UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2016

or

For the transition period from                      to                      

Commission File Number 000-51820

ALEXZA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

(Registrant’s telephone number, including area code): (650) 944-7000

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o

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

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

Total number of shares of common stock outstanding as of May 11, 2016: 21,750,615.

ALEXZA PHARMACEUTICALS, INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ALEXZA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

See accompanying notes to the financial statements.

3

ALEXZA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

(in thousands, except per share amounts)

(unaudited)

See accompanying notes to the financial statements.

4

ALEXZA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

See accompanying notes to the financial statements.

5

ALEXZA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. The Company and Basis of Presentation

Business

We were incorporated in the state of Delaware on December 19, 2000 as FaxMed, Inc., changed our name to Alexza Corporation in June 2001 and in December 2001 became Alexza Molecular Delivery Corporation. In July 2005, we changed our name to Alexza Pharmaceuticals, Inc.

We are a pharmaceutical company focused on the research, development, and commercialization of novel proprietary products for the acute treatment of central nervous system conditions. We operate in one business segment. Our facilities and employees are currently located in the United States.

As further described under note 13, Subsequent Events, below, on May 9, 2016, we entered into an Agreement and Plan of Merger, or the Merger Agreement, with Grupo Ferrer Internacional, S.A., a Spanish sociedad anonima, or Ferrer, and Ferrer Pharma Inc., a Delaware corporation and a wholly owned indirect subsidiary of Ferrer, or Purchaser, and upon the terms and subject to the conditions thereof, Purchaser has agreed to commence a cash tender offer to acquire all of the shares of our common stock (excluding any shares of our common stock held, directly or indirectly, by Ferrer), or the Offer. Following the consummation of the Offer, the Merger Agreement provides that Purchaser will merge with and into us, or the Merger, and we will become a wholly owned subsidiary of Ferrer.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our interim condensed consolidated financial information. The results for the three months ended March 31, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016 or for any other interim period or any other future year.

The accompanying unaudited condensed consolidated financial statements and notes to condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2015 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 28, 2016.

Basis of Consolidation

The unaudited condensed consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

2. Need to Raise Additional Capital

We have incurred significant losses from operations since inception and expect losses to continue for the foreseeable future. As of March 31, 2016, we had cash and cash equivalents of $4,502,000 and a working capital deficiency of $52,909,000. The working capital deficiency is primarily the result of the classification of our royalty securitization financing as a current liability. Our operating and capital plans call for cash expenditures to exceed cash and cash equivalent balances for the next twelve months.

We plan to finance our operations through partnership or licensing collaborations, the sale of equity securities, debt arrangements, a potential sale or disposition of one or more corporate assets or a strategic business combination or partnership, and we have engaged Guggenheim Securities, LLC to assist us in exploring such strategic options to enhance stockholder value. Such funding or potential transaction may not be available or may be on terms that are not favorable to us. Our inability to raise capital as and when needed could have a negative impact on our financial condition and our ability to continue as a going concern. If we become unable to continue as a going concern, we may have to liquidate our assets, and might realize significantly less than the values at which they are carried on our financial statements, and stockholders may lose all or part of their investment in our common stock. Based on our available cash resources, the additional $2,300,000 drawn in April and May 2016 under that certain promissory note we issued to

6

Ferrer as amended, or the Ferrer Note, and our expected cash usage, we estimate that we have sufficient capital resources to meet our anticipated cash needs until the end of June 2016.

In February 2016, we entered into a definitive agreement with Teva Pharmaceuticals USA, Inc. or Teva, whereby (i) we reacquired the ADASUVE commercial U.S. rights that we had licensed to Teva under that certain License and Collaboration Agreement we executed with Teva in May 2013, or the Teva Amendment, and (ii) restructured our obligations under the outstanding convertible promissory note from Teva, or the Amended Teva Note. The Teva Amendment is intended to allow us to continue to provide ADASUVE product to patients and health care providers either on our own or through another unaffiliated partner, at which time all Teva license rights to ADASUVE would terminate. The Amended Teva Note, provided for (i) the issuance of 2,172,886 shares of our common stock to Teva pursuant to a stock issuance agreement as consideration for a reduction in the outstanding balance of the Amended Teva Note by $5,000,000 and forgiveness of all accrued and unpaid interest under the Amended Teva Note; (ii) the contingent repayment of remaining $20,000,000 outstanding balance of the Amended Teva Note in four annual consecutive payments of $5,000,000 beginning on January 31 of the first calendar year following the calendar year in which the aggregate annual net sales of ADASUVE and any other Staccato enabled products first reach $50,000,000 in the United States; (iii) the elimination of the conversion feature and (iv) the prepayment of the outstanding balance of the Amended Teva Note at any time without penalty. Refer to Note 8 - Financing Obligations for further discussion on the Teva Note.

As further described under note 13, Subsequent Events, below, on May 9, 2016, we entered into the Merger Agreement pursuant to which  Purchaser  has agreed to commence a cash  tender  offer  to acquire all of the shares of our common stock (excluding  any  shares  of  our  common  stock  held,  directly  or  indirectly,  by  Ferrer)  pursuant  to  the  Offer. Following the consummation of the Offer, the Merger Agreement provides that Purchaser will merge with and into us in the Merger, and we will become a wholly owned subsidiary of Ferrer. There can be no assurance that the Offer or the Merger will be consummated.

The significant uncertainties surrounding any revenue from sales of ADASUVE, including royalties and milestone payments from our present and future collaborations, clinical development timelines and costs and the need to raise a significant amount of capital raises substantial doubt about our ability to continue as a going concern for a reasonable period of time. These consolidated financial statements have been prepared with the assumption that we will continue as a going concern and will be able to realize our assets and discharge our liabilities in the normal course of business and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern.  In order to mitigate the risk related with this uncertainty, we plan to issue debt or additional shares of our common stock for cash and services or enter into additional collaborations or a strategic transaction during the next twelve months.  There is no assurance we will able to raise sufficient capital on acceptable terms, or at all, to continue commercialization efforts for ADASUVE, continue development of our product candidates or to otherwise continue operations or that we will be able to execute any strategic transaction. Even if we are able to source additional capital, we may be forced to significantly reduce our operations if our business prospects do not improve. If we are unable to source additional capital, we may be forced to shut down operations altogether.

3. Summary of Significant Accounting Policies

Revenue Recognition

We recognize revenue when (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the fee is fixed or determinable; and (iv) collectability is reasonably assured.

For collaboration agreements, revenues for non-refundable upfront license fee payments, where we continue to have performance obligations, are recognized as performance occurs and obligations are completed. Revenues for non-refundable upfront license fee payments where we do not have significant future performance obligations are recognized when the agreement is signed and the payments are due.

For multiple element arrangements, such as collaboration agreements in which a collaborator may purchase several deliverables, we account for each deliverable as a separate unit of accounting if both of the following criteria are met: (i) the delivered item or items have value to the customer on a standalone basis; and (ii) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. We evaluate how the consideration should be allocated among the units of accounting and allocate revenue to each non-contingent element based upon the relative selling price of each element. We determine the relative selling price for each deliverable using (i) vendor-specific objective evidence, or VSOE, of selling price if it exists; (ii) third-party evidence, or TPE, of selling price if it exists; or (iii) our best estimated selling price for that deliverable if neither VSOE nor TPE of selling price exists for that deliverable. We then recognize the revenue allocated to each element when the four basic revenue criteria described above are met for each element.

