TECHNOLOGY II, L.P., a Delaware limited
partnership, and HERCULES TECHNOLOGY GROWTH CAPITAL, INC., a Maryland
corporation (collectively, “Lender”) and amends and restates in its entirety
that certain Loan and Security Agreement between Borrower, as the borrower and
Hercules Technology II, L.P., a Delaware limited partnership, and Hercules
Technology Growth Capital, Inc., collectively as the lender, dated June 29, 2011
(the “Original Agreement”).

RECITALS

A. Borrower has requested Lender to make available to Borrower a loan in an
aggregate principal amount of up to Forty Million Dollars ($40,000,000) (the
“Term Loan”);

B. Part of the proceeds of the Term Loan will be used to refinance loans funded
under the Original Agreement and for general corporate purposes; and

C. Lender is willing to make the Term Loan on the terms and conditions set forth
in this Agreement.

AGREEMENT

NOW, THEREFORE, Borrower and Lender agree as follows:

SECTION 1. DEFINITIONS AND RULES OF CONSTRUCTION

1.1 Unless otherwise defined herein, the following capitalized terms shall have
the following meanings:

“Account Control Agreement(s)” means any agreement entered into by and among the
Lender, Borrower and a third party Bank or other institution (including a
Securities Intermediary) in which Borrower maintains a Deposit Account or an
account holding Investment Property and which grants Lender a perfected first
priority security interest in the subject account or accounts.

“ACH Authorization” means the ACH Debit Authorization Agreement in substantially
the form of Exhibit I.

“Advance(s)” means a Term Loan Advance.

“Advance Date” means the funding date of any Advance.

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“Advance Request” means a request for an Advance submitted by Borrower to Lender
in substantially the form of Exhibit A.

“Agreement” means this Loan and Security Agreement, as amended from time to
time.

“Assignee” has the meaning given to it in Section 11.13.

“Borrower Products” means all products, software, service offerings, technical
data or technology currently being designed, manufactured or sold by Borrower or
which Borrower intends to sell, license, or distribute in the future including
any products or service offerings under development, collectively, together with
all products, software, service offerings, technical data or technology that
have been sold, licensed or distributed by Borrower since its incorporation.

“Cap” shall have the meaning assigned to such term in Section 2.2(e)(iii).

“Cash” means all cash and liquid funds.

“Change in Control” means any reorganization, recapitalization, consolidation or
merger (or similar transaction or series of related transactions) of Borrower or
any Subsidiary, sale or exchange of outstanding shares (or similar transaction
or series of related transactions) of Borrower or any Subsidiary in which the
holders of Borrower or Subsidiary’s outstanding shares immediately before
consummation of such transaction or series of related transactions do not,
immediately after consummation of such transaction or series of related
transactions, retain shares representing more than fifty percent (50%) of the
voting power of the surviving entity of such transaction or series of related
transactions (or the parent of such surviving entity if such surviving entity is
wholly owned by such parent), in each case without regard to whether Borrower or
Subsidiary is the surviving entity.

“Claims” has the meaning given to it in Section 11.10.

“Closing Date” means the date of this Agreement.

“Collateral” means the property described in Section 3.

“Collateral Agent” means Hercules Technology II, L.P..

“Commitment Fee” means $25,000, which fee was paid to Lender upon
countersignature of Lender’s proposal letter dated November 19, 2013, and shall
be deemed fully earned on such date regardless of the early termination of this
Agreement.

“Common Stock” means the Common Stock, $0.001 par value per share, of the
Company.

“Confidential Information” has the meaning given to it in Section 11.12.

 

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“Contingent Obligation” means, as applied to any Person, any direct or indirect
liability, contingent or otherwise, of that Person with respect to (i) any
indebtedness, lease, dividend, letter of credit or other obligation of another,
including any such obligation directly or indirectly guaranteed, endorsed,
co-made or discounted or sold with recourse by that Person, or in respect of
which that Person is otherwise directly or indirectly liable; (ii) any
obligations with respect to undrawn letters of credit, corporate credit cards or
merchant services issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term “Contingent Obligation” shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.

“Copyright License” means any written agreement granting any right to use any
Copyright or Copyright registration, now owned or hereafter acquired by Borrower
or in which Borrower now holds or hereafter acquires any interest.

“Copyrights” means all copyrights, whether registered or unregistered, held
pursuant to the laws of the United States, any State thereof, or of any other
country.

“Delivery Date” has the meaning given to it in Section 2.2(e)(i).

“Deposit Accounts” means any “deposit accounts,” as such term is defined in the
UCC, and includes any checking account, savings account, or certificate of
deposit.

“ERISA” is the Employee Retirement Income Security Act of 1974, and its
regulations.

“Event of Default” has the meaning given to it in Section 9.

“Facility Charge” means one percent (1.00%) of the Maximum Term Loan Amount.

“FDA” means the U.S. Food and Drug Administration or any successor entity
performing similar functions.

“Financial Statements” has the meaning given to it in Section 7.1.

“Fixed Conversion Price” has the meaning given to it in Section 2.2(e)(i).

“GAAP” means generally accepted accounting principles in the United States of
America, as in effect from time to time.

 

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“Indebtedness” means indebtedness of any kind, including (a) all indebtedness
for borrowed money or the deferred purchase price of property or services
(excluding trade credit entered into in the ordinary course of business due
within sixty (60) days), including reimbursement and other obligations with
respect to surety bonds and letters of credit, (b) all obligations evidenced by
notes, bonds, debentures or similar instruments, (c) all capital lease
obligations, and (d) all Contingent Obligations.

“Insolvency Proceeding” is any proceeding by or against any Person under the
United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.

“Intellectual Property” means all of Borrower’s Copyrights; Trademarks; Patents;
Licenses; trade secrets and inventions; mask works; Borrower’s applications
therefor and reissues, extensions, or renewals thereof; and Borrower’s goodwill
associated with any of the foregoing, together with Borrower’s rights to sue for
past, present and future infringement of Intellectual Property and the goodwill
associated therewith.

“Investment” means any beneficial ownership (including stock, partnership or
limited liability company interests) of or in any Person, or any loan, advance
or capital contribution to any Person.

“Joinder Agreements” means for each Subsidiary, a completed and executed Joinder
Agreement in substantially the form attached hereto as Exhibit G.

“Lender” has the meaning given to it in the preamble to this Agreement.

“Lender Expenses” are all audit fees and expenses, costs, and expenses
(including reasonable attorneys’ fees and expenses) for preparing, negotiating,
administering, defending and enforcing the Loan Documents (including, without
limitation, those incurred in connection with appeals or Insolvency Proceedings)
or otherwise incurred with respect to Borrower.

“License” means any Copyright License, Patent License, Trademark License or
other license of rights or interests.

“Lien” means any mortgage, deed of trust, pledge, hypothecation, assignment for
security, security interest, encumbrance, levy, lien or charge of any kind,
whether voluntarily incurred or arising by operation of law or otherwise,
against any property, any conditional sale or other title retention agreement,
and any lease in the nature of a security interest.

“Loan” means the Advances made under this Agreement.

“Loan Documents” means this Agreement, the Notes, the ACH Authorization, the
Account Control Agreements, the Joinder Agreements, all UCC Financing
Statements, the Warrant, and any other documents executed in connection with the
Secured Obligations or the transactions contemplated hereby, as the same may
from time to time be amended, modified, supplemented or restated.

 

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“Material Adverse Effect” means a material adverse effect upon: (i) the
business, operations, properties, assets, or condition (financial or otherwise)
of Borrower; or (ii) the ability of Borrower to perform the Secured Obligations
in accordance with the terms of the Loan Documents, or the ability of Lender to
enforce any of its rights or remedies with respect to the Secured Obligations;
or (iii) the Collateral or Lender’s Liens on the Collateral or the priority of
such Liens.

“Maximum Term Loan Amount” means Forty Million and No/100 Dollars ($40,000,000).

“Maximum Rate” shall have the meaning assigned to such term in Section 2.3.

“Note” means Secured Convertible Term Promissory Notes in substantially the form
of Exhibit B-1 and Exhibit B-2.

“Optional Prepayment” has the meaning given to it in Section 2.2(e)(i).

“Optional Prepayment Date” has the meaning given to it in Section 2.2(e)(i).

“Patent License” means any written agreement granting any right with respect to
any invention on which a Patent is in existence or a Patent application is
pending, in which agreement Borrower now holds or hereafter acquires any
interest.

“Patents” means all letters patent of, or rights corresponding thereto, in the
United States or in any other country, all registrations and recordings thereof,
and all applications for letters patent of, or rights corresponding thereto, in
the United States or any other country.

“Performance Milestone” means the date upon which the FDA approves Zalviso.

“Permitted Indebtedness” means: (i) Indebtedness of Borrower in favor of Lender
arising under this Agreement or any other Loan Document; (ii) Indebtedness
existing on the Closing Date which is disclosed in Schedule 1A;
(iii) Indebtedness of up to $200,000 outstanding at any time secured by a lien
described in clause (vii) of the defined term “Permitted Liens,” provided such
Indebtedness does not exceed the lesser of the cost or fair market value of the
Equipment financed with such Indebtedness; (iv) Indebtedness to trade creditors
incurred in the ordinary course of business, including Indebtedness incurred in
the ordinary course of business with corporate credit cards; (v) Indebtedness
that also constitutes a Permitted Investment; (vi) Subordinated Indebtedness;
(vii) reimbursement obligations in connection with letters of credit that are
secured by cash or cash equivalents and issued on behalf of the Borrower or a
Subsidiary thereof in an amount not to exceed $200,000 at any time outstanding,
(viii) other Indebtedness in an amount not to exceed $500,000 at any time
outstanding, and (ix) extensions, refinancings and renewals of any items of
Permitted Indebtedness, provided that the principal amount is not increased or
the terms modified to impose materially more burdensome terms upon Borrower or
its Subsidiary, as the case may be.

 

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“Permitted Investment” means: (i) Investments existing on the Closing Date which
are disclosed in Schedule 1B; (ii) (a) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within one year from the date of acquisition thereof,
(b) commercial paper maturing no more than one year from the date of creation
thereof and currently having a rating of at least A-2 or P-2 from either
Standard & Poor’s Corporation or Moody’s Investors Service, (c) certificates of
deposit issued by any bank with assets of at least $500,000,000 maturing no more
than one year from the date of investment therein, and (d) money market
accounts; (iii) Investments consisting of the endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business; (iv) repurchases of stock from former employees, directors,
or consultants of Borrower under the terms of applicable repurchase agreements
at the original issuance price of such securities in an aggregate amount not to
exceed $250,000 in any fiscal year, provided that no Event of Default has
occurred, is continuing or would exist after giving effect to the repurchases;
(v) Investments accepted in connection with Permitted Transfers;
(vi) Investments (including debt obligations) received in connection with the
bankruptcy or reorganization of customers or suppliers and in settlement of
delinquent obligations of, and other disputes with, customers or suppliers
arising in the ordinary course of Borrower’s business; (vii) Investments
consisting of notes receivable of, or prepaid royalties and other credit
extensions, to customers and suppliers who are not affiliates, in the ordinary
course of business, provided that this subparagraph (vii) shall not apply to
Investments of Borrower in any Subsidiary; (viii) Investments consisting of
loans not involving the net transfer on a substantially contemporaneous basis of
cash proceeds to employees, officers or directors relating to the purchase of
capital stock of Borrower pursuant to employee stock purchase plans or other
similar agreements approved by Borrower’s Board of Directors; (ix) Investments
consisting of travel advances, employee relocation loans and other employee
loans and advances in the ordinary course of business and not in excess of
$500,000 in the aggregate; (x) Investments in newly-formed Subsidiaries
organized in the United States, provided that such Subsidiaries enter into a
Joinder Agreement promptly after their formation by Borrower and execute such
other documents as shall be reasonably requested by Lender; (xi) Investments in
subsidiaries organized outside of the United States approved in advance in
writing by Lender; (xii) joint ventures or strategic alliances in the ordinary
course of Borrower’s business consisting of the nonexclusive licensing of
technology, the development of technology or the providing of technical support,
provided that any cash Investments by Borrower do not exceed $100,000 in the
aggregate in any fiscal year; (xiii) Investments constituting mergers or
acquisitions permitted by Section 7.10; and (xiv) additional Investments that do
not exceed $500,000 in the aggregate.

“Permitted Liens” means any and all of the following: (i) Liens in favor of
Lender; (ii) Liens existing on the Closing Date which are disclosed in Schedule
1C; (iii) Liens for taxes, fees, assessments or other governmental charges or
levies, either not delinquent or being contested in good faith by appropriate
proceedings; provided, that Borrower maintains adequate reserves therefor in
accordance with GAAP to the extent required thereby; (iv) Liens securing claims
or demands of materialmen, artisans, mechanics, carriers, warehousemen,
landlords and other like Persons arising in the ordinary course of Borrower’s
business and imposed without action of such parties; provided, that the payment
thereof is not overdue; (v) Liens arising from judgments, decrees or attachments
in circumstances which do not constitute an Event of Default hereunder; (vi) the
following deposits, to the extent made in the ordinary course of business:
deposits under worker’s compensation, unemployment insurance, social security
and other similar laws, or to

 

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secure the performance of bids, tenders or contracts (other than for the
repayment of borrowed money) or to secure indemnity, performance or other
similar bonds for the performance of bids, tenders or contracts (other than for
the repayment of borrowed money) or to secure statutory obligations (other than
liens arising under ERISA or environmental liens) or surety or appeal bonds, or
to secure indemnity, performance or other similar bonds; (vii) Liens on
Equipment or software or other intellectual property constituting purchase money
liens and liens in connection with capital leases securing Indebtedness
permitted in clause (iii) of “Permitted Indebtedness”; (viii) Liens incurred in
connection with Subordinated Indebtedness; (ix) leasehold interests in leases or
subleases and licenses granted in the ordinary course of business and not
interfering in any material respect with the business of the licensor; (x) Liens
in favor of customs and revenue authorities arising as a matter of law to secure
payment of custom duties that are promptly paid on or before the date they
become due; (xi) Liens on insurance proceeds securing the payment of financed
insurance premiums that are promptly paid on or before the date they become due
(provided that such Liens extend only to such insurance proceeds and not to any
other property or assets); (xii) statutory and common law rights of set-off and
other similar rights as to deposits of cash and securities in favor of banks,
other depository institutions and brokerage firms; (xiii) easements, zoning
restrictions, rights-of-way and similar encumbrances on real property imposed by
law or arising in the ordinary course of business so long as they do not
materially impair the value or marketability of the related property;
(xiv) Liens on cash or cash equivalents securing obligations permitted under
clause (vii) of the definition of Permitted Indebtedness; and (xv) Liens
incurred in connection with the extension, renewal or refinancing of the
indebtedness secured by Liens of the type described in clauses (i) through
(xi) above; provided, that any extension, renewal or replacement Lien shall be
limited to the property encumbered by the existing Lien and the principal amount
of the indebtedness being extended, renewed or refinanced (as may have been
reduced by any payment thereon) does not increase.

“Permitted Transfers” means (i) sales of Inventory in the normal course of
business, (ii) non-exclusive licenses and similar arrangements for the use of
Intellectual Property in the ordinary course of business and licenses that could
not result in a legal transfer of title of the licensed property but that may be
exclusive in respects other than territory and that may be exclusive as to
territory only as to discrete geographical areas outside of the United States in
the ordinary course of business, or (iii) dispositions of worn-out, obsolete or
surplus Equipment at fair market value in the ordinary course of business,
(iv) dispositions expressly permitted under Section 7.7, 7.8 or 7.10 hereof,
(v) dispositions arising from the abandonment of fixtures and other similar
tenant improvements in connection with office relocations, and (vi) other
Transfers of assets having a fair market value of not more than $250,000 in the
aggregate in any fiscal year.

“Person” means any individual, sole proprietorship, partnership, joint venture,
trust, unincorporated organization, association, corporation, limited liability
company, institution, other entity or government.

“Preferred Stock” means at any given time any equity security issued by Borrower
that has any rights, preferences or privileges senior to Borrower’s Common
Stock.

 

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“Prepayment Charge” shall have the meaning assigned to such term in Section 2.5.

“Principal Installment Due Date” has the meaning given to it in
Section 2.2(e)(i).

“Principal Installment Payment” has the meaning given to it in
Section 2.2(e)(i).

“Receivables” means (i) all of Borrower’s Accounts, Instruments, Documents,
Chattel Paper, Supporting Obligations, letters of credit, proceeds of any letter
of credit, and Letter of Credit Rights, and (ii) all customer lists, software,
and business records related thereto.

“Repayment Election Notice” has the meaning given to it in Section 2.2(e)(i).

“Rule 144” means Rule 144 under the Securities Act.

“SBA” shall have the meaning assigned to such term in Section 7.15.

“SBIC” shall have the meaning assigned to such term in Section 7.15.

“SBIC Act” shall have the meaning assigned to such term in Section 7.15.

“SEC” has the meaning given to it in Section 2.2(e)(iv).

“Secured Obligations” means Borrower’s obligations under this Agreement and any
Loan Document, including any obligation to pay any amount now owing or later
arising. Notwithstanding the foregoing, the Secured Obligations shall not
include any of Borrower’s obligations, liabilities or duties under the Warrant.

“Securities Act” means the Securities Act of 1933, as amended.

“Stock Payment Conditions” shall have the meaning assigned to such term in
Section 2.2(e)(ii).

“Stock Payment Option” has the meaning given to it in Section 2.2(e)(i).

“Subordinated Indebtedness” means Indebtedness subordinated to the Secured
Obligations in amounts and on terms and conditions satisfactory to Lender in its
sole discretion.

“Subsidiary” means an entity, whether corporate, partnership, limited liability
company, joint venture or otherwise, in which Borrower owns or controls 50% or
more of the outstanding voting securities, including each entity listed on
Schedule 1 hereto.

“Term Commitment” means as to any Lender, the obligation of such Lender, if any,
to make a Term Loan Advance to the Borrower in a principal amount not to exceed
the amount set forth under the heading “Term Commitment” opposite such Lender’s
name on Schedule 1.1.

 

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“Term Loan Advance” means any Term Loan funds advanced under this Agreement.

“Term Loan Interest Rate” means for any day a per annum rate of interest equal
to the greater of either (i) 9.1% plus the prime rate as reported in The Wall
Street Journal minus 5.25%, and (ii) 9.10%.

“Term Loan Maturity Date” means October 1, 2017, or, if the Performance
Milestone has occurred on or before April 1, 2015, January 1, 2018.

“Trademark License” means any written agreement granting any right to use any
Trademark or Trademark registration, now owned or hereafter acquired by Borrower
or in which Borrower now holds or hereafter acquires any interest.

“Trademarks” means all trademarks (registered, common law or otherwise) and any
applications in connection therewith, including registrations, recordings and
applications in the United States Patent and Trademark Office or in any similar
office or agency of the United States, any State thereof or any other country or
any political subdivision thereof.

“UCC” means the Uniform Commercial Code as the same is, from time to time, in
effect in the State of California; provided, that in the event that, by reason
of mandatory provisions of law, any or all of the attachment, perfection or
priority of, or remedies with respect to, Lender’s Lien on any Collateral is
governed by the Uniform Commercial Code as the same is, from time to time, in
effect in a jurisdiction other than the State of California, then the term “UCC”
shall mean the Uniform Commercial Code as in effect, from time to time, in such
other jurisdiction solely for purposes of the provisions thereof relating to
such attachment, perfection, priority or remedies and for purposes of
definitions related to such provisions.

“Warrant” means the warrant entered into in connection with the Loan.

“1934 Act” has the meaning given to it in Section 2.2(e)(iii).

Unless otherwise specified, all references in this Agreement or any Annex or
Schedule hereto to a “Section,” “subsection,” “Exhibit,” “Annex,” or “Schedule”
shall refer to the corresponding Section, subsection, Exhibit, Annex, or
Schedule in or to this Agreement. Unless otherwise specifically provided herein,
any accounting term used in this Agreement or the other Loan Documents shall
have the meaning customarily given such term in accordance with GAAP, and all
financial computations hereunder shall be computed in accordance with GAAP,
consistently applied. Unless otherwise defined herein or in the other Loan
Documents, terms that are used herein or in the other Loan Documents and defined
in the UCC shall have the meanings given to them in the UCC.

SECTION 2. THE LOAN

2.1 Reserved.

2.2 Term Loan.

 

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(a) Advances. Subject to the terms and conditions of this Agreement, Lender will
make, and Borrower agrees to draw, a Term Loan Advance of $15,000,000 on the
Closing Date. Beginning at any time on or after the Closing Date through
June 30, 2014, Borrower may request a second Term Loan Advance of up to
$10,000,000. Subject to Borrower’s achievement of the Performance Milestone,
from December 15, 2014 through March 15, 2015, Borrower may request a third Term
Loan Advance of up to $15,000,000. Each Term Loan Advance shall be subject to
the conditions precedent set forth in Sections 4.2 and 4.3. The aggregate
outstanding Term Loan Advances may be up to the Maximum Term Loan Amount.

(b) Advance Request. To obtain a Term Loan Advance, Borrower shall complete,
sign and deliver an Advance Request (at least five business days before the
Advance Date). Lender shall fund the Term Loan Advance in the manner requested
by the Advance Request provided that each of the conditions precedent to such
Term Loan Advance is satisfied as of the requested Advance Date.

(c) Interest. The principal balance of each Term Loan Advance shall bear
interest thereon from such Advance Date at the Term Loan Interest Rate based on
a year consisting of 360 days, with interest computed daily based on the actual
number of days elapsed. The Term Loan Interest Rate will float and change on the
day the Prime Rate changes from time to time.

(d) Payment. Borrower will pay interest on each Term Loan Advance on the first
day of each month, beginning the month after the Advance Date. Borrower shall
repay the aggregate Term Loan principal balance in thirty (30) equal monthly
installments of principal and interest beginning April 1, 2015, or, if the
Performance Milestone has occurred on or before April 1, 2015, Borrower shall
repay the aggregate Term Loan principal balance in twenty-four (24) equal
monthly installments of principal and interest beginning January 1, 2016, and
continuing on the first business day of each month thereafter. The entire Term
Loan principal balance and all accrued but unpaid interest hereunder, shall be
due and payable on the Term Loan Maturity Date. Borrower shall make all payments
under this Agreement without setoff, recoupment or deduction and regardless of
any counterclaim or defense. Except to the extent Borrower pays any regularly
scheduled installments of principal and/or optional prepayments of principal in
Common stock in accordance with, and subject to the limitations set forth in,
Section 2.2(e), Lender will initiate debit entries to the Borrower’s account as
authorized on the ACH Authorization on each payment date of all periodic
obligations payable to Lender under each Note or Term Loan Advance.

(e) Payment in Cash or Common Stock of Monthly Amount or Prepayment Principal
Amount.

(i) Payment in Cash or Common Stock. Subject to satisfaction of the Stock
Payment Conditions and compliance with the other terms and conditions of this
Section 2.2(e), Borrower may elect to pay, in whole or in part, any regularly
scheduled installment of principal (a “Principal Installment Payment”) or any

 

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optional prepayment of principal (an “Optional Prepayment”) by converting the
Notes into shares of Common Stock in lieu of payment in cash (such option, the
“Stock Payment Option”). In order to validly exercise a Stock Payment Option,
Borrower (A) must deliver written notice thereof, in the form attached hereto as
Exhibit J, to Lender (a”Repayment Election Notice”) five (5) days prior to
(i) the applicable due date of the Principal Installment Payment (the “Principal
Installment Due Date”) or (ii) the Optional Prepayment (such date, the “Optional
Prepayment Date”) and (B) shall either (i) (provided that Borrower’s transfer
agent is participating in the Fast Automated Securities Transfer Program of the
Depository Trust Company) credit to Lender by no later than the first trading
day following the applicable Principal Installment Due Date or Optional
Prepayment Date (such date, the “Delivery Date”) such aggregate number of shares
of Common Stock to be issued to Lender with respect to such Repayment Election
Notice, as determined in accordance with this Section 2.2(e) (which shares shall
be free of any restrictions on transfer), or (ii) deliver to Collateral Agent,
on behalf of Lender, stock certificates, without restrictive legend, evidencing
the number of shares of Common Stock with respect to such Repayment Election
Notice, as determined in accordance with this Section 2.2(e), by no later than
the first trading day following the applicable Delivery Date. All payments in
respect of a Principal Installment Payment and Optional Prepayment shall be made
in cash, unless (i) Borrower timely delivers a Repayment Election Notice in
accordance with the immediately preceding sentence, (ii) Borrower timely
delivers the requisite stock certificates or credits the shares of Common Stock
to Lender, free of restrictive legends, in accordance with this Section 2.2(e)
and (iii) the Stock Payment Conditions are satisfied in respect of such payment.
A Repayment Election Notice, once delivered by Borrower, shall be irrevocable
unless otherwise agreed, in writing, by Collateral Agent, on behalf of Lender.
If Borrower elects to convert the Notes to repay a Principal Installment Payment
or make an Optional Prepayment, in whole or in part, in shares of Common Stock,
the number of such shares of Common Stock to be issued in respect of such
Principal Installment Payment or Optional Prepayment shall be equal to the
number determined by dividing (x) the product of (A) the principal amount to be
paid in shares of Common Stock and (B) 103%, by (y) the Fixed Conversion Price.
For purposes hereof, the “Fixed Conversion Price” shall be $9.30; provided,
however, that upon the occurrence of any stock split, stock dividend,
combination of shares or reverse stock split pertaining to the Common Stock, the
Fixed Conversion Price shall be proportionately increased or decreased as
necessary to reflect the proportionate change in the shares of Common Stock
issued and outstanding as a result of such stock split, stock dividend,
combination of shares or reverse stock split. Any shares of Common Stock issued
pursuant to a Repayment Election Notice shall be deemed to be issued upon
conversion of the Notes.

 

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(ii) Stock Payment Conditions. Notwithstanding the foregoing, Borrower’s right
to deliver, and Lender’s obligation to accept, shares of Common Stock in lieu of
payment in cash of a Principal Installment Payment or Optional Prepayment, as
applicable, is conditioned on the satisfaction of each of the following
conditions (the “Stock Payment Conditions”) as of such Delivery Date: (A) the
closing price of the shares of Common Stock as reported by Bloomberg, L.P. on
the NASDAQ market for each of the seven (7) consecutive trading days immediately
preceding the Delivery Date shall be greater than or equal to 115% of the Fixed
Conversion Price; (B) the Common Stock issued in connection with any such
payment does not exceed 15% of the total trading volume of the Common Stock for
the twenty-two (22) consecutive trading days immediately prior to and including
such Delivery Date; (C) only one Repayment Election Notice may be given in any
calendar month; (D) the aggregate principal amount to be paid in shares of
Common Stock pursuant to Section 2.2 of this Agreement shall not exceed Five
Million Dollars ($5,000,000); (E) the Common Stock is (and was on each of the
twenty-two (22) consecutive trading days immediately preceding such Delivery
Date) quoted or listed on the NASDAQ market; (F) a registration statement is
effective and available for the resale of all of the shares of Common Stock to
be delivered on such Delivery Date, or such shares of Common Stock are eligible
for resale to the public pursuant to Rule 144 without any limitation; (G) after
giving effect to the issuance of such shares of Common Stock to Lender, Lender
would not (A) beneficially own, together with its affiliates, Common Stock in
excess of the limitations specified in subsection (e)(iii) below and (B) have
been issued shares of Common Stock pursuant to all Repayment Election Notices in
an aggregate amount in excess of the Cap; (H) as of such Delivery Date, there is
no outstanding Event of Default and there is no breach or default that, if left
uncured, would result in an Event of Default; and (I) Borrower shall have
sufficient authorized but unissued shares of Common Stock to provide for the
issuance of the shares of Common Stock pursuant to the Repayment Election
Notice. If any of the Stock Payment Conditions are not satisfied as of a
Delivery Date, Borrower shall not be permitted to pay, and the Lender shall not
be obligated to accept, the Principal Installment Payment or Optional
Prepayment, as applicable, in shares of Common Stock, and Borrower shall instead
pay such principal amount in cash; provided, however, that the Stock Payment
Conditions set forth in clauses (A), (B), (C), (E), (F) and (H) above may be
waived by a writing executed by both Borrower and Lender. In the event the
Company is relying upon an effective registration statement to satisfy clause
(F) of the Stock Payment Conditions, each of the Company and Lender shall
provide customary indemnification to one another with respect to such
registration statement in a form acceptable to the Company and Lender. By no
later than the first trading day following the Delivery Date, Borrower shall
either (i) (provided that Borrower’s transfer agent is participating in the Fast
Automated Securities Transfer Program of the Depository Trust Company) credit to
Lender the shares of Common Stock to be delivered by Borrower with respect to
the portion of the Principal Installment Payment or Optional Prepayment being
paid in shares of Common Stock or (ii) deliver to Collateral Agent, on behalf of
each Lender, certificates, free of restrictive legends, evidencing the shares of
Common Stock to be delivered by Borrower with respect to the portion of the
Principal Installment Payment or Optional Prepayment being paid in shares of
Common Stock, which shares of Common Stock, in the case of clauses (i) and (ii),
shall be allocated among each Lender in the manner specified to Borrower by the
Collateral Agent.

 

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(iii) Beneficial Ownership Limitation. Notwithstanding any provision herein to
the contrary, Lender, together with its affiliates, shall not be permitted to
beneficially own a number of shares of Common Stock (other than shares that may
be deemed beneficially owned except for being subject to a limitation analogous
to the limitation contained in this Section 2.2(e)(iii)) in excess of 9.99% of
the number of shares of Common Stock then issued and outstanding, it being the
intent of Borrower and Lender that Lender, together with its affiliates, not be
deemed at any time to have the power to vote or dispose of greater than 9.99% of
the number of shares of Common Stock issued and outstanding at any time;
provided, however, that Lender shall have the right, upon 61 days’ prior written
notice to Borrower, to waive the 9.99% limitation of this subsection (e)(iii).
Notwithstanding anything contained herein to the contrary, Borrower shall not be
permitted to issue to Lender, and Lender shall not be required to accept, shares
of Common Stock pursuant to a Repayment Election Notice if and to the extent
such issuance, when taking together with all other issuances pursuant to prior
Repayment Election Notices, would result in (A) the issuance of more than 19.99%
of the Common Stock outstanding as of the date of this Agreement or (B) Lender,
together with its affiliates, beneficially owning in excess of 19.99% of the
outstanding Common Stock (each of clauses (A) and (B) are referred to herein as
the “Cap”). As used herein, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended
(the “1934 Act”). For any reason at any time, upon written or oral request of
Lender, Borrower shall within one business day confirm orally and in writing to
Lender the number of shares of Common Stock then issued and outstanding as of
any given date.