7

For milestone payments received in connection with our collaboration agreements, we have elected to adopt the milestone method of accounting under Financial Accounting Standards Board Accounting Standards Codification 605-28, Milestone Method. Under the milestone method, revenues for payments which meet the definition of a milestone will be recognized as the respective milestones are achieved.

We recognize product revenue as follows:

Royalty revenue from our collaboration agreement will be recognized as we receive information from our collaborator regarding product sales and collectability is reasonably assured.

Significant management judgment is used in the determination of revenue to be recognized and the period in which it is recognized.

Inventory

Inventory is stated at standard cost, which approximates actual cost, determined on a first-in first-out basis, not in excess of market value. Inventory includes the direct costs incurred to manufacture products combined with allocated manufacturing overhead, which consists of indirect costs, including labor and facility overhead. The carrying cost of inventory is reduced so as to not be in excess of the market value of the inventory as determined by the contractual transfer prices to Ferrer and Teva. The excess over the market value is expensed to cost of goods sold. If information becomes available that suggests that all or certain of the inventory may not be realizable, we may be required to expense a portion, or all, of the capitalized inventory into cost of goods sold.

We have fulfilled all of the orders we received from Teva and Ferrer for commercial units of ADASUVE for the near and medium term. As a result, we have suspended our commercial production operations (Refer to Note 3 – Summary of Significant Accounting Policies) and there is no certainty as to when we will resume ADASUVE commercial production or if we can secure additional resources to fund our future operations.

In February 2016, we reacquired the ADASUVE commercial U.S. rights under the Teva Amendment through an exclusive, royalty-free sub-license arrangement in exchange for the termination of all future milestone and royalty obligations that Teva had under the original agreement. As part of this exchange, all remaining ADASUVE inventory held by Teva was transferred to us along with a right to resell such inventory for up to one year. The Teva Amendment is intended to allow us to continue to provide ADASUVE product to patients and health care providers either on our own or through another unaffiliated partner, at which time the all Teva license rights to ADASUVE would terminate. We accounted for the sub-license rights and the receipt of inventory under ASC 845, Nonmonetary Transaction. We concluded that the cost of the inventory transferred to us shall be based on the fair value of the inventory received as its fair value is more clearly evident than the fair value of the future milestone and royalty obligations relinquished. The fair value of the inventory received was determined to be $945,000 with an offsetting gain on exchange that is

8

reflected as a non-operating line item within our consolidated statements of loss and comprehensive loss. However, given our continued operating losses, the uncertainty of when we will resume commercial production, the limited ability to sell the inventory, the twelve-month expiration of this inventory, and our ability to continue as a going concern, we subsequently fully impaired the inventory we received by recording a $945,000, or $0.05 per share, impairment charge that was included in our cost of goods sold within our consolidated statements of loss and comprehensive loss for the three months ended March 31, 2016. Our inventory was fully reserved as of December 31, 2015 and March 31, 2016.

Contingencies

From time to time, we are involved in lawsuits, arbitrations, claims, investigations and proceedings that arise in the ordinary course of business. We make provisions for liabilities when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. No such provisions have been made for the periods presented herein. Litigation and related matters are inherently unpredictable. If any unfavorable ruling were to occur in any specific period, there exists the possibility of a material adverse impact on the results of operations of that period or on our cash flows and liquidity.

Recent Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board issued the Accounting Standards Update, or ASU, No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. In doing so, companies will have reduced diversity in the timing and content of footnote disclosures than under the current guidance. Refer to Note 2 – Need to Raise Additional Capital regarding our discussion on our ability to continue as a going concern.

In May 2014, the Financial Accounting Standards Board issued the ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), that will supersede nearly all existing revenue recognition guidance under US GAAP. The core principle of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. The standard will be effective for public entities for annual and interim periods beginning after December 15, 2017. Entities can choose to apply the standard using either the full retrospective approach or a modified retrospective approach. Entities electing the full retrospective adoption will apply the standard to each period presented in the financial statements. This means that entities will have to apply the new guidance as if it had been in effect since the inception of all its contracts with customers presented in the financial statements. Entities that elect the modified retrospective approach will apply the guidance retrospectively only to the most current period presented in the financial statements. This means that entities will have to recognize the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings at the date of initial application. The new revenue standard will be applied to contracts that are in progress at the date of initial application.

In April 2015, the Financial Accounting Standards Board issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This new guidance is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. This guidance has no material impact on the results of our consolidated financial position, results of operations and cash flows. We have presented our financing obligations net of the related debt issuance costs as of March 31, 2016 and December 31, 2015.

In July 2015, the Financial Accounting Standards Board issued ASU No. 2015-14, which delays the effective date of the standard for one year to annual periods beginning after December 15, 2017, with early adoption permitted for annual periods beginning after December 15, 2016. We are evaluating the requirements of this guidance and have not yet determined the impact of its adoption on our consolidated financial position, results of operations and cash flows.

In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, Leases (Topic 842) which supersedes FASB ASC Topic 840, Leases (Topic 840) - and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee, which will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing

9

guidance for operating leases. The standard is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. We are evaluating the requirements of this guidance and have not yet determined the impact of its adoption on our consolidated financial position, results of operations and cash flows.

4. Fair Value Accounting

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Three levels of inputs, of which the first two are considered observable and the last unobservable, may be used to measure fair value. The three levels are:

The following table represents the fair value hierarchy for our financial assets (cash equivalents, marketable securities and restricted cash) by major security type and contingent consideration liability measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2015 (in thousands):

Cash equivalents and marketable securities

The amortized cost, fair value and unrealized gain/(loss) for our financial assets by major security type as of March 31, 2015 and December 31, 2015 are as follows (in thousands):

10

We had no sales of marketable securities during the three months ended March 31, 2016 or 2015.

Contingent Consideration Liability

In connection with the exercise of our option to purchase all of the outstanding equity of Symphony Allegro, Inc., or Allegro, in 2009, we are obligated to make contingent cash payments to the former Allegro stockholders related to certain payments received by us from future collaboration agreements pertaining to ADASUVE/AZ-104 (Staccato loxapine) or AZ-002 (Staccato alprazolam). In order to estimate the fair value of the liability associated with the contingent cash payments, we prepared several cash flow scenarios for ADASUVE, AZ-104 and AZ-002, which are subject to the contingent payment obligation. Each potential cash flow scenario consisted of assumptions of the range of estimated milestone and license payments potentially receivable from such collaborations and assumed royalties received from future product sales. Based on these estimates, we computed the estimated payments to be made to the former Allegro stockholders. Payments were assumed to terminate in accordance with current agreement terms or, if no agreements exist, upon the expiration of the related patents.

The projected cash flow assumptions for ADASUVE in the United States are based on internally and externally developed product sales forecasts. The timing and extent of the projected cash flows for ADASUVE for the territories in which ADASUVE is licensed to Ferrer, or the Ferrer Territories are based on a Collaboration, License and Supply Agreement we executed with Ferrer in October 2011, or the Ferrer Agreement. The timing and extent of the projected cash flows for the remaining territories for ADASUVE and worldwide territories for AZ-002 and AZ-104 were based on internal estimates for potential milestones and multiple product royalty scenarios and are also consistent in structure to the most recently negotiated collaboration agreements.

We then assigned a probability to each of the cash flow scenarios based on several factors, including: the product candidate’s stage of development, preclinical and clinical results, technological risk related to the successful development of the different drug candidates, estimated market size, market risk and potential collaboration interest to determine a risk adjusted weighted average cash flow based on all of these scenarios. These probability and risk adjusted weighted average cash flows were then discounted utilizing our estimated weighted average cost of capital, or WACC. Our WACC considered our cash position, competition, risk of substitute products, and risk associated with the financing of the development projects. We have used a discount rate of 20% since the fourth quarter of 2014 to reflect our current estimated WACC based on our current financial condition, market capitalization and our estimated increase in borrowing costs.