(iv) With a view to making available to Lender the benefits of Rule 144 (or its
successor rule) and any other rule or regulation of the Securities and Exchange
Commission (the “SEC”) that may at any time permit Lender to sell shares of
Common Stock issued pursuant to Section 2.2(e) of this Agreement to the public
without registration, Borrower covenants and agrees to: (i) make and keep public
information available, as those terms are understood and defined in Rule 144,
until six (6) months after such date as all of the shares of Common Stock issued
pursuant to Section 2.2(e) of this Agreement may be sold without restriction by
Lender pursuant to Rule 144 or any other rule of similar effect; (ii) file with
the SEC in a timely manner all reports and other documents required of Borrower
under the 1934 Act; and (iii) furnish to Lender upon request, as long as Lender
owns any shares of Common Stock issued pursuant to Section 2.2(e) of this
Agreement, such information as may be reasonably requested in order to avail
Lender of any rule or regulation of the SEC that permits the selling of any such
shares of Common Stock without registration.

 

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(v) Borrower covenants and agrees to reserve from its duly authorized capital
stock not less than the number of shares of Common Stock that may be issuable
upon payment of any Principal Installment Payment or Optional Prepayment
pursuant to Section 2.2(e) of this Agreement. Borrower further represents,
warrants and covenants that, upon issuance of any shares of Common Stock
pursuant to Section 2.2(e) of this Agreement, such shares of Common Stock shall
be validly issued, fully paid and non-assessable and free from all preemptive or
similar rights, taxes, liens and charges with respect to the issue thereof.

(vi) For so long as Lender holds any shares of Common Stock issued pursuant to
Section 2.2(e) of this Agreement, Borrower shall maintain the Common Stock’s
authorization for listing on NASDAQ and Borrower shall not take any action which
would reasonably be executed to result in the delisting or suspension of the
Common Stock on NASDAQ.

2.3 Maximum Interest. Notwithstanding any provision in this Agreement, the
Notes, or any other Loan Document, it is the parties’ intent not to contract
for, charge or receive interest at a rate that is greater than the maximum rate
permissible by law that a court of competent jurisdiction shall deem applicable
hereto (which under the laws of the State of California shall be deemed to be
the laws relating to permissible rates of interest on commercial loans) (the
“Maximum Rate”). If a court of competent jurisdiction shall finally determine
that Borrower has actually paid to Lender an amount of interest in excess of the
amount that would have been payable if all of the Secured Obligations had at all
times borne interest at the Maximum Rate, then such excess interest actually
paid by Borrower shall be deemed retroactively applied as of the date of receipt
of such payment as follows: first, to the payment of the Secured Obligations,
consisting of the outstanding principal; second, after all principal is repaid,
to the payment of Lender’s accrued interest, costs, expenses, professional fees
and any other Secured Obligations; and third, after all Secured Obligations are
repaid, the excess (if any) shall be refunded to Borrower.

2.4 Default Interest. In the event any payment is not paid on the scheduled
payment date, an amount equal to five percent (5%) of the past due amount shall
be payable on demand. In addition, upon the occurrence and during the
continuation of an Event of Default hereunder, all Secured Obligations,
including principal, interest, compounded interest, and Lender’s fees and
expenses in accordance with Section 11.11 hereof, shall bear interest at a rate
per annum equal to the rate set forth in Section 2.2(c) plus five percent
(5%) per annum. In the event any interest is not paid when due hereunder,
delinquent interest shall be added to principal and shall bear interest on
interest, compounded at the rate set forth in Section 2.2(c) or this
Section 2.4, as applicable.

2.5 Prepayment. At its option upon at least 7 business days prior notice to
Lender, Borrower may prepay all, but not less than all, of the outstanding
Advances by paying the entire principal balance and all accrued and unpaid
interest, together with a prepayment charge equal to the following percentage of
the Advance amount being prepaid: if such Advance amounts are prepaid in any of
the first twelve (12) months following the Closing Date, 3.0%; after twelve
(12) months but prior to twenty four (24) months, 2.0%;

 

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and thereafter, 1.0% (each, a “Prepayment Charge”). Borrower agrees that the
Prepayment Charge is a reasonable calculation of Lender’s lost profits in view
of the difficulties and impracticality of determining actual damages resulting
from an early repayment of the Advances. Borrower shall prepay the outstanding
amount of all principal and accrued interest through the prepayment date and the
Prepayment Charge upon the occurrence of a Change in Control. Notwithstanding
the above, no Prepayment Charge shall be due in connection with term loan
advances funded under the Original Agreement.

2.6 End of Term Charge.

(a) On the earliest to occur of (i) the Term Loan Maturity Date, (ii) the date
that Borrower prepays the outstanding Secured Obligations, or (iii) the date
that the Secured Obligations become due and payable, Borrower shall pay Lender a
charge of $1,700,000. Notwithstanding the required payment date of such charge,
it shall be deemed earned by Lender as of the Closing Date.

(b) On December 1, 2014, Borrower shall pay Lender a charge of $200,000 as
scheduled in connection with the term loan advances funded in connection with
the Original Agreement. Notwithstanding the required payment date of such
charge, it shall be deemed earned by Lender as of the Closing Date.

2.7 Lender Investment Representations. The Note is being issued to Lender in
reliance upon the following representations and covenants of Lender (which, for
the avoidance of doubt, are being made severally, but not jointly, by each
Lender):

(a) Investment Purpose. The Note has been, and the Common Stock issuable upon
conversion of the Note by Borrower in accordance with Section 2.2(e) of this
Agreement will be, acquired by Lender for investment and not with a view to the
sale or distribution of any part thereof, and Lender has no present intention of
selling or engaging in any public distribution of the same except pursuant to a
registration under the Securities Act or an exemption from the registration
requirements of the Securities Act. Lender is not a registered broker-dealer
under Section 15 of the 1934 Act or an entity engaged in a business that would
require it to be so registered as a broker-dealer.

(b) Private Issue. The Lender understands (i) that the Common Stock issuable
upon conversion of the Note by Borrower in accordance with Section 2.2(e) of
this Agreement is not registered under the Securities Act or qualified under
applicable state securities laws on the ground that the issuance contemplated
upon conversion of the Note will be exempt from the registration and
qualifications requirements thereof, and (ii) that the Company’s reliance on
such exemption is predicated on the representations set forth in this
Section 2.7.

(c) Financial Risk. The Lender has such knowledge and experience in financial
and business matters as to be capable of evaluating the merits and risks of its
investment in the Note, and has the ability to bear the economic risks of its
investment.

 

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(d) Risk of No Registration. Without in any way limiting the Company’s
obligations under this Agreement, the Lender understands that if the Common
Stock is not registered with the SEC pursuant to Section 12 of the 1934 Act or
the Company is not required to file reports pursuant to Section 13(a) or
Section 15(d) of the 1934 Act, or if a registration statement is not effective
under the Securities Act covering the resale of the shares of Common Stock
issued to Lender upon conversion of the Note when it desires to sell such shares
of Common Stock it may be required to hold such securities for an indefinite
period. The Lender also understands that any sale of Common Stock issuable by
Borrower to Lender upon conversion of the Note in accordance with Section 2.2(e)
of this Agreement which might be made by it in reliance upon Rule 144 under the
Securities Act may be made only in accordance with the terms and conditions of
Rule 144.

(e) Accredited Investor. The Lender is an “accredited investor” within the
meaning of Rule 501 of Regulation D promulgated under the Securities Act.

(f) No Short Sales. The Lender has not engaged, and will not engage, in “short
sales” of the Common Stock of the Company. The term “short sale” shall mean any
sale of a security which the seller does not own or any sale which is
consummated by the delivery of a security borrowed by, or for the account of,
the seller.

(g) Legends. The Lender understands and agrees that each Note issued pursuant to
this Agreement may bear the following legend.

THIS SECURED CONVERTIBLE TERM PROMISSORY NOTE HAS NOT BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN
RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, AND, ACCORDINGLY, MAY NOT BE TRANSFERRED UNLESS (I) THIS NOTE HAS
BEEN REGISTERED FOR SALE PURSUANT TO THE SECURITIES ACT OF 1933, AS AMENDED,
(II) THIS NOTE MAY BE SOLD PURSUANT TO RULE 144, OR (III) THE BORROWER HAS
RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IT THAT SUCH TRANSFER
MAY LAWFULLY BE MADE WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.

Lender acknowledges and agrees that the issuance of a certificate or
certificates without restrictive legend for, or deposit with the Depositary
Trust Company via book-entry of, any shares of Common Stock that may be issued
upon conversion of the Notes is predicated upon the Company’s reliance that the
holder of such shares would sell, transfer, assign, pledge, hypothecate or
otherwise dispose of such shares pursuant to either the registration
requirements of the Act, including any applicable prospectus delivery
requirements, or an exemption therefrom, and that if such shares are sold
pursuant to a registration statement, they will be sold in compliance with the
plan of distribution set forth therein. Lender acknowledges that the foregoing
representations, warranties and covenants will be relied upon by the Company,
the Company’s transfer agent, and by the Company’s counsel in delivering an
opinion to such transfer agent, in connection with not including restrictive
legends on the certificates representing the shares, in order to facilitate the
sale of the shares pursuant Rule 144 or an effective registration statement.

 

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The foregoing representations and covenants of Lender do not imply any period of
time that Lender will hold any shares of Common Stock issuable to Lender in
accordance with Section 2.2(e) of this Agreement, and any shares of Common Stock
issuable to Lender in accordance with Section 2.2(e) of this Agreement shall
(i) not contain any restrictions on transfer and (ii) either be subject to an
effective resale registration statement or be eligible for resale to the public
pursuant to Rule 144 without any limitation.

2.8 Pro Rata Treatment. Each payment (including prepayment) on account of any
fee and any reduction of the Term Loans shall be made pro rata according to the
Term Commitments of the relevant Lender.

SECTION 3. SECURITY INTEREST

3.1 As security for the prompt, complete and indefeasible payment when due
(whether on the payment dates or otherwise) of all the Secured Obligations,
Borrower grants to Lender a security interest in all of Borrower’s personal
property now owned or hereafter acquired, including the following (collectively,
the “Collateral”): (a) Receivables; (b) Equipment; (c) Fixtures; (d) General
Intangibles (other than Intellectual Property); (e) Inventory; (f) Investment
Property (but excluding thirty-five percent (35%) of the capital stock of any
foreign Subsidiary that constitutes a Permitted Investment); (g) Deposit
Accounts; (h) Cash; (i) Goods; and other tangible and intangible personal
property of Borrower whether now or hereafter owned or existing, leased,
consigned by or to, or acquired by, Borrower and wherever located; and, to the
extent not otherwise included, all Proceeds of each of the foregoing and all
accessions to, substitutions and replacements for, and rents, profits and
products of each of the foregoing; provided, however, that the Collateral shall
include all Accounts and General Intangibles that consist of rights to payment
and proceeds from the sale, licensing or disposition of all or any part, or
rights in, the Intellectual Property (the “Rights to Payment”). Notwithstanding
the foregoing, if a judicial authority (including a U.S. Bankruptcy Court) holds
that a security interest in the underlying Intellectual Property is necessary to
have a security interest in the Rights to Payment, then the Collateral shall
automatically, and effective as of the date of this Agreement, include the
Intellectual Property to the extent necessary to permit perfection of Lender’s
security interest in the Rights to Payment. Upon payment in full in cash of the
Secured Obligations (other than inchoate indemnity obligations and any other
obligations which, by their terms, are to survive the termination of this
Agreement) and at such time as this Agreement has been terminated, the
Collateral Agent shall, at Borrower’s sole cost and expense, release its Liens
in the Collateral and all rights therein shall revert to Borrower.

 

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SECTION 4. CONDITIONS PRECEDENT TO LOAN

The obligations of Lender to make the Loan hereunder are subject to the
satisfaction by Borrower of the following conditions:

4.1 Initial Advance. On or prior to the Closing Date, Borrower shall have
delivered to Lender the following:

(a) executed originals of the Loan Documents, Account Control Agreements, and
all other documents and instruments reasonably required by Lender to effectuate
the transactions contemplated hereby or to create and perfect the Liens of
Lender with respect to all Collateral, in all cases in form and substance
reasonably acceptable to Lender;

(b) certified copy of resolutions of Borrower’s board of directors evidencing
approval of (i) the Loan and other transactions evidenced by the Loan Documents;
and (ii) the Warrant and transactions evidenced thereby;

(c) certified copies of the Certificate of Incorporation and the Bylaws, as
amended through the Closing Date, of Borrower;

(d) a certificate of good standing for Borrower from its state of incorporation
and similar certificates from all other jurisdictions in which it does business
and where the failure to be qualified would have a Material Adverse Effect;

(e) payment of the Facility Charge and reimbursement of Lender’s current
expenses reimbursable pursuant to this Agreement, which amounts may be deducted
from the initial Advance; and

(f) such other documents as Lender may reasonably request.

4.2 All Advances. On each Advance Date:

(a) Lender shall have received (i) an Advance Request for the relevant Advance
as required by Section 2.2(b), each duly executed by Borrower’s Chief Executive
Officer or Chief Financial Officer, and (ii) any other documents Lender may
reasonably request.

(b) The representations and warranties set forth in this Agreement and in
Section 5 and in the Warrant shall be true and correct in all material respects
on and as of the Advance Date with the same effect as though made on and as of
such date, except to the extent such representations and warranties expressly
relate to an earlier date.

(c) Borrower shall be in compliance with all the terms and provisions set forth
herein and in each other Loan Document on its part to be observed or performed,
and at the time of and immediately after such Advance no Event of Default shall
have occurred and be continuing.

(d) Each Advance Request shall be deemed to constitute a representation and
warranty by Borrower on the relevant Advance Date as to the matters specified in
paragraphs (b) and (c) of this Section 4.2 and as to the matters set forth in
the Advance Request.

 

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4.3 No Default. As of the Closing Date and each Advance Date, (i) no fact or
condition exists that would (or would, with the passage of time, the giving of
notice, or both) constitute an Event of Default and (ii) no event that has had
or could reasonably be expected to have a Material Adverse Effect has occurred
and is continuing.