The fair value measurement of the contingent consideration liability is based on significant inputs not observed in the market and thus represents a Level 3 measurement. Level 3 measurements are valued based on unobservable inputs that are supported by little or no market activity and reflect our assumptions in measuring fair value.

We record any changes in the fair value of the contingent consideration liability in earnings in the period of the change. Certain events including, but not limited to, the timing and terms of any collaboration agreement, clinical trial results, approval or non-approval of any future regulatory submissions and the commercial success of ADASUVE, AZ-104 or AZ-002 could have a material impact on the fair value of the contingent consideration liability, and as a result, our results of operations and financial position for the impacted period.

During the three months ended March 31, 2016, we updated the discounted cash flow model to reflect adjusted U.S. ADASUVE milestones and royalties with any future U.S. collaborator and adjusted sales milestones for ADASUVE in the Ferrer Territories. These changes resulted in our recognizing a non-operating, non-cash gain of $200,000, or $0.009 per share during the three months ended March 31, 2016.

During the three months ended March 31, 2015, we updated the discounted cash flow model to reflect adjusted ADASUVE sales projections and the projected timing of the receipt of certain milestone payments. As part of this process, we received updated projections from our collaboration partners in late March, 2015 that indicated sales of ADASUVE would be lower in 2015 and 2016 than had been anticipated in the various projections and scenarios used to estimate the contingent consideration liability in previous

11

periods. As a result of these lower projected sales and the decision to suspend our commercial production operations (see Note 12), we reevaluated the rate at which we believe sales will increase, the amount of peak sales, the period of time it will take to reach peak sales, the number of years at which peak sales would be achieved, and the related impact on the amount and timing of related royalties and milestones to be received. This evaluation resulted in a decrease to projected sales and the related milestones and royalties under the high, medium, and low sales scenarios and a heavier weighting to the lower sales scenario. These changes on the discounted cash flow model resulted in a decrease to our net loss of $14,833,000, or $0.75 per share, for the three months ended March 31, 2015. A payment of $867,000 was made during the same period to the former Allegro stockholders.

The following table represents a reconciliation of the change in the fair value measurement of the contingent consideration liability for the three months ended March 31, 2016 and 2015 (in thousands):

Financing Obligations

We have estimated the fair value of our financing obligations (Refer to Note 8 –Financing Obligations) using the net present value of the payments discounted at an interest rate that is consistent with our estimated current borrowing rate for similar long-term debt. We believe the estimates used to measure the fair value of the financing obligations constitute Level 3 inputs.

At March 31, 2016 and December 31, 2015, the estimated fair value of our financing obligations was $50,028,000 and $52,151,000, respectively, and had book values of $67,953,000 and $67,967,000, respectively. Our payment commitments associated with these debt instruments may vary with changes in interest rates and are comprised of interest payments and principal payments. The estimated fair value of our debt will fluctuate with movements of interest rates, increasing in periods of declining rates of interest and declining in periods of increasing rates of interest. In addition, the fair value of our royalty securitization financing will be affected by the timing and amount of U.S. ADASUVE royalties and milestones.

5. Share-Based Compensation Plans

2015 Equity Incentive Plan

In April 2015, our Board of Directors approved the 2015 Equity Incentive Plan, or the 2015 Plan, and authorized for issuance thereunder (i) an additional 1,000,000 shares of common stock plus (ii) the number of shares available for issuance pursuant to the grant of future awards under our 2005 Equity Incentive Plan determined as of the effective date of the 2015 Plan; plus (iii) the number of shares underlying outstanding stock awards granted under our previous stock option plans prior to the effective date of the 2015 Plan that expire or terminate for any reason prior to exercise or settlement, are forfeited or repurchased because of the failure to meet a contingency or condition required to vest such shares, or are reacquired, withheld (or not issued) to satisfy a tax withholding obligation in connection with an award. The 2015 Plan became effective upon the approval of the plan by our stockholders on June 23, 2015. Due to the effectiveness of our 2015 Plan, no additional awards will be made under our previous stock option plans. All outstanding awards under our previous stock option plans will continue to be subject to the terms and conditions as set forth in the agreements evidencing such stock awards and the terms of the applicable plan. Stock options issued under the 2015 Plan generally vest over 4 years; vesting is generally based on service time, and have a maximum contractual term of 10 years.

2015 Non-Employee Directors’ Stock Option Plan

In April 2015, our Board of Directors adopted the 2015 Non-Employee Directors’ Stock Option Plan, or the 2015 Directors’ Plan, and authorized for issuance thereunder and (i) an additional 250,000 shares of common stock plus (ii) the number of shares available for issuance pursuant to the grant of future awards under our previous non-employee directors stock option plan determined as of the effective date of the 2015 Directors’ Plan; plus (iii) the number of shares underlying outstanding stock awards granted under our previous non-employee directors stock option plan prior to the effective date of the 2015 Directors’ Plan that expire or terminate for any reason prior to exercise or settlement, are forfeited or repurchased because of the failure to meet a contingency or condition

12

required to vest such shares, or are reacquired, withheld (or not issued) to satisfy a tax withholding obligation in connection with an award. The 2015 Directors’ Plan became effective upon the approval of the plan by our stockholders on June 23, 2015. Due to the effectiveness of our 2015 Directors’ Plan, no additional awards will be made under our previous non-employee directors’ stock option plan. The 2015 Directors’ Plan provides for the automatic grant of nonstatutory stock options to purchase shares of common stock to our non-employee directors, which vest over approximately one year and have a term of 10 years.

The following table sets forth the summary of option activity under our share-based compensation plans (the 2015 Plan, the 2005 Equity Incentive Plan, the 2015 Directors’ Plan and the 2005 Non-Employee Directors’ Stock Option Plan) for the three months ended March 31, 2016:

There were no options exercised during the three months ended March 31, 2016 and 2015.

The following table sets forth the summary of restricted stock units, or RSUs, activity under our share-based compensation plans for the three months ended March 31, 2016:

At March 31, 2016, RSUs to purchase 13,725 shares of common stock were vested but unreleased. These RSUs will be released upon opening of the trading window.

As of March 31, 2016, 2,683,289 and 410,000 shares remained available for issuance under the 2015 Plan and the 2015 Directors’ Plan, respectively.

2015 Employee Stock Purchase Plan

In April 2015, our Board of Directors adopted the 2015 Employee Stock Purchase Plan, or 2015 ESPP, and authorized for issuance thereunder (i) an additional 500,000 shares of our common stock plus (ii) the 128,249 additional shares, that remained available for issuance under our previous employee stock purchase plan after all outstanding purchase rights under such plan were exercised in October 2015. The 2015 ESPP allows eligible employee participants to purchase shares of our common stock at a discount through payroll deductions. The terms of any offering period under the 2015 ESPP will be determined by our Board of Directors. Purchases are generally made on the last trading day of each November and May. Employees may purchase shares at each purchase date at 85% of the market value of our common stock at either the beginning of the offering period or the end of the purchase period, whichever price is lower. Our previous employee stock purchase plan remained in effect until the conclusion of our previous offering, which concluded in October 2015.

As of March 31, 2016, 628,249 shares were available for issuance under the 2015 ESPP.

13

6. Share-Based Compensation

Employee Share-Based Awards

Compensation cost for employee share-based awards is based on the grant-date fair value and is recognized over the vesting period of the applicable award on a straight-line basis. We issue employee share-based awards in the form of stock options and restricted stock units under our equity incentive plans, and stock purchase rights under the 2015 ESPP (see Note 5).

Valuation of Stock Options, Stock Purchase Rights and Restricted Stock Units

During the three months ended March 31, 2016 and 2015, the per share weighted average fair value of employee stock options granted were as follows:

The estimated grant date fair values of the stock options and stock purchase rights were calculated using the Black-Scholes valuation model, and the following weighted average assumptions:

The estimated fair value of restricted stock unit awards is calculated based on the market price of our common stock on the date of grant, reduced by the present value of dividends expected to be paid on our common stock prior to vesting of the restricted stock unit. Our estimate assumes no dividends will be paid prior to the vesting of the restricted stock unit.

As of March 31, 2016, there was $1,478,000, $70,000, and $1,000 of total unrecognized compensation expense related to unvested stock option awards, unvested restricted stock units and stock purchase rights, respectively, which are expected to be recognized over a weighted average period of 2.8 years, 1.0 years, and 0.02 years, respectively.

We had no share-based compensation capitalized at March 31, 2016 and it was immaterial at March 31, 2015.

14

7. Net Loss per Share

Basic and diluted net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period. The following items were excluded in the net loss per share calculation for the three months ended March 31, 2016 and 2015 because the inclusion of such items would have had an anti-dilutive effect:

8. Financing Obligations

Teva Pharmaceuticals USA, Inc.

In May 2013, concurrent with our execution of a License and Collaboration Agreement with Teva, or the Teva Agreement (refer to Note 9 – License Agreements), we entered into a Convertible Promissory Note and Agreement to Lend with Teva, or the Teva Note. Under the terms of the Teva Note, we had the ability, upon written notice to Teva, to draw upon the Teva Note to fund agreed operating budgets related to ADASUVE. As of December 31, 2015, the aggregate drawdowns totaled $25,000,000 and are due and payable, together with all interest, on the fifth anniversary of the signing of the Teva Note. Under the Teva Note, at any time prior to five days before the maturity date, Teva has the right to convert the then outstanding amounts into shares of our common stock at a conversion price of $4.4833 per share. The Teva Note bears simple interest of 4% per year.

At the time of the drawdowns, the contractual conversion price was less than the value of our common stock. As a result, at each draw down date, we calculated the value of the beneficial conversion feature of the convertible note and recorded an increase to additional paid-in-capital and a discount on the Teva Note which was being amortized to interest expense over the life of the borrowing. Additionally, at each draw, we reclassified the relative portion of the unamortized right-to-borrow asset, classified as an Other Asset, against the Teva Note, which was also being amortized to interest expense over the life of the borrowing.

As we drew on the Teva Note, the relative portion of the unamortized right-to-borrow was accounted for as a discount on the borrowing and was amortized to interest expense over the life of the borrowing. The right-to-borrow asset had been fully reclassified against the Teva Note in 2014.

In February 2016, we entered into the Amended Teva Note, which provided for (i) the issuance of 2,172,886 shares of our common stock to Teva pursuant to a stock issuance agreement as consideration for a reduction in the outstanding balance of the Amended Teva Note by $5,000,000 and forgiveness of all accrued and unpaid interest under the Amended Teva Note; (ii) the contingent repayment of the remaining $20,000,000 outstanding balance of the Amended Teva Note in four annual consecutive payments of $5,000,000 on January 31 of the calendar year following the calendar year in which the aggregate annual net sales of ADASUVE and any other Staccato enabled products first reach $50,000,000 in the United States; and (iii) we may prepay the outstanding balance of the Amended Teva Note. We assessed the note restructuring under ASC 470, Debt, and concluded that the transaction qualified as a troubled debt restructuring as defined by the accounting literature, as we are experiencing financial difficulty and the Amended Teva Note contained a concession through a reduction in the effective interest rate from 5.2 percent to zero percent. At the date of restructuring, the carrying amount of the Teva Note was $23,081,000. As the restructuring involved a partial settlement by us granting Teva an equity interest and a modification of the terms of the remaining Teva Note, we reduced the carrying amount of the Amended Teva Note by $575,000, which represents the fair value of the 2,172,886 shares of our common stock granted to Teva based on the $0.28 per share price as of the restructuring date, net of $33,000 in direct issuance costs. The remaining carrying amount of $22,506,000 was then written down to $20,000,000, which represents the total future undiscounted cash payments of the Amended Teva Note and consist entirely of the contingent repayments, resulting in a restructuring gain of $2,506,000, or $0.12 per share as reflected on our consolidated statements of loss and comprehensive loss. The remaining outstanding balance of $20,000,000 of the Amended Teva Note is classified as a non-current liability as of March 31, 2016.

Royalty Securitization Financing

In March 2014, we completed a royalty securitization financing, or the royalty securitization financing, which consisted of a private placement to qualified institutional investors of $45,000,000 of non-recourse notes, or the Notes, issued by Atlas U.S. Royalty,

15

LLC, a Delaware limited liability company and our wholly-owned subsidiary, or Atlas, and warrants to purchase 345,661 shares of our common stock at a price of $0.01 per share exercisable for five years from the date of issuance, or the 2014 Warrants. The Notes bear interest at 12.25% per annum payable quarterly beginning June 15, 2014. All U.S. ADASUVE royalty and milestone payments, after paying interest, administrative fees, and any applicable taxes, will be applied to principal and interest payments on the Notes until the Notes have been paid in full.

From the proceeds of the transaction, we established a $6,890,000 interest reserve account, which is classified as a noncurrent asset, to cover any potential shortfall in interest payments. The interest reserve account was fully utilized in 2015 to pay for interest related to our royalty securitization financing.

In connection with our royalty securitization financing, we sold and contributed to Atlas all of our rights to U.S. ADASUVE royalty and milestone payments. The Notes are secured by all of the assets of Atlas (including the right to receive royalty and milestone payments based on commercial sales of ADASUVE in the U.S.) and our equity ownership in Atlas. The Notes have no other recourse to us. The Notes may not be redeemed at our option until after March 18, 2016, and may be redeemed after that date subject to the achievement of certain milestones and the payment of a redemption premium for any redemption occurring prior to March 19, 2019. The Notes are not convertible into Alexza equity, nor have we guaranteed them.

In connection with the execution of the Merger Agreement, the holders of the Notes each entered into a participation agreement with Atlas pursuant to which Atlas agreed to grant to the holders of the Notes contractual rights to receive payments from Atlas upon the receipt of certain payments and achievement of certain milestones in respect of the commercialization of ADASUVE within the Unites States.

We valued the 2014 Warrants utilizing the Black-Scholes valuation model with an assumed volatility of 87%, an estimated life of 5 years, a 1.54% risk-free interest rate and a dividend rate of 0%. The total value of the 2014 Warrants, $1,721,000, was recognized as an increase to additional paid in capital and as a discount to the Notes. The discount on the Notes is being amortized into interest expense over five-years. We incurred total fees and expenses of $4,171,000, which we recorded as a noncurrent Other Asset, and are amortizing into interest expense over a five-year period.