SECTION 5. REPRESENTATIONS AND WARRANTIES OF BORROWER

Borrower represents and warrants that:

5.1 Corporate Status. Borrower is a corporation duly organized, legally existing
and in good standing under the laws of the State of Delaware, and is duly
qualified as a foreign corporation in all jurisdictions in which the nature of
its business or location of its properties require such qualifications and where
the failure to be qualified could reasonably be expected to have a Material
Adverse Effect. Borrower’s present name, former names (if any), locations, place
of formation, tax identification number, organizational identification number
and other information are correctly set forth in Exhibit C, as may be updated by
Borrower in a written notice (including any Compliance Certificate) provided to
Lender after the Closing Date.

5.2 Collateral. Borrower owns the Collateral and the Intellectual Property, free
of all Liens, except for Permitted Liens. Borrower has the power and authority
to grant to Lender a Lien in the Collateral as security for the Secured
Obligations.

5.3 Consents. Borrower’s execution, delivery and performance of the Notes, this
Agreement and all other Loan Documents, and Borrower’s execution of the Warrant,
(i) have been duly authorized by all necessary corporate action of Borrower,
(ii) will not result in the creation or imposition of any Lien upon the
Collateral, other than Permitted Liens and the Liens created by this Agreement
and the other Loan Documents, (iii) do not violate any provisions of Borrower’s
Certificate or Articles of Incorporation (as applicable), bylaws, or any, law,
regulation, order, injunction, judgment, decree or writ to which Borrower is
subject and (iv) except as described on Schedule 5.3, do not violate any
contract or agreement or require the consent or approval of any other Person.
The individual or individuals executing the Loan Documents and the Warrant are
duly authorized to do so.

5.4 Material Adverse Effect. Since September 30, 2013, no event that has had or
could reasonably be expected to have a Material Adverse Effect has occurred and
is continuing. Borrower is not aware of any event likely to occur that is
reasonably expected to result in a Material Adverse Effect.

5.5 Actions Before Governmental Authorities. Except as described on Schedule
5.5, there are no actions, suits or proceedings at law or in equity or by or
before any governmental authority now pending or, to the knowledge of Borrower,
threatened against or affecting Borrower or its property.

 

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5.6 Laws. Borrower is not in violation of any law, rule or regulation, or in
default with respect to any judgment, writ, injunction or decree of any
governmental authority, where such violation or default is reasonably expected
to result in a Material Adverse Effect. Borrower is not in default in any manner
under any provision of any agreement or instrument evidencing indebtedness, or
any other material agreement to which it is a party or by which it is bound.

5.7 Information Correct and Current. No information, report, Advance Request,
financial statement, exhibit or schedule furnished, by or on behalf of Borrower
to Lender in connection with any Loan Document or included therein or delivered
pursuant thereto contained, contains or will contain any material misstatement
of fact or omitted, omits or will omit to state any material fact necessary to
make the statements therein, in the light of the circumstances under which they
were, are or will be made, not misleading at the time such statement was made or
deemed made. Additionally, any and all financial or business projections
provided by Borrower to Lender shall be (i) provided in good faith and based on
the most current data and information available to Borrower, and (ii) the most
current of such projections approved by Borrower’s Board of Directors.

5.8 Tax Matters. Except as described on Schedule 5.8, (a) Borrower has filed all
federal, and all material state and local tax returns that it is required to
file, (b) Borrower has duly paid or fully reserved for all taxes or installments
thereof (including any interest or penalties) as and when due, which have or may
become due pursuant to such returns, and (c) Borrower has paid or fully reserved
for any tax assessment received by Borrower for the three (3) years preceding
the Closing Date, if any (including any taxes being contested in good faith and
by appropriate proceedings).

5.9 Intellectual Property Claims. Borrower is the sole owner of, or otherwise
has the right to use, the Intellectual Property. Except as described on Schedule
5.9,(i) each of the material Copyrights, Trademarks and Patents is valid and
enforceable, (ii) no material part of the Intellectual Property has been judged
invalid or unenforceable, in whole or in part, and (iii) no claim has been made
to Borrower that any material part of the Intellectual Property violates the
rights of any third party. Exhibit D is a true, correct and complete list of
each of Borrower’s Patents, registered Trademarks, registered Copyrights, and
material agreements under which Borrower licenses Intellectual Property from
third parties (other than shrink-wrap software licenses), together with
application or registration numbers, as applicable, owned by Borrower or any
Subsidiary, in each case as of the Closing Date. Borrower is not in material
breach of, nor has Borrower failed to perform any material obligations under,
any of the foregoing contracts, licenses or agreements and, to Borrower’s
knowledge, no third party to any such contract, license or agreement is in
material breach thereof or has failed to perform any material obligations
thereunder.

5.10 Intellectual Property. Except as described on Schedule 5.10, Borrower has,
or in the case of any proposed business, will have, all material rights with
respect to Intellectual Property necessary in the operation or conduct of
Borrower’s business as currently conducted and proposed to be conducted by
Borrower. Without limiting the generality of the foregoing, and in the case of
Licenses, except for restrictions that are

 

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unenforceable under Division 9 of the UCC, Borrower has the right, to the extent
required to operate Borrower’s business, to freely transfer, license or assign
Intellectual Property without condition, restriction or payment of any kind
(other than license payments in the ordinary course of business) to any third
party, and Borrower owns or has the right to use, pursuant to valid licenses,
all software development tools, library functions, compilers and all other
third-party software and other items that are used in the design, development,
promotion, sale, license, manufacture, import, export, use or distribution of
Borrower Products.

5.11 Borrower Products. Except as described on Schedule 5.11, no Intellectual
Property owned by Borrower and no Borrower Product has been or is subject to any
actual or, to the knowledge of Borrower, threatened litigation, proceeding
(including any proceeding in the United States Patent and Trademark Office or
any corresponding foreign office or agency) or outstanding decree, order,
judgment, settlement agreement or stipulation that restricts in any manner
Borrower’s use, transfer or licensing thereof or that may affect the validity,
use or enforceability thereof. There is no decree, order, judgment, agreement,
stipulation, arbitral award or other provision entered into in connection with
any litigation or proceeding that obligates Borrower to grant licenses or
ownership interest in any future Intellectual Property related to the operation
or conduct of the business of Borrower or Borrower Products. Borrower has not
received any written notice or claim, or, to the knowledge of Borrower, oral
notice or claim, challenging or questioning Borrower’s ownership in any
Intellectual Property (or written notice of any claim challenging or questioning
the ownership in any licensed Intellectual Property of the owner thereof) or
suggesting that any third party has any claim of legal or beneficial ownership
with respect thereto nor, to Borrower’s knowledge, is there a reasonable basis
for any such claim. Neither Borrower’s use of its Intellectual Property nor the
production and sale of Borrower Products infringes the Intellectual Property or
other rights of others.

5.12 Financial Accounts. Exhibit E, as may be updated by the Borrower in a
written notice provided to Lender after the Closing Date, is a true, correct and
complete list of (a) all banks and other financial institutions at which
Borrower or any Subsidiary maintains Deposit Accounts and (b) all institutions
at which Borrower or any Subsidiary maintains an account holding Investment
Property, and such exhibit correctly identifies the name, address and telephone
number of each bank or other institution, the name in which the account is held,
a description of the purpose of the account, and the complete account number
therefor.

5.13 Employee Loans. Borrower has no outstanding loans to any employee, officer
or director of the Borrower nor has Borrower guaranteed the payment of any loan
made to an employee, officer or director of the Borrower by a third party.

5.14 Capitalization and Subsidiaries. Borrower’s capitalization as of the
Closing Date is set forth on Schedule 5.14 annexed hereto. Borrower does not own
any stock, partnership interest or other securities of any Person, except for
Permitted Investments. Attached as Schedule 5.14, as may be updated by Borrower
in a written notice provided after the Closing Date, is a true, correct and
complete list of each Subsidiary.

 

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SECTION 6. INSURANCE; INDEMNIFICATION

6.1 Coverage. Borrower shall cause to be carried and maintained commercial
general liability insurance, on an occurrence form, against risks customarily
insured against in Borrower’s line of business. Such risks shall include the
risks of bodily injury, including death, property damage, personal injury,
advertising injury, and contractual liability per the terms of the
indemnification agreement found in Section 6.3. Borrower must maintain a minimum
of $2,000,000 of commercial general liability insurance for each occurrence.
Borrower has and agrees to maintain a minimum of $10,000,000 of directors and
officers’ insurance for each occurrence and $10,000,000 in the aggregate. So
long as there are any Secured Obligations (other than inchoate indemnity
obligations) outstanding, Borrower shall also cause to be carried and maintained
insurance upon the Collateral, insuring against all risks of physical loss or
damage, in an amount not less than the full replacement cost of the Collateral,
provided that such insurance may be subject to standard exceptions and
deductibles. Borrower shall also carry and maintain a fidelity insurance policy
in an amount not less than $25,000.

6.2 Certificates. Borrower shall deliver to Lender certificates of insurance
that evidence Borrower’s compliance with its insurance obligations in
Section 6.1 and the obligations contained in this Section 6.2. Borrower’s
insurance certificate shall state Lender is an additional insured for commercial
general liability, loss payee for all risk property damage insurance, subject to
the insurer’s approval, and a loss payee for property insurance. Attached to the
certificates of insurance will be additional insured endorsements for liability
and lender’s loss payable endorsements, or copies of policy forms evidencing
such coverages. Any failure of Lender to scrutinize such insurance certificates
for compliance is not a waiver of any of Lender’s rights, all of which are
reserved.

6.3 Indemnity. Borrower agrees to indemnify and hold Lender and its officers,
directors, employees, agents, in-house attorneys, representatives and
shareholders harmless from and against any and all claims, costs, expenses,
damages and liabilities (including such claims, costs, expenses, damages and
liabilities based on liability in tort, including strict liability in tort),
including reasonable attorneys’ fees and disbursements and other costs of
investigation or defense (including those incurred upon any appeal), that may be
instituted or asserted against or incurred by Lender or any such Person as the
result of credit having been extended, suspended or terminated under this
Agreement and the other Loan Documents or the administration of such credit, or
in connection with or arising out of the transactions contemplated hereunder and
thereunder, or any actions or failures to act in connection therewith, or
arising out of the disposition or utilization of the Collateral, excluding in
all cases claims resulting solely from the Collateral Agent’s or the Lender’s
gross negligence or willful misconduct. Borrower agrees to pay, and to save
Lender harmless from, any and all liabilities with respect to, or resulting from
any delay in paying, any and all excise, sales or other similar taxes (excluding
taxes imposed on or measured by the net income of Lender) that may be payable or
determined to be payable with respect to any of the Collateral or this
Agreement.

 

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SECTION 7. COVENANTS OF BORROWER

Borrower agrees as follows:

7.1 Financial Reports. Borrower shall furnish to Lender the financial statements
and reports listed hereinafter (the “Financial Statements”):

(a) as soon as practicable (and in any event within 30 days) after the end of
each month, unaudited interim and year-to-date financial statements as of the
end of such month (prepared on a consolidated and consolidating basis, if
applicable), including balance sheet and related statements of income and cash
flows accompanied by a report detailing any material contingencies (including
the commencement of any material litigation by or against Borrower) or any other
occurrence that would reasonably be expected to have a Material Adverse Effect,
all certified by Borrower’s Chief Executive Officer or Chief Financial Officer
to the effect that they have been prepared in accordance with GAAP, except
(i) for the absence of footnotes, (ii) that they are subject to normal year end
adjustments, (iii) they do not contain certain non-cash items that are
customarily included in quarterly and annual financial statements, and (iv) for
the first two months of each quarter only the balance sheet and income statement
will be required;

(b) as soon as practicable (and in any event within 45 days) after the end of
each of the first three fiscal quarters of any fiscal year of Borrower,
unaudited interim and year-to-date financial statements as of the end of such
fiscal quarter (prepared on a consolidated and consolidating basis, if
applicable), including balance sheet and related statements of income and cash
flows accompanied by a report detailing any material contingencies (including
the commencement of any material litigation by or against Borrower) or any other
occurrence that would reasonably be expected to have a Material Adverse Effect,
certified by Borrower’s Chief Executive Officer or Chief Financial Officer to
the effect that they have been prepared in accordance with GAAP, except (i) for
the absence of footnotes, and (ii) that they are subject to normal year end
adjustments; as well as the most recent capitalization table for Borrower,
including the weighted average exercise price of employee stock options;

(c) as soon as practicable (and in any event within 90 days) after the end of
each fiscal year, unqualified audited financial statements as of the end of such
year (prepared on a consolidated and consolidating basis, if applicable),
including balance sheet and related statements of income and cash flows, and
setting forth in comparative form the corresponding figures for the preceding
fiscal year, certified by a firm of independent certified public accountants
selected by Borrower and reasonably acceptable to Lender, accompanied by any
management report from such accountants;

(d) as soon as practicable (and in any event within 30 days) after the end of
each month, a Compliance Certificate in the form of Exhibit F;

(e) promptly after the sending or filing thereof, as the case may be, copies of
any proxy statements, financial statements or reports that Borrower has made
available to holders of its Preferred Stock and copies of any regular, periodic
and special reports or registration statements that Borrower files with the SEC
or any governmental authority that may be substituted therefor, or any national
securities exchange;

 

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(f) [reserved]; and

(g) financial and business projections promptly following their approval by
Borrower’s Board of Directors, as well as other financial information reasonably
requested by Lender.

Borrower shall not make any change in its (a) accounting policies or reporting
practices, except in accordance with GAAP or with the consent of Lender, or
(b) fiscal years or fiscal quarters. The fiscal year of Borrower shall end on
December 31.

The executed Compliance Certificate may be sent via facsimile to Lender at
(650) 473-9194 or via e-mail to cnorman@herculestech.com. All Financial
Statements required to be delivered pursuant to clauses (a), (b) and (c) shall
be sent via e-mail to financialstatements@herculestech.com with a copy to
cnorman@herculestech.com provided, that if e-mail is not available or sending
such Financial Statements via e-mail is not possible, they shall be sent via
facsimile to Lender at: (866) 468-8916, attention Chief Credit Officer.
Notwithstanding anything herein to the contrary, documents required to be
delivered pursuant to this Section 7.1 may be delivered electronically and if so
delivered, shall be deemed to have been delivered on the date on which Borrower
posts such documents, or provides a link thereto, on Borrower’s website on the
Internet at www.acelrx.com, and notifies Lender via email or facsimile as
provided in the immediately preceding sentence.

7.2 Management Rights. Borrower shall permit any representative that Lender
authorizes, including its attorneys and accountants, to inspect the Collateral
and examine and make copies and abstracts of the books of account of Borrower at
reasonable times and upon reasonable notice during normal business hours. Such
inspections or examinations shall be conducted no more often than once every six
months unless an Event of Default has occurred and is continuing. In addition,
any such representative shall have the right to meet with management and
officers of Borrower to discuss such books of account and records. In addition,
Lender shall be entitled at reasonable times and intervals to consult with and
advise the management and officers of Borrower concerning significant business
issues affecting Borrower. Such consultations shall not unreasonably interfere
with Borrower’s business operations. The parties intend that the rights granted
Lender shall constitute “management rights” within the meaning of 29 C.F.R
Section 2510.3-101(d)(3)(ii), but that any advice, recommendations or
participation by Lender with respect to any business issues shall not be deemed
to give Lender, nor be deemed an exercise by Lender of, control over Borrower’s
management or policies.