In the fourth quarter of 2015, we did not make the quarterly interest payment due on December 15, 2015 for the Notes.  As a result, we received a notice of event of default from the trustee. The aggregate interest payments that were in default were approximately $4,262,000, which includes the interest due and payable since September 15, 2015. In January 2016, we entered into a forbearance agreement with the holders of the Notes whereby such holders would generally forbear from delivering an acceleration notice and exercising other remedies under the Notes for thirty day renewing periods through June 15, 2016. In connection with the execution of the Merger Agreement, we entered into a Forbearance and Waiver Agreement, or the Second Forbearance Agreement, with Atlas, Purchaser and the holders of the 2014 Warrants and the Notes. Pursuant to the terms of  the Second Forbearance Agreement, the holders of the Notes agreed (i) to forbear on exercising all rights and remedies under that certain Indenture by and between Atlas and U.S. Bank National Association, as the trustee, or the Indenture, and the other documentation  relating  to the Notes and  Atlas through  the earlier  of November  9, 2016 (subject to extension under certain circumstances) and the termination  of the Merger Agreement and (ii) to ratify certain amendments to the Teva Agreement. Pursuant to the terms of the Second Forbearance Agreement, the holders of the Notes also agreed to the cancellation of the Notes and the discharge of the Indenture in connection with the consummation of the Offer and to take any and all actions necessary to effect the foregoing.   In addition, the holders of the 2014 Warrants agreed to the treatment of the 2014 Warrants in connection with the Offer as described in the Merger Agreement effective as of the Merger. Each of the holders of the Notes, the holders of the 2014 Warrants, Atlas and us also agreed to certain releases of claims effective upon the consummation of the Offer or, in the case of claims with respect to Purchaser and its affiliates, upon the execution of the Second Forbearance Agreement.

As a result of our default and the short forbearance time period, the principal balance of $45,000,000 and the amortization of the debt discounts of $1,021,000 related to the 2014 Warrants were reclassified from non-current liabilities to current liabilities since the fourth quarter of 2015. Additionally, the deferred interest charges associated with the royalty securitization financing that were being amortized over five years were reclassified from non-current assets to other current assets as of March 31, 2016, consistent with the related debt.

Ferrer Promissory Note

In September 2015, we issued the Ferrer Note to Ferrer. The terms of the Ferrer Note provided that (i) Ferrer would loan us up to $5,000,000 in tranches, (ii) the initial tranche of $3,000,000 was received by us on September 28, 2015, (iii) another tranche of $1,000,000 was received by us on March 21, 2016, (iv) the third tranche of $1,000,000 was received by us on April 15, 2016, (v) interest accrues on the outstanding principal at the rate of 6% per annum, compounded monthly, through May 31, 2016, (vi) all outstanding principal and accrued interest under the Ferrer Note became due and payable upon Ferrer’s demand on May 31, 2016, (vii) we could prepay the Ferrer Note at any time without premium or penalty, and (viii) we issue 125,000 shares of our common stock

16

to Ferrer as partial consideration for the loan. The common stock was issued to Ferrer pursuant to a stock issuance agreement and was not registered at the time of issuance under the Securities Act of 1933, as amended.

On May 9, 2016, we amended and restated the Ferrer Note in order to, among other things (i) increase the maximum principal amount of the Ferrer Note to $6,300,000, (ii) extend the maturity date of the Ferrer Note to September 30, 2016 and (iii) provide for certain events of default under the Ferrer Note in connection with the Merger. As of May 11, 2016, the outstanding principal amount of the Ferrer Note was $6,300,000.

We valued the common stock issued to Ferrer at approximately $144,000 using the closing price of our common stock on the date we issued the stock to Ferrer. Based on the percent of the maximum principal amount of the Ferrer Note drawdown through March 31, 2016, 80% of the value of the common stock issued to Ferrer was proportionately recorded as a discount to the Ferrer Note and 20% was capitalized as a current asset on our consolidated Balance Sheet as of March 31, 2016. With the third tranche and the final tranche of the Ferrer Note drawn in April 2016 and May 2016, respectively, the remaining balance of the capitalized amount will be reclassified as a debt discount against the remaining tranches. The amount of $144,000 is being amortized over the life of the Ferrer Note. The effective interest rate of the Ferrer Note, including the value of the shares issued, is 10.5%.

Future Scheduled Payments

Future scheduled principal payments under our various debt obligations as of March 31, 2016 are as follows (in thousands):

The above table excludes the third tranche of $1,000,000 and the final tranche of $1,300,000 from the Ferrer Note that we received in April and May 2016, respectively, plus any payments pursuant to the Notes issued by Atlas, which have a legal maturity date in 2027. The principal payments by Atlas under the royalty securitization financing will be dependent upon the timing and amounts of royalties and milestone payments received from any future U.S. collaborator. We are obligated to repay the remaining $20,000,000 outstanding balance of the Amended Teva Note in four annual consecutive payments of $5,000,000 beginning on January 31 of the first calendar year following the calendar year in which the aggregate annual net sales of ADASUVE and any other Staccato enabled products first reach $50,000,000 in the United States.

9. Facility Leases

We lease a building in Mountain View, California which we began to occupy in the fourth quarter of 2007. We recognize rental expense on the facility on a straight line basis over the initial term of the lease. Differences between the straight line rent expense and rent payments are classified as deferred rent liability on the balance sheet. The lease for the building expires on March 31, 2018, and we have two options to extend the lease for five years each.

10. License Agreements

Grupo Ferrer Internacional, S.A.

On October 5, 2011, we and Ferrer entered into the Ferrer Agreement to commercialize ADASUVE in the Ferrer Territories (Europe, Latin America, the Commonwealth of Independent States countries, the Middle East and North Africa countries, Korea, Philippines and Thailand). Under the terms of the Ferrer Agreement, we received an upfront cash payment of $10,000,000, of which $5,000,000 was paid to the former stockholders of Allegro. The Ferrer Agreement provided for up to an additional $51,000,000 in additional milestone payments, contingent on approval of the EU Marketing Authorization Application, or MAA, certain individual country commercial sales initiations and royalty payments based on cumulative net sales targets in the Ferrer Territories. The MAA was submitted to the European Medicines Agency, or EMA, and was approved in February 2013 by the European Commission, or the EC. Ferrer has the exclusive rights to commercialize the product in the Ferrer Territories. We supply ADASUVE to Ferrer for all of its commercial sales, and receive a specified per-unit transfer price paid in Euros. Either party may terminate the Ferrer Agreement for

17

the other party’s uncured material breach or bankruptcy. The Ferrer Agreement continues in effect on a country-by-country basis until the later of the last to expire patent covering ADASUVE in such country or 12 years after first commercial sale. The Ferrer Agreement is subject to earlier termination in the event the parties mutually agree, by a party in the event of an uncured material breach by the other party or upon the bankruptcy or insolvency of either party.

In October 2014, we entered into an amendment to the Ferrer Agreement. We and Ferrer agreed to eliminate certain individual country commercial sales initiation milestone payments in exchange for Ferrer’s purchase of 2,000,000 shares of our common stock for $4.00 per share for a total of $8,000,000, which reflected a premium on the fair value of our common stock of approximately $2,400,000. In January 2015, we paid the former shareholders of Allegro $865,000 related to this stock sale.

In June 2015, we entered into another amendment to the Ferrer Agreement. We and Ferrer agreed to: (i) transfer ownership of the MAA to Ferrer, whereby Ferrer becomes responsible for all post-approval requirements of the MAA, including the post-authorization safety study, the drug utilization study and the Phase 3 clinical trial for adolescents and all other related regulatory activities and costs associated with the ADASUVE MAA, (ii) provide Ferrer an option to manufacture ADASUVE in the Ferrer Territories as well as for use by us in territories other than the U.S., Canada, China, Hong Kong, Taiwan and Macao, and if Ferrer does not exercise this option, we have the right to assign the ADASUVE manufacturing right to a third party, subject to Ferrer’s written consent, not to be unreasonably withheld, (iii) eliminate the remaining milestones related to first commercial sales in selected countries, and (iv) provide Ferrer with the right to access technology and develop a Staccato product of their choice to commercialize in the Ferrer Territories, with Ferrer paying a fixed royalty percentage on all sales of new Staccato products developed by Ferrer. The transfer of the MAA for ADASUVE to Ferrer was completed in August 2015.

We evaluated whether the delivered elements under the Ferrer Agreement, as amended, have value on a stand-alone basis and allocated revenue to the identified units of accounting based on relative fair value. We determined that the license and the development and regulatory services are a single unit of accounting as the licenses were determined not to have stand-alone value. We have begun to deliver all elements of the arrangement and are recognizing the $10,000,000 upfront payment as revenue ratably over the estimated performance period of the agreement of four years. The $1,452,000 and $2,400,000 premiums received from the sales of common stock to Ferrer are additional consideration received pursuant to the Ferrer Agreement and does not pertain to a separate deliverable or element of the arrangement, and thus is being deferred and recognized as revenue in a manner consistent with the $10,000,000 upfront payment.

The Ferrer Agreement, as amended, provides for us to receive up to $40,000,000 of additional payments related to cumulative net sales targets in the Ferrer Territories. The cumulative net sales targets will be recognized as royalty revenue when each target is earned and payable to us. We believe each of these milestones is substantive as there is uncertainty that the milestones will be met, the milestone can only be achieved as a result of our past performance and the achievement of the milestone will result in additional payment to us. In January 2014, we recognized revenue in the amount of $1,000,000 from a milestone payment for the first product sale in Spain, of which $250,000 was paid to the former stockholders of Allegro (Refer to Note 3 – Summary of Significant Accounting Policies).

We recognized $712,000 and $612,000 of revenue related to the Ferrer Agreement, as amended, in the three months ended March 31, 2016 and 2015, respectively. At March 31, 2016 we had deferred revenue of $2,136,000 related to the Ferrer Agreement, as amended.

Teva Pharmaceuticals USA, Inc.

In May 2013, we entered into the Teva Agreement to provide Teva with an exclusive license to develop and commercialize ADASUVE in the United States.

In February 2016, we entered into the Teva Amendment which is intended to allow us to continue to provide ADASUVE product to patients and health care providers and provides for (i) the transfer of the New Drug Application, or NDA, and related regulatory filings for ADASUVE to us and the assumption of responsibility by us for all regulatory activities related to ADASUVE in the U.S. as soon as practicable; (ii) an exclusive license of Teva intellectual property with respect to ADASUVE, which intellectual property will be assigned to us in connection with a change of control or an exclusive license to ADASUVE in the U.S. from us to a third party; (iii) our undertaking of responsibility for the ADASUVE United States Phase 4 study, product pharmacovigilance, medical services, and REMS compliance, either through Teva’s vendors or a vendor otherwise selected by us; (iv) the transfer from Teva of existing supplies of ADASUVE as well as all commercial, medical and academic materials, documents and relationships; (v) our right to sell Teva-labeled products in accordance with all applicable laws and Teva policies; (vi) the satisfaction and termination of all payment obligations of the parties with respect to the commercialization of ADASUVE except with respect to the Amended Teva

18

Note and our issuance of 2,172,886 shares of our common stock to Teva; and (vii) a mutual release between the parties with respect to claims under the Teva Agreement.

11. Autoliv Manufacturing and Supply Agreement

In November 2007, we entered into a Manufacturing and Supply Agreement, or the Manufacture Agreement, with Autoliv relating to the commercial supply of chemical heat packages that can be incorporated into our Staccato device, or the Chemical Heat Packages. Autoliv had developed these Chemical Heat Packages for us pursuant to a development agreement between Autoliv and us.

Subject to certain exceptions, Autoliv has agreed to manufacture, assemble and test the Chemical Heat Packages solely for us in conformance with our specifications. We pay Autoliv a specified purchase price, which varies based on annual quantities we order, per Chemical Heat Package delivered. Upon termination of the Manufacture Agreement, we were to retain full ownership of the production equipment for commercial manufacture of the Chemical Heat Packages developed for us by Autoliv, and Autoliv’s obligations under the Manufacture Agreement will terminate in full. In December 2014, we amended the Manufacture Agreement with Autoliv, or the 2014 Amendment through which we and Autoliv are extending the Manufacturing Agreement through 2018. In addition, we have the right to engage a second source supplier and implement a manufacturing line transfer from Autoliv to manufacture and supply the Chemical Heat Packages to us or our licensees.

We have contracted with Autoliv, through a third-party supplier, to build one additional manufacturing cell to manufacture chemical heat packages at a cost of approximately $2.4 million, or the New Cell. The New Cell was expected to be installed at Autoliv with the cell currently being utilized by Autoliv, or the Original Cell, to be installed at a second source supplier. Due to the Original Cell no longer being utilized and the uncertainty of the timing of engaging a second source supplier (see Note 12), we recorded additional cost of goods sold of $1,381,000 in the three months ended March 31, 2015 due to the impairment of the Original Cell. The $1,381,000 impairment reduced the carrying amount of this cell to $0, which we believe is the fair value of this equipment and is a level 3 fair value measurement. The equipment is specialized and was developed specifically for the manufacture of ADASUVE and would be of limited, if any, utility to a third-party. Thus, we concluded that given the decreased projections of ADASUVE sales and the related decline in production noted below in Note 12, as well as the limited ability to sell this equipment, that its fair value is $0. The New Cell will be utilized if and when commercial production resumes. We did not record additional impairment charges during the three months ended March 31, 2016.

12. Restructuring

As of December 31, 2015, we completed the commercial production and shipment of all ADASUVE orders received from Teva and Ferrer. With commercial production completed, we suspended our ADASUVE commercial manufacturing operations.

During the fiscal year ended December 31, 2015, we concluded that due to (i) the suspension of the ADASUVE commercial production operations during the third quarter of 2015, (ii) our continued operating losses and poor cash flows, (iii) the uncertainty of when we will resume commercial production, (iv) the limited ability to sell the capitalized equipment, and (v) our basic ability to continue as a going concern,  the carrying amounts of our long-lived assets including the first and second manufacturing cells from Autoliv ASP, Inc., or Autoliv, exceeded their fair values based on a Level 3 fair value measurement. We recognized non-cash impairment charges of approximately $1,381,000 on our long-lived assets, $1,229,000 of related inventory with fixed expiration dates, and $1,024,000 on prepayments made to the supplier of our lower housing assembly for fiscal year 2015. During the fourth quarter of 2015, we had recognized an additional $7,210,000 of impairment charges on our long-lived assets.

We did not record any long-lived asset impairment during the three months ended March 31, 2016.

Due to our reacquisition of the ADASUVE commercial U.S. rights under the Teva Amendment, all remaining ADASUVE inventory held by Teva was transferred to us along with a right to resell such inventory for up to one year. The Teva Amendment is intended to allow us to continue to provide ADASUVE product to patients and health care providers either on our own or through another unaffiliated partner, at which time all Teva license rights to ADASUVE would terminate. We accounted for the sub-license rights and the receipt of inventory under ASC 845, Nonmonetary Transaction. We concluded that the cost of the inventory transferred to us shall be based on the fair value of the inventory received as its fair value is more clearly evident than the fair value of the future milestone and royalty obligations relinquished. The fair value of the inventory was determined to be $945,000 recorded as a gain on exchange that is reflected as a non-operating line item within our consolidated statements of loss and comprehensive loss. However, given our continued operating losses, the uncertainty of when we will resume commercial production, the limited ability to sell the inventory, the twelve-month expiration of this inventory and our ability to continue as a going concern, we subsequently fully

19

impaired the inventory we received by recording a $945,000, or $0.05 per share, impairment charge that was included in our cost of goods sold within our consolidated statements of loss and comprehensive loss. Our inventory was fully reserved as of December 31, 2015 and March 31, 2016.