 

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7.3 Further Assurances. Borrower shall from time to time execute, deliver and
file, alone or with Lender, any financing statements, security agreements,
collateral assignments, notices, control agreements, or other documents to
perfect or give the highest priority to Lender’s Lien on the Collateral.
Borrower shall from time to time procure any instruments or documents as may be
requested by Lender, and take all further action that may be necessary or
desirable, or that Lender may reasonably request, to perfect and protect the
Liens granted hereby and thereby. In addition, and for such purposes only,
Borrower hereby authorizes Lender to execute and deliver on behalf of Borrower
and to file such financing statements, collateral assignments, notices, control
agreements, security agreements and other documents without the signature of
Borrower either in Lender’s name or in the name of Lender as agent and
attorney-in-fact for Borrower. Borrower shall protect and defend Borrower’s
title to the Collateral and Lender’s Lien thereon against all Persons claiming
any interest adverse to Borrower or Lender other than Permitted Liens.

7.4 Post-Closing Items. Borrower shall use its commercially reasonable efforts
to deliver or cause to be delivered the documents listed on Schedule 7.4 on or
before the corresponding dates set forth on Schedule 7.4. Within three
(3) business days of the Closing Date, Borrower shall deliver to Lender a legal
opinion of Borrower’s counsel and certified incumbency signatures.

7.5 Indebtedness. Borrower shall not create, incur, assume, guarantee or be or
remain liable with respect to any Indebtedness, or permit any Subsidiary so to
do, other than Permitted Indebtedness, or prepay any Indebtedness or take any
actions which impose on Borrower an obligation to prepay any Indebtedness,
except for the conversion of Indebtedness into equity securities and the payment
of cash in lieu of fractional shares in connection with such conversion.

7.6 Collateral. Borrower shall at all times keep the Collateral, the
Intellectual Property and all other property and assets used in Borrower’s
business or in which Borrower now or hereafter holds any interest free and clear
from any legal process or Liens whatsoever (except for Permitted Liens), and
shall give Lender prompt written notice of any legal process affecting the
Collateral, the Intellectual Property, such other property and assets, or any
Liens thereon. Borrower shall cause its Subsidiaries to protect and defend such
Subsidiary’s title to its assets from and against all Persons claiming any
interest adverse to such Subsidiary, and Borrower shall cause its Subsidiaries
at all times to keep such Subsidiary’s property and assets free and clear from
any legal process or Liens whatsoever (except for Permitted Liens), and shall
give Lender prompt written notice of any legal process affecting such
Subsidiary’s assets. Except with respect to (i) specific property encumbered to
secure payment of particular Indebtedness incurred to finance the acquisition of
such property, and (ii) restrictions by reason of customary provisions
restricting assignment, subletting or other transfers contained in leases,
licenses and similar agreements entered into in the ordinary course of business
(provided that such restrictions are limited to the property or assets secured
by such Liens or the property or assets subject to such leases, licenses or
similar agreements, as the case may be), Borrower shall not agree with any
Person other than Lender not to encumber its property.

7.7 Investments. Borrower shall not directly or indirectly acquire or own, or
make any Investment in or to any Person, or permit any of its Subsidiaries so to
do, other than Permitted Investments.

 

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7.8 Distributions. Borrower shall not, and shall not allow any Subsidiary to,
(a) repurchase or redeem any class of stock or other equity interest other than
pursuant to employee, director or consultant stock purchase or repurchase plans
or other similar agreements, provided, however, in each case the repurchase or
redemption price does not exceed the original consideration paid for such stock
or equity interest, or (b) declare or pay any cash dividend or make a cash
distribution on any class of stock or other equity interest, except that a
Subsidiary may pay dividends or make distributions to Borrower, or (c) lend
money to any employees, officers or directors except as expressly permitted by
clause (ix) of the definition of Permitted Investments.

7.9 Transfers. Except for Permitted Transfers, neither Borrower nor its
Subsidiaries shall voluntarily or involuntarily transfer, sell, lease, license,
lend or in any other manner convey any equitable, beneficial or legal interest
in any material portion of their assets.

7.10 Mergers or Acquisitions. Borrower shall not merge or consolidate, or permit
any of its Subsidiaries to merge or consolidate, with or into any other business
organization (other than mergers or consolidations of a Subsidiary into another
Subsidiary or into Borrower), or acquire, or permit any of its Subsidiaries to
acquire, all or substantially all of the capital stock or property of another
Person.

7.11 Taxes. Borrower and its Subsidiaries shall pay when due all taxes, fees or
other charges of any nature whatsoever (together with any related interest or
penalties) now or hereafter imposed or assessed against Borrower, Lender (to the
extent assessed in connection with the making of the Loan hereunder but
excluding taxes on Lender’s net income) or the Collateral or upon Borrower’s
ownership, possession, use, operation or disposition thereof or upon Borrower’s
rents, receipts or earnings arising therefrom. Borrower shall file on or before
the due date therefor all personal property tax returns in respect of the
Collateral. Notwithstanding the foregoing, Borrower may contest, in good faith
and by appropriate proceedings, taxes for which Borrower maintains adequate
reserves therefor in accordance with GAAP.

7.12 Corporate Changes. Neither Borrower nor any Subsidiary shall change its
corporate name, legal form or jurisdiction of formation without twenty
(20) days’ prior written notice to Lender. Neither Borrower nor any Subsidiary
shall suffer a Change in Control. Neither Borrower nor any Subsidiary shall
relocate its chief executive office or its principal place of business unless:
(i) it has provided prior written notice to Lender; and (ii) such relocation
shall be within the continental United States. Neither Borrower nor any
Subsidiary shall relocate any item of Collateral (other than (w) sales of
Inventory in the ordinary course of business, (x) relocations of mobile
Equipment, (y) relocations of other Equipment having an aggregate value of up to
$150,000 in any fiscal year, and (z) relocations of Collateral from a location
described on Exhibit C to another location described on Exhibit C) unless (i) it
has provided prompt written notice to Lender, (ii) such relocation is within the
continental United States or to such other jurisdiction as designated in writing
by Borrower from time to time, and (iii), if such relocation is to a third party
bailee, it has delivered a bailee agreement in form and substance reasonably
acceptable to Lender.

 

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7.13 Deposit Accounts. Neither Borrower nor any Subsidiary shall maintain any
Deposit Accounts, or accounts holding Investment Property, except with respect
to which Lender has an Account Control Agreement.

7.14 Borrower shall notify Lender of each Subsidiary formed subsequent to the
Closing Date and, within 30 days of formation, shall cause any such Subsidiary
organized under the laws of any State within the United States to execute and
deliver to Lender a Joinder Agreement.

7.15 Notification of Event of Default. Borrower shall notify Lender promptly
upon becoming aware of the occurrence of any Event of Default, such notice to be
sent via facsimile to Lender.

7.16 Hercules Technology II, L.P. has received a license from the U.S. Small
Business Administration (“SBA”) to extend loans as a small business investment
company (“SBIC”) pursuant to the Small Business Investment Act of 1958, as
amended, and the associated regulations (collectively, the “SBIC Act”). Portions
of the loan to Borrower will be made under the SBA license and the SBIC Act.
Addendum 1 to this Agreement outlines various responsibilities of Lender and
Borrower associated with an SBA loan, and such Addendum 1 is hereby incorporated
in this Agreement.

SECTION 8. [RESERVED]

SECTION 9. EVENTS OF DEFAULT

The occurrence of any one or more of the following events shall be an Event of
Default:

9.1 Payments. Borrower fails to pay any amount due under this Agreement, the
Notes or any of the other Loan Documents on the due date; or

9.2 Covenants. Borrower breaches or defaults in the performance of any covenant
or Secured Obligation under this Agreement, the Notes, or any of the other Loan
Documents, and (a) with respect to a default under any covenant under this
Agreement (other than under Sections 6, 7.5, 7.6, 7.7, 7.8, 7.9, 7.10 or 7.16)
such default continues for more than ten (10) days after the earlier of the date
on which (i) Lender has given notice of such default to Borrower and
(ii) Borrower has actual knowledge of such default or (b) with respect to a
default under any of Sections 6, 7.5, 7.6, 7.7, 7.8, 7.9, 7.10 or 7.16, the
occurrence of such default; or

9.3 Material Adverse Effect. A circumstance has occurred that would reasonably
be expected to have a Material Adverse Effect; or

 

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9.4 Other Loan Documents. The occurrence of any default under any Loan Document
or any other agreement between Borrower and Lender and such default continues
for more than ten (10) days after the earlier of the date on which (a) Lender
has given notice of such default to Borrower, or (b) Borrower has actual
knowledge of such default; or

9.5 Representations. Any representation or warranty made by Borrower in any Loan
Document or in the Warrant shall have been false or misleading in any material
respect; or

9.6 Insolvency. Borrower (A) (i) shall make an assignment for the benefit of
creditors; or (ii) shall be unable to pay its debts as they become due, or be
unable to pay or perform under the Loan Documents, or shall become insolvent; or
(iii) shall file a voluntary petition in bankruptcy; or (iv) shall file any
petition, answer, or document seeking for itself any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any present or future statute, law or regulation pertinent to such
circumstances; or (v) shall seek or consent to or acquiesce in the appointment
of any trustee, receiver, or liquidator of Borrower or of all or any substantial
part (i.e., 33-1/3% or more) of the assets or property of Borrower; or
(vi) shall cease operations of its business as its business has normally been
conducted, or terminate substantially all of its employees; or (vii) Borrower or
its directors or majority shareholders shall take any action initiating any of
the foregoing actions described in clauses (i) through (vi); or (B) either
(i) forty-five (45) days shall have expired after the commencement of an
involuntary action against Borrower seeking reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under any
present or future statute, law or regulation, without such action being
dismissed or all orders or proceedings thereunder affecting the operations or
the business of Borrower being stayed; or (ii) a stay of any such order or
proceedings shall thereafter be set aside and the action setting it aside shall
not be timely appealed; or (iii) Borrower shall file any answer admitting or not
contesting the material allegations of a petition filed against Borrower in any
such proceedings; or (iv) the court in which such proceedings are pending shall
enter a decree or order granting the relief sought in any such proceedings; or
(v) forty-five (45) days shall have expired after the appointment, without the
consent or acquiescence of Borrower, of any trustee, receiver or liquidator of
Borrower or of all or any substantial part of the properties of Borrower without
such appointment being vacated; or

9.7 Attachments; Judgments. Any portion of Borrower’s assets is attached or
seized, or a levy is filed against any such assets, or a judgment or judgments
is/are entered for the payment of money, individually or in the aggregate, of at
least $500,000, and such judgment remains unstayed for a period of ten
(10) days, or Borrower is enjoined or in any way prevented by court order from
conducting any part of its business; or

9.8 Other Obligations. The occurrence of any default under any agreement or
obligation of Borrower involving any Indebtedness which results in a right by a
third party or parties, whether or not exercised, to accelerate the maturity of
such Indebtedness in excess of $250,000, or the occurrence of any default under
any agreement or obligation of Borrower that could reasonably be expected to
have a Material Adverse Effect; or

 

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9.9 Stop Trade. At any time after Lender has received shares of Common Stock
pursuant to the terms set forth in Section 2.3(e), an SEC stop trade order or
NASDAQ market trading suspension of the Common Stock shall be in effect for five
(5) consecutive days or five (5) days during a period of ten (10) consecutive
days, excluding in all cases a suspension of all trading on a public market,
provided that Borrower shall not have been able to cure such trading suspension
within thirty (30) days of the notice thereof or list the Common Stock on
another public market within sixty (60) days of such notice.

SECTION 10. REMEDIES

10.1 General. Upon and during the continuance of any one or more Events of
Default, (i) Lender may, at its option, accelerate and demand payment of all or
any part of the Secured Obligations together with a Prepayment Charge and
declare them to be immediately due and payable (provided, that upon the
occurrence of an Event of Default of the type described in Section 9.6, the
Notes and all of the Secured Obligations shall automatically be accelerated and
made due and payable, in each case without any further notice or act), and
(ii) Lender may notify any of Borrower’s account debtors to make payment
directly to Lender, compromise the amount of any such account on Borrower’s
behalf and endorse Lender’s name without recourse on any such payment for
deposit directly to Lender’s account. Lender may exercise all rights and
remedies with respect to the Collateral under the Loan Documents or otherwise
available to it under the UCC and other applicable law, including the right to
release, hold, sell, lease, liquidate, collect, realize upon, or otherwise
dispose of all or any part of the Collateral and the right to occupy, utilize,
process and commingle the Collateral. All Lender’s rights and remedies shall be
cumulative and not exclusive.

10.2 Collection; Foreclosure. Upon the occurrence and during the continuance of
any Event of Default, Lender may, at any time or from time to time, apply,
collect, liquidate, sell in one or more sales, lease or otherwise dispose of,
any or all of the Collateral, in its then condition or following any
commercially reasonable preparation or processing, in such order as Lender may
elect. Any such sale may be made either at public or private sale at its place
of business or elsewhere. Borrower agrees that any such public or private sale
may occur upon ten (10) calendar days’ prior written notice to Borrower. Lender
may require Borrower to assemble the Collateral and make it available to Lender
at a place designated by Lender that is reasonably convenient to Lender and
Borrower. The proceeds of any sale, disposition or other realization upon all or
any part of the Collateral shall be applied by Lender in the following order of
priorities:

First, to Lender in an amount sufficient to pay in full Lender’s costs and
professionals’ and advisors’ fees and expenses as described in Section 11.11;

Second, to Lender in an amount equal to the then unpaid amount of the Secured
Obligations (including principal, interest, and the Default Rate interest), in
such order and priority as Lender may choose in its sole discretion; and
Finally, after the full, final, and indefeasible payment in Cash of all of the
Secured Obligations, to any creditor holding a junior Lien on the Collateral, or
to Borrower or its representatives or as a court of competent jurisdiction may
direct.

 

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Lender shall be deemed to have acted reasonably in the custody, preservation and
disposition of any of the Collateral if it complies with the obligations of a
secured party under the UCC.

10.3 No Waiver. Lender shall be under no obligation to marshal any of the
Collateral for the benefit of Borrower or any other Person, and Borrower
expressly waives all rights, if any, to require Lender to marshal any
Collateral.

10.4 Cumulative Remedies. The rights, powers and remedies of Lender hereunder
shall be in addition to all rights, powers and remedies given by statute or rule
of law and are cumulative. The exercise of any one or more of the rights, powers
and remedies provided herein shall not be construed as a waiver of or election
of remedies with respect to any other rights, powers and remedies of Lender.

SECTION 11. MISCELLANEOUS

11.1 Severability. Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement shall be prohibited by or invalid under
such law, such provision shall be ineffective only to the extent and duration of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.

11.2 Notice. Except as otherwise provided herein, any notice, demand, request,
consent, approval, declaration, service of process or other communication
(including the delivery of Financial Statements) that is required, contemplated,
or permitted under the Loan Documents or with respect to the subject matter
hereof shall be in writing, and shall be deemed to have been validly served,
given, delivered, and received upon the earlier of: (i) the day of transmission
by facsimile or hand delivery or delivery by an overnight express service or
overnight mail delivery service; or (ii) the third calendar day after deposit in
the United States mails, with proper first class postage prepaid, in each case
addressed to the party to be notified as follows:

 

  (a) If to either Lender:

HERCULES TECHNOLOGY II, L.P.

Legal Department

Attention: Chief Legal Officer and Chad Norman

400 Hamilton Avenue, Suite 310

Palo Alto, CA 94301

Facsimile: 650-473-9194

Telephone: 650-289-3060

 

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  (b) If to Borrower:

ACELRX PHARMACEUTICALS, INC.

Attention: Chief Financial Officer

351 Galveston Drive

Redwood City, CA 94063

Facsimile: 650-216-6500

Telephone: 650-216-3511

or to such other address as each party may designate for itself by like notice.

11.3 Entire Agreement; Amendments. This Agreement, the Notes, and the other Loan
Documents constitute the entire agreement and understanding of the parties
hereto in respect of the subject matter hereof and thereof, and supersede and
replace in their entirety any prior proposals, term sheets, letters,
negotiations or other documents or agreements, whether written or oral, with
respect to the subject matter hereof or thereof (including Lender’s proposal
letter dated November 19, 2013). None of the terms of this Agreement, the Notes
or any of the other Loan Documents may be amended except by an instrument
executed by each of the parties hereto.

11.4 No Strict Construction. The parties hereto have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties hereto and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of the authorship
of any provisions of this Agreement.

11.5 No Waiver. The powers conferred upon Lender by this Agreement are solely to
protect its rights hereunder and under the other Loan Documents and its interest
in the Collateral and shall not impose any duty upon Lender to exercise any such
powers. No omission or delay by Lender at any time to enforce any right or
remedy reserved to it, or to require performance of any of the terms, covenants
or provisions hereof by Borrower at any time designated, shall be a waiver of
any such right or remedy to which Lender is entitled, nor shall it in any way
affect the right of Lender to enforce such provisions thereafter.

11.6 Survival. All agreements, representations and warranties contained in this
Agreement, the Notes and the other Loan Documents or in any document delivered
pursuant hereto or thereto shall be for the benefit of Lender and shall survive
the execution and delivery of this Agreement and the expiration or other
termination of this Agreement.

11.7 Successors and Assigns. The provisions of this Agreement and the other Loan
Documents shall inure to the benefit of and be binding on Borrower and its
permitted assigns (if any). Borrower shall not assign its obligations under this
Agreement, the Notes or any of the other Loan Documents without Lender’s express
prior written consent, and any such attempted assignment without such consent
shall be void and of no effect. Subject to Section 11.13, Lender may assign,
transfer, or endorse its rights hereunder and under the other Loan Documents
without prior notice to Borrower, and all of such rights shall inure to the
benefit of Lender’s successors and assigns.

 

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11.8 Governing Law. This Agreement, the Notes and the other Loan Documents have
been negotiated and delivered to Lender in the State of California, and shall
have been accepted by Lender in the State of California. Payment to Lender by
Borrower of the Secured Obligations is due in the State of California. This
Agreement, the Notes and the other Loan Documents shall be governed by, and
construed and enforced in accordance with, the laws of the State of California,
excluding conflict of laws principles that would cause the application of laws
of any other jurisdiction.

11.9 Consent to Jurisdiction and Venue. All judicial proceedings (to the extent
that the reference requirement of Section 11.10 is not applicable) arising in or
under or related to this Agreement, the Notes or any of the other Loan Documents
may be brought in any state or federal court located in the State of California.
By execution and delivery of this Agreement, each party hereto generally and
unconditionally: (a) consents to nonexclusive personal jurisdiction in Santa
Clara County, State of California; (b) waives any objection as to jurisdiction
or venue in Santa Clara County, State of California; (c) agrees not to assert
any defense based on lack of jurisdiction or venue in the aforesaid courts; and
(d) irrevocably agrees to be bound by any judgment rendered thereby in
connection with this Agreement, the Notes or the other Loan Documents. Service
of process on any party hereto in any action arising out of or relating to this
Agreement shall be effective if given in accordance with the requirements for
notice set forth in Section 11.2, and shall be deemed effective and received as
set forth in Section 11.2. Nothing herein shall affect the right to serve
process in any other manner permitted by law or shall limit the right of either
party to bring proceedings in the courts of any other jurisdiction.

11.10 Mutual Waiver of Jury Trial / Judicial Reference.

(a) Because disputes arising in connection with complex financial transactions
are most quickly and economically resolved by an experienced and expert person
and the parties wish applicable state and federal laws to apply (rather than
arbitration rules), the parties desire that their disputes be resolved by a
judge applying such applicable laws. EACH OF BORROWER AND LENDER SPECIFICALLY
WAIVES ANY RIGHT IT MAY HAVE TO TRIAL BY JURY OF ANY CAUSE OF ACTION, CLAIM,
CROSS-CLAIM, COUNTERCLAIM, THIRD PARTY CLAIM OR ANY OTHER CLAIM (COLLECTIVELY,
“CLAIMS”) ASSERTED BY BORROWER AGAINST LENDER OR ITS ASSIGNEE OR BY LENDER OR
ITS ASSIGNEE AGAINST BORROWER. This waiver extends to all such Claims, including
Claims that involve Persons other than Borrower and Lender; Claims that arise
out of or are in any way connected to the relationship between Borrower and
Lender; and any Claims for damages, breach of contract, tort, specific
performance, or any equitable or legal relief of any kind, arising out of this
Agreement, any other Loan Document.

(b) If the waiver of jury trial set forth in Section 11.10(a) is ineffective or
unenforceable, the parties agree that all Claims shall be resolved by reference
to a private judge sitting without a jury, pursuant to Code of Civil Procedure
Section 638, before a mutually acceptable referee or, if the parties cannot
agree, a referee selected by the Presiding Judge of the Santa Clara County,
California. Such proceeding shall be conducted in Santa Clara County,
California, with California rules of evidence and discovery applicable to such
proceeding.

 

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(c) In the event Claims are to be resolved by judicial reference, either party
may seek from a court identified in Section 11.9, any prejudgment order, writ or
other relief and have such prejudgment order, writ or other relief enforced to
the fullest extent permitted by law notwithstanding that all Claims are
otherwise subject to resolution by judicial reference.

11.11 Professional Fees. Borrower promises to pay Lender’s fees and expenses
necessary to finalize the loan documentation, including but not limited to
reasonable attorneys fees, UCC searches, filing costs, and other miscellaneous
expenses. In addition, Borrower promises to pay any and all reasonable
attorneys’ and other professionals’ fees and expenses (including fees and
expenses of in-house counsel) incurred by Lender after the Closing Date in
connection with or related to: (a) the Loan; (b) the administration, collection,
or enforcement of the Loan; (c) the amendment or modification of the Loan
Documents; (d) any waiver, consent, release, or termination under the Loan
Documents; (e) the protection, preservation, sale, lease, liquidation, or
disposition of Collateral or the exercise of remedies with respect to the
Collateral; (f) any legal, litigation, administrative, arbitration, or out of
court proceeding in connection with or related to Borrower or the Collateral,
and any appeal or review thereof; and (g) any bankruptcy, restructuring,
reorganization, assignment for the benefit of creditors, workout, foreclosure,
or other action related to Borrower, the Collateral, the Loan Documents,
including representing Lender in any adversary proceeding or contested matter
commenced or continued by or on behalf of Borrower’s estate, and any appeal or
review thereof.

11.12 Confidentiality. Lender acknowledges that certain items of Collateral and
information provided to Lender by Borrower are confidential and proprietary
information of Borrower, if and to the extent such information either (x) is
marked as confidential by Borrower at the time of disclosure, or (y) should
reasonably be understood to be confidential (the “Confidential Information”).
Accordingly, Lender agrees that any Confidential Information it may obtain in
the course of acquiring, administering, or perfecting Lender’s security interest
in the Collateral shall not be disclosed to any other person or entity in any
manner whatsoever, in whole or in part, without the prior written consent of
Borrower, except that Lender may disclose any such information: (a) to its own
directors, officers, employees, accountants, counsel and other professional
advisors and to its affiliates if Lender in its sole discretion determines that
any such party should have access to such information in connection with such
party’s responsibilities in connection with the Loan or this Agreement and,
provided that such recipient of such Confidential Information either (i) agrees
to be bound by the confidentiality provisions of this paragraph or (ii) is
otherwise subject to confidentiality restrictions that reasonably protect
against the disclosure of Confidential Information; (b) if such information is
generally available to the public through no fault of Collateral Agent or
Lender; (c) if required or appropriate in any report, statement or testimony
submitted to any governmental authority having or claiming to have jurisdiction
over Lender; (d) if required or appropriate in response to any summons

 

33

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or subpoena or in connection with any litigation, to the extent permitted or
deemed advisable by Lender’s counsel; (e) to comply with any legal requirement
or law applicable to Lender; (f) to the extent reasonably necessary in
connection with the exercise of any right or remedy under any Loan Document,
including Lender’s sale, lease, or other disposition of Collateral after
default; (g) to any participant or assignee of Lender or any prospective
participant or assignee; provided, that such participant or assignee or
prospective participant or assignee agrees in writing to be bound by this
Section prior to disclosure; or (h) otherwise with the prior consent of
Borrower; provided, that any disclosure made in violation of this Agreement
shall not affect the obligations of Borrower or any of its affiliates or any
guarantor under this Agreement or the other Loan Documents.

11.13 Assignment of Rights. Borrower acknowledges and understands that Lender
may sell and assign all or part of its interest hereunder and under the Note(s)
and Loan Documents to any person or entity (an “Assignee”), provided, however,
that (i) Lender shall not sell or assign any of its rights pursuant to Section 8
of this Agreement without the express written consent of Borrower, which consent
may be withheld by Borrower in its sole discretion, and any such attempted
assignment without such consent shall be void and of no effect and (ii) any
transfer by Lender of the Note shall be subject to compliance with applicable
federal and state securities laws. After such assignment the term “Lender” as
used in the Loan Documents shall mean and include such Assignee, and such
Assignee shall be vested with all rights, powers and remedies of Lender
hereunder with respect to the interest so assigned; but with respect to any such
interest not so transferred, Lender shall retain all rights, powers and remedies
hereby given. No such assignment by Lender shall relieve Borrower of any of its
obligations hereunder. Lender agrees that in the event of any transfer by it of
the Note(s), it will endorse thereon a notation as to the portion of the
principal of the Note(s), which shall have been paid at the time of such
transfer and as to the date to which interest shall have been last paid thereon.

11.14 Revival of Secured Obligations. This Agreement and the Loan Documents
shall remain in full force and effect and continue to be effective if any
petition is filed by or against Borrower for liquidation or reorganization, if
Borrower becomes insolvent or makes an assignment for the benefit of creditors,
if a receiver or trustee is appointed for all or any significant part of
Borrower’s assets, or if any payment or transfer of Collateral is recovered from
Lender. The Loan Documents and the Secured Obligations and Collateral security
shall continue to be effective, or shall be revived or reinstated, as the case
may be, if at any time payment and performance of the Secured Obligations or any
transfer of Collateral to Lender, or any part thereof is rescinded, avoided or
avoidable, reduced in amount, or must otherwise be restored or returned by, or
is recovered from, Lender or by any obligee of the Secured Obligations, whether
as a “voidable preference,” “fraudulent conveyance,” or otherwise, all as though
such payment, performance, or transfer of Collateral had not been made. In the
event that any payment, or any part thereof, is rescinded, reduced, avoided,
avoidable, restored, returned, or recovered, the Loan Documents and the Secured
Obligations shall be deemed, without any further action or documentation, to
have been revived and reinstated except to the extent of the full, final, and
indefeasible payment to Lender in Cash.

 

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11.15 Counterparts. This Agreement and any amendments, waivers, consents or
supplements hereto may be executed in any number of counterparts, and by
different parties hereto in separate counterparts, each of which when so
delivered shall be deemed an original, but all of which counterparts shall
constitute but one and the same instrument.

11.16 No Third Party Beneficiaries. No provisions of the Loan Documents are
intended, nor will be interpreted, to provide or create any third-party
beneficiary rights or any other rights of any kind in any person other than
Lender and Borrower unless specifically provided otherwise herein, and, except
as otherwise so provided, all provisions of the Loan Documents will be personal
and solely between the Lender and the Borrower.

11.17 Publicity. Lender may use Borrower’s name and logo, and include a brief
description of the relationship between Borrower and Lender, in Lender’s
marketing materials.

SECTION 12. COLLATERAL AGENT

12.1 Appointment of Agent. Hercules Technology II, L.P. is hereby appointed as
Collateral Agent hereunder and under the other Loan Documents and each Lender
hereby authorizes Hercules Technology II, L.P. to act as Collateral Agent in
accordance with the terms hereof and the other Loan Documents. Collateral Agent
hereby agrees to act in its capacity as such upon the express conditions
contained herein and the other Loan Documents, as applicable. The provisions of
this Section 12 are solely for the benefit of Collateral Agent and each Lender
and Borrower shall have any rights as a third party beneficiary of any of the
provisions thereof.

12.2 Powers and Duties. Each Lender irrevocably authorizes Collateral Agent to
take such action on such Lender’s behalf and to exercise such powers, rights and
remedies hereunder and under the other Loan Documents as are specifically
delegated or granted to Collateral Agent by the terms hereof and thereof,
together with such powers, rights and remedies as are reasonably incidental
thereto. Collateral Agent may exercise such powers, rights and remedies and
perform such duties by or through its agents or employees. Collateral Agent may
accept payments of principal, interest, fees and expenses due under the Loan
Documents from and deposits from Borrower on the account or benefit for any
Lender.

(SIGNATURES TO FOLLOW)

 

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IN WITNESS WHEREOF, Borrower and Lender have duly executed and delivered this
Loan and Security Agreement as of the day and year first above written.

 

BORROWER:

 

ACELRX PHARMACEUTICALS, INC.