As part of our restructuring plan, we eliminated 33 employees during 2015. Each affected employee received (i) severance payments equal to three months of salary plus an additional amount equal to one week of salary for each year of Alexza service in excess of five years; and (ii) three months of paid medical insurance premiums and outplacement services, or in total, the Severance Package. In addition, our remaining employees have received notification that their positions may be eliminated. If we are unable to obtain additional financing and further restructure our operations, the remaining employees will receive benefits substantially equivalent to the Severance Package. The aggregate cost of the Severance Package for these employees is being amortized over the period in which the employees are expected to provide service. During the three months ended March 31, 2016, we recognized $235,000 of severance related expenses and none in first quarter of 2015. We have accrued $1,707,000 in severance related expenses as of March 31, 2016.

13. Subsequent Events

On April 15, 2016, we received the third tranche of $1,000,000 from the Ferrer Note. On May 9, 2016, we amended and restated the Ferrer Note in order to, among other things (i) increase  the maximum principal amount of the Ferrer Note to $6,300,000, (ii) extend the maturity date of the Ferrer Note to September 30, 2016, and (iii) provide for certain events of default under the Ferrer Note in connection with the Merger. We received the final tranche of $1,300,000 on May 11, 2016 which brought the principal balance outstanding on the Ferrer Note to $6,300,000.

On May 9, 2016, we entered into the Merger Agreement with Ferrer and Purchaser. Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, Purchaser has agreed to commence the Offer for a purchase price of $0.90 per share, net to the holders thereof in cash, subject to reduction for any applicable withholding taxes in respect thereof, without interest, or the Cash Consideration, plus one contractual contingent value right per share of our common stock, or a CVR, which shall represent the right to receive a pro-rata share of up to four payment categories in an aggregate (i.e., to all CVR holders assuming all four payments are made) maximum amount of $35,000,000 (subject to certain deductions) if certain licensing payments and revenue milestones are achieved and subject to the terms and conditions of the contingent value rights agreement to be entered into by Ferrer and the rights agent thereunder prior to the closing of the Offer, net to the holder thereof in cash, subject to reduction for any applicable withholding taxes in respect thereof, without interest, or together with the Cash Consideration, the Offer Price. On May 9, 2016, both our board of directors and the board of directors of Ferrer approved the terms of the Merger Agreement. Prior to entering into the Merger Agreement, Ferrer was the holder of greater than 10% of our outstanding voting securities and the Ferrer Note and our commercial partner for ADASUVE in the Ferrer Territories.

The consummation of the Offer will be conditioned on (i) at least a number of shares of our common stock having been validly tendered into and not withdrawn from the Offer which equals, when added to any shares of our common stock owned by Ferrer or Purchaser or any of their respective subsidiaries, at least a majority of the then outstanding shares of our common stock, (ii) the accuracy of the representations and warranties contained in the Merger Agreement, subject to certain qualifications, (iii) our performance certain covenants contained in the Merger Agreement, subject to certain conditions, (iv) the Second Forbearance Agreement  continuing in full force and effect, without any default, and performance of any required condition thereunder, as of the closing of the Offer, (v) the aggregate number of shares of our common stock held by persons who properly exercise appraisal rights under Section 262 of the Delaware General Corporate Law represents no more than 20% of the shares of our common stock then outstanding and (vi) other customary conditions. The Offer is not subject to a financing condition.

Following the consummation of the Offer, the Merger Agreement provides that Purchaser will merge with and into us in the Merger, and we will become a wholly owned subsidiary of Ferrer Therapeutics, Inc., a Delaware corporation and subsidiary of Ferrer. In the Merger, each outstanding share of our common stock (other than shares owned by Ferrer, us or Purchaser or any of their direct or indirect wholly owned subsidiaries and shares with respect to which appraisal rights are properly exercised in accordance with Delaware law) will be converted into the right to receive the Offer Price. The consummation of the Merger is subject to certain closing conditions.

The transactions described above are expected to close in the second quarter of 2016 and are subject to customary closing conditions.

In addition, in connection with the transactions contemplated by the Merger Agreement, the vesting of all our unvested options and unvested restricted stock units will be accelerated to be vested in full and, with respect to the options, immediately exercisable at

20

least six days prior to the closing of the Offer.  Any options that are not exercised prior to the closing of the Offer will be cancelled. Additionally, pursuant to the terms of the Merger Agreement, (i) each holder of a warrant originally issued by us on October 5, 2009 or February 23, 2012 will receive a lump-sum cash payment equal to (A) the total number of shares of our common stock issuable to such holder upon the exercise of the applicable warrant, multiplied by (B) the value of such warrant to purchase one share of our common stock, calculated in accordance with Appendix B of such warrant; and (ii) each holder of the 2014 Warrants will receive (A) a lump-sum cash payment equal to (1) the total number of shares of our common stock issuable to such holder upon the exercise of the applicable warrant, multiplied by (2) the excess of (x) the Cash Consideration over (y) the per-share exercise price for such warrant and (B) one CVR for each share of our common stock underlying such warrant.

The Merger Agreement contains customary representations, warranties and covenants of the parties. We have agreed to refrain from engaging in certain activities until the effective time of the Merger. In addition, under the terms of the Merger Agreement, we have agreed not to solicit or support any alternative acquisition proposals, subject to customary exceptions for us to respond to and support unsolicited proposals in the exercise of the fiduciary duties of our board of directors. We are obligated to pay a termination fee of $1,000,000 to Ferrer in certain circumstances following termination of the Merger Agreement.  Additionally, if either we or Ferrer terminate the Merger Agreement in accordance with its terms, then all outstanding unpaid principal and accrued interest owed on the Ferrer Note by us will become immediately due and payable to Ferrer.

In connection with the execution of the Merger Agreement, we entered into the Second Forbearance Agreement with Atlas, Purchaser and the holders of the 2014 Warrants and the Notes. Pursuant to the terms of the Second Forbearance Agreement, the holders of the Notes agreed (i) to forbear on exercising all rights and remedies under the Indenture and the other documentation relating to the Notes and Atlas through the earlier of November 9, 2016 (subject to extension under certain circumstances) and the termination of the Merger Agreement and (ii) to ratify certain amendments to the Teva Agreement.  Pursuant to the terms of the Second Forbearance Agreement, the holders of the Notes also agreed to the cancellation of the Notes and the discharge of the Indenture in connection with the consummation of the Offer and to take any and all actions necessary to effect the foregoing.  In addition, the holders of the 2014 Warrants agreed to the treatment of the 2014 Warrants in connection with the Offer as described in the Merger Agreement effective as of the Merger.  Each of the holders of the Notes, the holders of the 2014 Warrants, Atlas and us also agreed to certain releases of claims effective upon the consummation of the Offer or, in the case of claims with respect to Purchaser and its affiliates, upon the execution of the Second Forbearance Agreement.