Signature:   /s/ James Welch Print Name:   James Welch Title:   CFO    

Accepted in Palo Alto, California:

LENDER: HERCULES TECHNOLOGY II, L.P. By:    Hercules Technology SBIC Management,
LLC, its General Partner By:   Hercules Technology Growth Capital, Inc., its
Manager Signature:   /s/ Ben Bang Print Name:   Ben Bang Title:   Senior Counsel
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. Signature:   /s/ Ben Bang Print Name:  

Ben Bang

Title:   Senior Counsel

[Signature Page to Loan and Security Agreement]

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Table of Addenda, Exhibits and Schedules

 

Addendum 1:    SBA Provisions Exhibit A:   

Advance Request

Attachment to Advance Request

Exhibit B-1:    Term Note for Hercules Technology II, L.P. Exhibit B-2:    Term
Note for Hercules Technology Growth Capital, Inc. Exhibit C:    Name, Locations,
and Other Information for Borrower Exhibit D:    Borrower’s Patents, Trademarks,
Copyrights and Licenses Exhibit E:    Borrower’s Deposit Accounts and Investment
Accounts Exhibit F:    Compliance Certificate Exhibit G:    Joinder Agreement
Exhibit H:    Reserved Exhibit I:    ACH Debit Authorization Agreement Schedule
1    Subsidiaries Schedule 1.1    Commitments Schedule 1A    Existing Permitted
Indebtedness Schedule 1B    Existing Permitted Investments Schedule 1C   
Existing Permitted Liens Schedule 5.3    Consents, Etc. Schedule 5.5    Actions
Before Governmental Authorities Schedule 5.8    Tax Matters Schedule 5.9   
Intellectual Property Claims Schedule 5.10    Intellectual Property
Schedule 5.11    Borrower Products Schedule 5.14    Capitalization Exhibit J:   
Repayment Election Notice

 

1

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ADDENDUM 1 to LOAN AND SECURITY AGREEMENT

(a) Borrower’s Business. For purposes of this Addendum 1, Borrower shall be
deemed to include its “affiliates” as defined in Title 13 Code of Federal
Regulations Section 121.103. Borrower represents and warrants to Hercules
Technology II, L.P. (“Hercules II”) as of the Closing Date, and covenants to
Hercules II

(b) for a period of one year after the Closing Date with respect to subsections
2, 3, 4, 5, 6 and 7 below, as follows:

 

  1. Size Status. As of the Closing Date, Borrower’s NAIC is 325412, and
Borrower has fewer than 750 employees;

 

  2. No Relender. Borrower’s primary business activity does not involve,
directly or indirectly, providing funds to others, purchasing debt obligations,
factoring, or long-term leasing of equipment with no provision for maintenance
or repair;

 

  3. No Passive Business. Borrower is engaged in a regular and continuous
business operation (excluding the mere receipt of payments such as dividends,
rents, lease payments, or royalties). Borrower’s employees are carrying on the
majority of day to day operations. Borrower will not pass through substantially
all of the proceeds of the Loan to another entity;

 

  4. No Real Estate Business. Borrower is not classified under Major Group 65
(Real Estate) or Industry No. 1531 (Operative Builders) of the SIC Manual. The
proceeds of the Loan will not be used to acquire or refinance real property
unless Borrower (x) is acquiring an existing property and will use at least 51
percent of the usable square footage for its business purposes; (y) is building
or renovating a building and will use at least 67 percent of the usable square
footage for its business purposes; or (z) occupies the subject property and uses
at least 67 percent of the usable square footage for its business purposes.

 

  5. No Project Finance. Borrower’s assets are not intended to be reduced or
consumed, generally without replacement, as the life of its business progresses,
and the nature of Borrower’s business does not require that a stream of cash
payments be made to the business’s financing sources, on a basis associated with
the continuing sale of assets (e.g., real estate development projects and oil
and gas wells). The primary purpose of the Loan is not to fund production of a
single item or defined limited number of items, generally over a defined
production period, where such production will constitute the majority of the
activities of Borrower (e.g., motion pictures and electric generating plants).

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  6. No Farm Land Purchases. Borrower will not use the proceeds of the Loan to
acquire farm land which is or is intended to be used for agricultural or
forestry purposes, such as the production of food, fiber, or wood, or is so
taxed or zoned.

 

  7. No Foreign Investment. The proceeds of the Loan will not be used
substantially for a foreign operation. At the time of the Loan, Borrower will
not have more than 49 percent of its employees or tangible assets located
outside the United States. The representation in this subsection (7) is made
only as of the date hereof and shall not continue for one year as contemplated
in the first sentence of this Section 1.

(c) Small Business Administration Documentation. Hercules II acknowledges that
Borrower completed, executed and delivered to Hercules II SBA Forms 480, 652 and
1031 (Parts A and B) together with a business plan showing Borrower’s financial
projections (including balance sheets and income and cash flows statements) for
the period described therein and a written statement (whether included in the
purchase agreement or pursuant to a separate statement) from Hercules II
regarding its intended use of proceeds from the sale of securities to Hercules
II (the “Use of Proceeds Statement”). Borrower represents and warrants to
Hercules II that the information regarding Borrower and its affiliates set forth
in the SBA Form 480, Form 652 and Form 1031 and the Use of Proceeds Statement
delivered as of the Closing Date is accurate and complete.

(d) Inspection. The following covenants contained in this Section (c) are
intended to supplement and not to restrict the related provisions of the Loan
Documents. Subject to the preceding sentence, Borrower will permit, for so long
as Hercules II holds any debt or equity securities of Borrower, Hercules II or
its representative, at Hercules II’s expense, and examiners of the SBA to visit
and inspect the properties and assets of Borrower, to examine its books of
account and records, and to discuss Borrower’s affairs, finances and accounts
with Borrower’s officers, senior management and accountants, all at such
reasonable times as may be requested by Hercules II or the SBA.

(e) Annual Assessment. Promptly after the end of each calendar year (but in any
event prior to February 28 of each year) and at such other times as may be
reasonably requested by Hercules II, Borrower will deliver to Hercules II a
written assessment of the economic impact of Hercules II’s investment in
Borrower, specifying the full-time equivalent jobs created or retained in
connection with the investment, the impact of the investment on the businesses
of Borrower in terms of expanded revenue and taxes, other economic benefits
resulting from the investment (such as technology development or
commercialization, minority business development, or expansion of exports) and
such other information as may be required regarding Borrower in connection with
the filing of

 

2

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Hercules II’s SBA Form 468. Hercules II will assist Borrower with preparing such
assessment. In addition to any other rights granted hereunder, Borrower will
grant Hercules II and the SBA access to Borrower’s books and records for the
purpose of verifying the use of such proceeds. Borrower also will furnish or
cause to be furnished to Hercules II such other information regarding the
business, affairs and condition of Borrower as Hercules II may from time to time
reasonably request.

(f) Use of Proceeds. Borrower will deliver to Hercules II from time to time
promptly following Hercules II’s request, a written report, certified as correct
by Borrower’s Chief Financial Officer, verifying the purposes and amounts for
which proceeds from the Loan have been disbursed. Borrower will supply to
Hercules II such additional information and documents as Hercules II reasonably
requests with respect to its use of proceeds and will permit Hercules II and the
SBA to have access to any and all Borrower records and information and personnel
as Hercules II deems necessary to verify how such proceeds have been or are
being used.

(g) Activities and Proceeds. Neither Borrower nor any of its affiliates (if any)
will engage in any activities or use directly or indirectly the proceeds from
the Loan for any purpose for which a small business investment company is
prohibited from providing funds by the SBIC Act, including 13 C.F.R.
§107.720. Without obtaining the prior written approval of Hercules II, Borrower
will not change within 1 year of the date hereof, Borrower’s current business
activity to a business activity which a licensee under the SBIC Act is
prohibited from providing funds by the SBIC Act.

(h) Redemption Provisions. Notwithstanding any provision to the contrary
contained in the Certificate of Incorporation of Borrower, as amended from time
to time (the “Charter”), if, pursuant to the redemption provisions contained in
the Charter, Hercules II is entitled to a redemption of its Warrant, such
redemption (in the case of Hercules II) will be at a price equal to the
redemption price set forth in the Charter (the “Existing Redemption Price”). If,
however, Hercules II delivers written notice to Borrower that the then current
regulations promulgated under the SBIC Act prohibit payment of the Existing
Redemption Price in the case of an SBIC (or, if applied, the Existing Redemption
Price would cause the Series C Preferred Stock to lose its classification as an
“equity security” and Hercules II has determined that such classification is
unadvisable), the amount Hercules II will be entitled to receive shall be the
greater of (i) fair market value of the securities being redeemed taking into
account the rights and preferences of such securities plus any costs and
expenses of Hercules II incurred in making or maintaining the Warrant, and
(ii) the Existing Redemption Price where the amount of accrued but unpaid
dividends payable to Hercules II is limited to Borrower’s earnings plus any
costs and expenses of Hercules II incurred in making or maintaining the Warrant;
provided, however, the amount calculated in subsections (i) or (ii) above shall
not exceed the Existing Redemption Price.

(i) Cost of Money. Notwithstanding any provision to the contrary contained in
the Loan Documents, all interest and fees charged pursuant to the Loan Documents
shall comply with the provisions of 13 C.F.R. § 107.855, including, without
limitation, that such amounts shall not exceed the Cost of Money ceiling (as
defined hereafter). The current Cost of Money ceiling for this Loan is fourteen
percent.

 

3

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(j) Compliance and Resolution. Borrower agrees that a failure to comply with
Borrower’s obligations under this Addendum, or any other set of facts or
circumstances where it has been asserted by any governmental regulatory agency
(or Hercules II believes that there is a substantial risk of such assertion)
that Hercules II and its affiliates are not entitled to hold, or exercise any
significant right with respect to, any securities issued to Hercules II by
Borrower, will constitute a breach of the obligations of Borrower under the
financing agreements between Borrower and Hercules II. In the event of (i) a
failure to comply with Borrower’s obligations under this Addendum; or (ii) an
assertion by any governmental regulatory agency (or Hercules II believes that
there is a substantial risk of such assertion) of a failure to comply with
Borrower’s obligations under this Addendum, then (i) Hercules II and Borrower
will meet and resolve any such issue in good faith to the satisfaction of
Borrower, Hercules II, and any governmental regulatory agency, and (ii) upon
request of Hercules II, Borrower will cooperate and assist with any assignment
of the financing agreements from Hercules II to Hercules Technology Growth
Capital, Inc.

 

4

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EXHIBIT A

ADVANCE REQUEST

 

To:   Lender:

   Date:             , 20__

Hercules Technology II, L.P.

Hercules Technology Growth Capital, Inc.

400 Hamilton Avenue, Suite 310

Palo Alto, CA 94301

Facsimile: 650-473-9194

Attn:

AcelRx Pharmaceuticals, Inc. (“Borrower”) hereby requests from Hercules
Technology II, L.P. and Hercules Technology Growth Capital, Inc. (collectively,
“Lender”) an Advance in the amount of Fifteen Million Dollars ($15,000,000.00)
on December 16, 2013 (the “Advance Date”) pursuant to the Loan and Security
Agreement between Borrower and Lender dated as of December 16, 2013 (the
“Agreement”). In addition, Borrower directs Lender to (i) retain the Facility
Charge and reimbursement of Lender’s current expenses and (ii) payoff loans
funded under the Original Agreement. Capitalized words and other terms used but
not otherwise defined herein are used with the same meanings as defined in the
Agreement.

Please:

 

  (a) Issue a check payable to Borrower                         

                         or

 

  (b) Wire Funds to Borrower’s account                         

 

Bank:

       

Address:

               

ABA Number:

       

Account Number:

       

Account Name:

       

Borrower represents that the conditions precedent to the Advance set forth in
the Agreement are satisfied and shall be satisfied upon the making of such
Advance, including but not limited to: (i) that no event that has had or could
reasonably be expected to have a Material Adverse Effect has occurred and is
continuing; (ii) that the representations and warranties set forth in the
Agreement and in the Warrants are and shall be true and correct in all material
respects on and as of the Advance Date with the same effect as though made on
and as of such date, except to the extent such representations and warranties
expressly relate to an earlier date; (iii) that Borrower is in compliance with
all the terms and provisions set forth in each Loan Document on its part to be
observed or performed; and (iv) that as of the Advance Date, no fact or
condition exists that would (or would, with the passage of time, the giving of
notice, or both) constitute an Event of Default under the Loan Documents.
Borrower understands and acknowledges that Lender has the right to review the
financial information supporting this representation and, based upon such review
in its sole discretion, Lender may decline to fund the requested Advance.

--------------------------------------------------------------------------------

Borrower hereby represents that Borrower’s corporate status and locations have
not changed since the date of the Agreement or, if the Attachment to this
Advance Request is completed, are as set forth in the Attachment to this Advance
Request.

Borrower agrees to notify Lender promptly before the funding of the Loan if any
of the matters which have been represented above shall not be true and correct
on the Borrowing Date and if Lender has received no such notice before the
Advance Date then the statements set forth above shall be deemed to have been
made and shall be deemed to be true and correct as of the Advance Date.

Executed as of                     , 20__.

 

BORROWER: AcelRx Pharmaceuticals, Inc. SIGNATURE:     TITLE:     PRINT NAME:    

[Signature Page to Advance Request]

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ATTACHMENT TO ADVANCE REQUEST

Dated:                             

Borrower hereby represents and warrants to Lender that Borrower’s current name
and organizational status is as follows:

 

  Name:    AcelRx Pharmaceuticals, Inc.   Type of organization:    Corporation  
State of organization:    Delaware   Organization file number:    3998627

Borrower hereby represents and warrants to Lender that the street addresses,
cities, states and postal codes of its current locations are as follows:

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EXHIBIT B-1

THIS SECURED CONVERTIBLE TERM PROMISSORY NOTE HAS NOT BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN
RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, AND, ACCORDINGLY, MAY NOT BE TRANSFERRED UNLESS (I) THIS NOTE HAS
BEEN REGISTERED FOR SALE PURSUANT TO THE SECURITIES ACT OF 1933, AS AMENDED,
(II) THIS NOTE MAY BE SOLD PURSUANT TO RULE 144, OR (III) THE BORROWER HAS
RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IT THAT SUCH TRANSFER
MAY LAWFULLY BE MADE WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.

SECURED CONVERTIBLE TERM PROMISSORY NOTE

 

$13,333,333.33    Advance Date: December 16, 2013

FOR VALUE RECEIVED, AcelRx Pharmaceuticals, Inc., a Delaware corporation, for
itself and each of its Subsidiaries (the “Borrower”) hereby promises to pay to
the order of Hercules Technology II, L.P., a Delaware limited partnership or the
holder of this Note (the “Lender”) at 400 Hamilton Avenue, Suite 310, Palo Alto,
CA 94301 or such other place of payment as the holder of this Secured Term
Promissory Note (this “Promissory Note”) may specify from time to time in
writing, in lawful money of the United States of America, the principal amount
of Thirteen Million Three Hundred Thirty-Three Thousand Three Hundred
Thirty-Three and 33/100 Dollars ($13,333,333.33) or such other principal amount
as Lender has advanced to Borrower, together with interest at a floating rate as
set forth in that certain Loan and Security Agreement dated December 16, 2013,
by and between Borrower and Lender (as the same may from time to time be
amended, modified or supplemented in accordance with its terms, the “Loan
Agreement”).

This Promissory Note is one of the Notes referred to in, and is executed and
delivered in connection with, the Loan Agreement, and is entitled to the benefit
and security of the Loan Agreement and the other Loan Documents (as defined in
the Loan Agreement), to which reference is made for a statement of all of the
terms and conditions thereof. All payments shall be made in accordance with the
Loan Agreement, including the right of Borrower to pay a portion of the amounts
due and owing under this Promissory Note in shares of Common Stock in accordance
with, and subject to the limitations set forth in, Section 2.2(e) of the Loan
Agreement (including the requirement that any shares of Common Stock issuable by
Borrower upon conversion of this Note are subject to an effective resale
registration statement or are eligible for resale to the public pursuant to Rule
144 without any limitation). All terms defined in the Loan Agreement shall have
the same definitions when used herein, unless otherwise defined herein. An Event
of Default under the Loan Agreement shall constitute a default under this
Promissory Note.

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Borrower waives presentment and demand for payment, notice of dishonor, protest
and notice of protest under the UCC or any applicable law. Borrower agrees to
make all payments under this Promissory Note without setoff, recoupment or
deduction and regardless of any counterclaim or defense. This Promissory Note
has been negotiated and delivered to Lender and is payable in the State of
California. This Promissory Note shall be governed by and construed and enforced
in accordance with, the laws of the State of California, excluding any conflicts
of law rules or principles that would cause the application of the laws of any
other jurisdiction.

 

BORROWER:     ACELRX PHARMACEUTICALS, INC.     By:       Title:        

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EXHIBIT B-2

THIS SECURED CONVERTIBLE TERM PROMISSORY NOTE, AND ANY SECURITIES ISSUED UPON
CONVERSION PURSUANT TO THIS SECURED CONVERTIBLE TERM PROMISSORY NOTE, HAVE NOT
BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND, ACCORDINGLY, MAY NOT BE TRANSFERRED
UNLESS (I) SUCH SECURITIES HAVE BEEN REGISTERED FOR SALE PURSUANT TO THE
SECURITIES ACT OF 1933, AS AMENDED, (II) SUCH SECURITIES MAY BE SOLD PURSUANT TO
RULE 144, OR (III) THE BORROWER HAS RECEIVED AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO IT THAT SUCH TRANSFER MAY LAWFULLY BE MADE WITHOUT REGISTRATION
UNDER THE SECURITIES ACT OF 1933, AS AMENDED.

SECURED CONVERTIBLE TERM PROMISSORY NOTE

 

$26,666,666.67    Advance Date: December 16, 2013

FOR VALUE RECEIVED, AcelRx Pharmaceuticals, Inc., a Delaware corporation, for
itself and each of its Subsidiaries (the “Borrower”) hereby promises to pay to
the order of Hercules Technology Growth Capital, Inc., a Maryland corporation or
the holder of this Note (the “Lender”) at 400 Hamilton Avenue, Suite 310, Palo
Alto, CA 94301 or such other place of payment as the holder of this Secured Term
Promissory Note (this “Promissory Note”) may specify from time to time in
writing, in lawful money of the United States of America, the principal amount
of Twenty-Six Million Six Hundred Sixty-Six Thousand Six Hundred Sixty-Six and
67/100 Dollars ($26,666,666.67) or such other principal amount as Lender has
advanced to Borrower, together with interest at a floating rate as set forth in
that certain Loan and Security Agreement dated December 16, 2013, by and between
Borrower and Lender (as the same may from time to time be amended, modified or
supplemented in accordance with its terms, the “Loan Agreement”).

This Promissory Note one of the Notes referred to in, and is executed and
delivered in connection with, the Loan Agreement, and is entitled to the benefit
and security of the Loan Agreement and the other Loan Documents (as defined in
the Loan Agreement), to which reference is made for a statement of all of the
terms and conditions thereof. All payments shall be made in accordance with the
Loan Agreement, including the right of Borrower to pay a portion of the amounts
due and owing under this Promissory Note in shares of Common Stock in accordance
with, and subject to the limitations set forth in, Section 2.2(e) of the Loan
Agreement (including the requirement that any shares of Common Stock issuable by
Borrower upon conversion of this Note are subject to an effective resale
registration statement or are eligible for resale to the public pursuant to Rule
144 without any limitation). All terms defined in the Loan Agreement shall have
the same definitions when used herein, unless otherwise defined herein. An Event
of Default under the Loan Agreement shall constitute a default under this
Promissory Note.

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Borrower waives presentment and demand for payment, notice of dishonor, protest
and notice of protest under the UCC or any applicable law. Borrower agrees to
make all payments under this Promissory Note without setoff, recoupment or
deduction and regardless of any counterclaim or defense. This Promissory Note
has been negotiated and delivered to Lender and is payable in the State of
California. This Promissory Note shall be governed by and construed and enforced
in accordance with, the laws of the State of California, excluding any conflicts
of law rules or principles that would cause the application of the laws of any
other jurisdiction.

 

BORROWER:     ACELRX PHARMACEUTICALS, INC.     By:       Title:        

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EXHIBIT C

NAME, LOCATIONS, AND OTHER INFORMATION FOR BORROWER

1. Borrower represents and warrants to Lender that Borrower’s current name and
organizational status as of the Closing Date is as follows:

 

Name:    AcelRx Pharmaceuticals, Inc. Type of organization:    Corporation State
of organization:    Delaware Organization file number:    3998627

2. Borrower represents and warrants to Lender that for five (5) years prior to
the Closing Date, Borrower did not do business under any other name or
organization or form except the following:

Name:

Used during dates of:

Type of Organization: Corporation

State of organization: Delaware

Organization file Number:

Borrower’s fiscal year ends on December 31

Borrower’s federal employer tax identification number is: 41-2193603

3. Borrower represents and warrants to Lender that its chief executive office is
located at 351 Galveston Drive, Redwood City, CA 94063.

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EXHIBIT D

BORROWER’S PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES

See attached chart of patents.

ACELRX, THE ACELRX LOGO, ARX, NANOTAB, ACCELERATE.INNOVATE.ALLEVIATE., ZALVISO
AND ASSOCIATED LOGO ARE TRADEMARKS OF ACELRX PHARMACEUTICALS, INC.

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EXHIBIT E

BORROWER’S DEPOSIT ACCOUNTS AND INVESTMENT ACCOUNTS

DEPOSIT ACCOUNTS

 

Depository Institution

(name and address)

  

Account Type

  

Account Number

  

Account Holder

Wells Fargo Bank    Demand    4121466536    AcelRx Pharmaceuticals, Inc.

INVESTMENT ACCOUNTS

 

Securities Intermediary

(name and address)

  

Account Type

  

Account Number

  

Account Holder

Morgan Stanley & Co.    Securities    14-78EW8    AcelRx Pharmaceuticals, Inc.

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EXHIBIT F

COMPLIANCE CERTIFICATE

Hercules Technology II, L.P.

Hercules Technology Growth Capital, Inc.

400 Hamilton Avenue, Suite 310

Palo Alto, CA 94301

Reference is made to that certain Loan and Security Agreement dated December 16,
2013 and all ancillary documents entered into in connection with such Loan and
Security Agreement all as may be amended from time to time, (hereinafter
referred to collectively as the “Loan Agreement”) between Hercules Technology
II, L.P. and Hercules Technology Growth Capital, Inc., each as a Lender, and
AcelRx Pharmaceuticals, Inc. (the “Company”) as Borrower. All capitalized terms
not defined herein shall have the same meaning as defined in the Loan Agreement.

The undersigned is an officer of the Company, knowledgeable of all Company
financial matters, and is authorized to provide certification of information
regarding the Company; hereby certifies that in accordance with the terms and
conditions of the Loan Agreement, the Company is in compliance for the period
ending                     , 20     of all covenants, conditions and terms and
hereby reaffirms that all representations and warranties contained therein are
true and correct on and as of the date of this Compliance Certificate with the
same effect as though made on and as of such date, except to the extent such
representations and warranties expressly relate to an earlier date, after giving
effect in all cases to any standard(s) of materiality contained in the Loan
Agreement as to such representations and warranties. Attached are the required
documents supporting the above certification. The undersigned further certifies
that these are prepared in accordance with GAAP (except for the absence of
footnotes with respect to unaudited financial statement and subject to normal
year end adjustments) and are consistent from one period to the next except as
explained below.

 

REPORTING REQUIREMENT    REQUIRED    CHECK IF ATTACHED Interim Financial
Statements    Monthly within 30 days    ¨ Interim Financial Statements    Within
45 days after each of the first 3 fiscal quarters of each fiscal year    ¨
Audited Financial Statements    FYE within 90 days    ¨

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Very Truly Yours,

 

ACELRX PHARMACEUTICALS, INC.

By:     Name:     Its:    

[Signature Page to Compliance Certificate]

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EXHIBIT G

FORM OF JOINDER AGREEMENT

This Joinder Agreement (the “Joinder Agreement”) is made and dated as of
[        ], 20[    ], and is entered into by and between                    ., a
                     corporation (“Subsidiary”), and HERCULES TECHNOLOGY II,
L.P., a Delaware limited partnership, and HERCULES TECHNOLOGY GROWTH CAPITAL,
INC., a Maryland corporation (collectively, “Lender”).

RECITALS

A. Subsidiary’s Affiliate, AcelRx Pharmaceuticals, Inc. (“Company”) has entered
into that certain Loan and Security Agreement dated December 16, 2013, with
Lender, as such agreement may be amended (the “Loan Agreement”), together with
the other agreements executed and delivered in connection therewith;

B. Subsidiary acknowledges and agrees that it will benefit both directly and
indirectly from Company’s execution of the Loan Agreement and the other
agreements executed and delivered in connection therewith;

AGREEMENT

NOW THEREFORE, Subsidiary and Lender agree as follows:

 

1. The recitals set forth above are incorporated into and made part of this
Joinder Agreement. Capitalized terms not defined herein shall have the meaning
provided in the Loan Agreement.

 

2. By signing this Joinder Agreement, Subsidiary shall be bound by the terms and
conditions of the Loan Agreement the same as if it were the Borrower (as defined
in the Loan Agreement) under the Loan Agreement, mutatis mutandis, provided
however, that Lender shall have no duties, responsibilities or obligations to
Subsidiary arising under or related to the Loan Agreement or the other
agreements executed and delivered in connection therewith. Rather, to the extent
that Lender has any duties, responsibilities or obligations arising under or
related to the Loan Agreement or the other agreements executed and delivered in
connection therewith, those duties, responsibilities or obligations shall flow
only to Company and not to Subsidiary or any other person or entity. By way of
example (and not an exclusive list): (a) Lender’s providing notice to Company in
accordance with the Loan Agreement or as otherwise agreed between Company and
Lender shall be deemed provided to Subsidiary; (b) a Lender’s providing an
Advance to Company shall be deemed an Advance to Subsidiary; and (c) Subsidiary
shall have no right to request an Advance or make any other demand on Lender.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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[SIGNATURE PAGE TO JOINDER AGREEMENT]

SUBSIDIARY:

 

                                                                 .     

 

  By:                  Name:                  Title:                          
        Address:                                   Telephone:                  
  Facsimile:                 

HERCULES TECHNOLOGY II, L.P.

 

  By: Hercules Technology SBIC Management, LLC, its General Partner

 

  By: Hercules Technology Growth Capital, Inc., its Manager

 

  By:              Name:              Title:             

 

Address:

400 Hamilton Ave., Suite 310

Palo Alto, CA 94301

Facsimile: 650-473-9194

Telephone: 650-289-3060

  

HERCULES TECHNOLOGY GROWTH CAPITAL, INC.

 

  By:              Name:              Title:             

 

Address:

400 Hamilton Ave., Suite 310

Palo Alto, CA 94301

Facsimile: 650-473-9194

Telephone: 650-289-3060

  

[Signature Page to Joinder Agreement]

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EXHIBIT H

[RESERVED]

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EXHIBIT I

ACH DEBIT AUTHORIZATION AGREEMENT

Hercules Technology II, L.P.

Hercules Technology Growth Capital, Inc.

400 Hamilton Avenue, Suite 310

Palo Alto, CA 94301

Re: Loan and Security Agreement dated December 16, 2013 between AcelRx
Pharmaceuticals, Inc. (“Borrower”) and Hercules Technology II, L.P. and Hercules
Technology Growth Capital, Inc. (collectively, “Company”) (the “Agreement”)

In connection with the above referenced Agreement, the Borrower hereby
authorizes the Company to initiate debit entries for the periodic payments due
under the Agreement to the Borrower’s account indicated below. The Borrower
authorizes the depository institution named below to debit to such account.

 

DEPOSITORY NAME    BRANCH CITY    STATE AND ZIP CODE TRANSIT/ABA NUMBER   
ACCOUNT NUMBER

This authority will remain in full force and effect so long as any amounts are
due under the Agreement.

 

ACELRX PHARMACEUTICALS, INC. By:     Date:    

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EXHIBIT J

REPAYMENT ELECTION NOTICE

[INSERT DATE]

Hercules Technology II, L.P.

Hercules Technology Growth Capital, Inc.

400 Hamilton Avenue, Suite 310

Palo Alto, CA 94301

Reference is made to that certain Loan and Security Agreement dated December 16,
2013 and all ancillary documents entered into in connection with such Loan and
Security Agreement all as may be amended from time to time, (hereinafter
referred to collectively as the “Loan Agreement”) between Hercules Technology
II, L.P. and Hercules Technology Growth Capital, Inc., each as a Lender, and
AcelRx Pharmaceuticals, Inc. (the “Company”) as Borrower. All capitalized terms
not defined herein shall have the same meaning as defined in the Loan Agreement.

Borrower hereby irrevocably elects to make [the Principal Installment Payment in
the amount of $             due on [                    ] (the “Delivery Date”)
in shares of Common Stock in accordance with Section 2.2(e) of the Loan
Agreement][an Optional Prepayment in the amount of $                     on
[                    ] (the “Delivery Date”) in shares of Common Stock in
accordance with Section 2.2(e) of the Loan Agreement].1 The number of shares of
Common Stock to be delivered to Lender, on or prior to the Delivery Date, is
[                    ], which amount was determined in accordance with
Section 2.2(e) of the Loan Agreement. The stock certificates shall be delivered
free and clear of any restrictive legends.

The Borrower hereby represents, warrants and certifies to Lender that, as of the
date hereof, all of the Stock Payment Conditions have been satisfied. The
Borrower acknowledges and agrees that its right to pay the [Principal
Installment Payment][Optional Prepayment] in Common Stock in accordance with
this Repayment Election Notice is subject to the satisfaction of all of the
Stock Payment Conditions on the Delivery Date and, to the extent any of the
Stock Payment Conditions are not satisfied on the Delivery Date, Borrower shall
pay the [Principal Installment Payment][Optional Prepayment] in cash.

 

Sincerely,

 

1  Note: In accordance with Section 2.2(e) of the Loan Agreement, the Delivery
Date must be at least 10 days following the date of delivery of this Repayment
Election Notice.

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ACELRX PHARMACEUTICALS, INC. By:     Name:     Its:    

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SCHEDULE 1.1

COMMITMENTS

 

LENDER

   TERM COMMITMENT      TERM COMMITMENT
PERCENTAGE  

Hercules Technology II, L.P.

   $ 13,333,333.33         33.33 % 

Hercules Technology Growth Capital, Inc.

   $ 26,666,666.67         66.67 % 

TOTAL COMMITMENTS

   $ 40,000,000.00         100 % 

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SCHEDULE 7.4

POST-CLOSING ITEMS

Borrower shall deliver or cause to be delivered to Lender:

1. On or before February 16, 2014, a Landlord’s Waiver and Consent for 351
Galveston Drive, Redwood City, CA 94063 in form reasonably satisfactory to
Lender.

2. On or before February 16, 2014, a Bailee Agreement approved by Patheon Inc.
for Collateral located at 2110 East Galbraith Road, Cincinnati, OH 45237 in form
reasonably satisfactory to Lender.