In connection with the execution of the Merger Agreement, the holders of the Notes each entered into a participation agreement with Atlas pursuant to which Atlas agreed to grant to the holders of the Notes contractual rights to receive payments from Atlas upon the receipt of certain payments and achievement of certain milestones in respect of the commercialization of ADASUVE within the Unites States.

21

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Examples of these statements include, but are not limited to, statements regarding: our ability and the ability of Purchaser and Ferrer to complete the transactions contemplated by the Merger Agreement, including the parties’ ability to satisfy the conditions to the consummation of the Merger, the possibility of any termination of the Merger Agreement and the timing and completion of the Merger, the adequacy of our capital to support our operations through June 2016, the ability of us and our collaborator to effectively and profitably commercialize ADASUVE estimated product revenues and royalties associated with the sales of ADASUVE, the timing of the commercial launch of ADASUVE in various countries, our ability to raise additional funds and the potential terms of such potential financings, our collaborators’ ability to implement and assess the ADASUVE REMS program, the timing and outcome of the ADASUVE post-marketing studies, the prospects of our receiving approval to market ADASUVE in additional Latin American countries, the Commonwealth of Independent States countries and other countries, our ability to identify and complete a new commercial agreement for ADASUVE in the U.S., the efficiencies to be gained by the suspension of certain manufacturing operations, the implications of interim or final results of our other clinical trials, the progress and timing of our research programs, including clinical testing, the extent to which our issued and pending patents may protect our products and technology, the potential of our product candidates to lead to the development of safe or effective therapies, our ability to enter into collaborations, our future operating expenses, our future losses, our future expenditures and the sufficiency of our cash resources. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. While we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain.

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

The names “Alexza Pharmaceuticals,” “Alexza,” “Staccato” and “ADASUVE” are trademarks of Alexza Pharmaceuticals, Inc. We have registered these trademarks with the U.S. Patent and Trademark Office and other international trademark offices. All other trademarks, trade names and service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.

We are a pharmaceutical company focused on the research, development and commercialization of novel proprietary products for the acute treatment of central nervous system conditions. The Staccato^® system, our proprietary technology, is the foundation for our first approved product, ADASUVE^® (Staccato loxapine), and all of our product candidates. The Staccato system vaporizes excipient-free drugs to form a condensation aerosol that, when inhaled, allows for rapid systemic drug delivery. Because of the particle size of the aerosol, the drug is quickly absorbed through the deep lung into the bloodstream, providing speed of therapeutic onset that is comparable to intravenous, or IV, administration but with greater ease, patient comfort and convenience.

ADASUVE has been developed for the treatment of agitation associated with schizophrenia or bipolar disorder and has been approved for marketing in the United States by the U.S. Food and Drug Administration, or FDA, in the European Union, or EU, by the European Commission, or the EC, and in certain countries in Latin America. In the United States, the EU and Latin America, ADASUVE is approved for similar indications. It is approved with a different number of dose strengths and has different risk mitigation and management plans in the United States, the EU and Latin America. ADASUVE is our only approved product.

We have two product candidates in active development. AZ-002 (Staccato alprazolam) is being developed for the management of epilepsy patients with acute repetitive seizures, sometimes called cluster seizures, or ARS. A Phase 2a proof-of-concept study for AZ-002 in patients with epilepsy was initiated in January 2015. AZ-007 (Staccato zaleplon) is being developed for the treatment of patients with middle of the night insomnia. We do not anticipate further clinical development of AZ-007 without obtaining additional capital resources..

We have retained all rights to the Staccato system and to our product candidates other than ADASUVE and AZ-104 (Staccato loxapine, low-dose). In May 2013, we licensed the exclusive rights for the U.S. markets to commercialize ADASUVE and AZ-104, or

22

the Teva Agreement, to Teva Pharmaceuticals USA, Inc., or Teva. In February 2016, we amended the Teva Agreement, or the Teva Amendment, whereby we reacquired the ADASUVE U.S. commercial rights through an exclusive, royalty-free sub-license arrangement in exchange for the termination of all future milestone and royalty obligations that Teva had under the original agreement. As part of this exchange, all remaining ADASUVE inventory held by Teva was transferred to us along with a right to resell such inventory for up to one year. The Teva Amendment is intended to allow us to continue to provide ADASUVE product to patients and health care providers either on our own or through another unaffiliated partner, at which time all Teva license rights to ADASUVE would terminate.

For Europe, Latin America and the Commonwealth of Independent States countries, or the Ferrer Territories, we have licensed the exclusive rights to commercialize ADASUVE to Grupo Ferrer Internacional S.A., or Ferrer. We intend to develop certain product candidates internally and to identify external resources or collaborators to develop and commercialize other product candidates.

On May 9, 2016, we entered into an Agreement and Plan of Merger, or the Merger Agreement, with Ferrer and Ferrer Pharma Inc., a Delaware corporation and a wholly owned indirect subsidiary of Ferrer, or Purchaser, and upon the terms and subject to the conditions thereof, Purchaser has agreed to commence a cash tender offer to acquire all of the shares of our common stock (excluding any shares of our common stock held, directly or indirectly, by Ferrer), or the Offer, for a purchase price of $0.90 per share, net to the holders thereof in cash, subject to reduction for any applicable withholding taxes in respect thereof, without interest, or the Cash Consideration, plus one contractual contingent value right per share of our common stock, or a CVR, which shall represent the right to receive a pro-rata share of up to four payment categories in an aggregate (i.e., to all CVR holders assuming all four payments are made) maximum amount of $35.0 million (subject to certain deductions) if certain licensing payments and revenue milestones are achieved and subject to the terms and conditions of the contingent value rights agreement to be entered into by Ferrer and the rights agent thereunder prior to the closing of the Offer, net to the holder thereof in cash, subject to reduction for any applicable withholding taxes in respect thereof, without interest, or together with the Cash Consideration, the Offer Price. On May 9, 2016, both our board of directors and the board of directors of Ferrer approved the terms of the Merger Agreement. Prior to entering into the Merger Agreement, Ferrer was the holder of greater than 10% of the Company’s outstanding voting securities and the Ferrer Note and our commercial partner for ADASUVE in the Ferrer Territories.

The consummation of the Offer will be conditioned on (i) at least a number of shares of our common stock, having been validly tendered into and not withdrawn from the Offer which equals, when added to any shares of our common stock owned by Ferrer or Purchaser or any of their respective subsidiaries, at least a majority of the then outstanding shares of our common stock, (ii) the accuracy of the representations and warranties contained in the Merger Agreement, subject to certain qualifications, (iii) our performance certain covenants contained in the Merger Agreement, subject to certain conditions, (iv) the Second Forbearance Agreement (as defined below) continuing in full force and effect, without any default, and performance of any required condition thereunder, as of the closing of the Offer, (v) the aggregate number of shares of our common stock held by persons who properly exercise appraisal rights under Section 262 of the Delaware General Corporate Law represents no more than 20% of the shares of our common stock then outstanding and (vi) other customary conditions. The Offer is not subject to a financing condition.

Following the consummation of the Offer, the Merger Agreement provides that Purchaser will merge with and into us in the Merger and we will become a wholly owned subsidiary of Ferrer Therapeutics, Inc., a Delaware corporation and subsidiary of Ferrer. In the Merger, each outstanding share of our common stock (other than shares owned by Ferrer, us or Purchaser or any of their direct or indirect wholly owned subsidiaries and shares with respect to which appraisal rights are properly exercised in accordance with Delaware law) will be converted into the right to receive the Offer Price. The consummation of the Merger is subject to certain closing conditions.

In addition, in connection with the transactions contemplated by the Merger Agreement, the vesting of all our unvested options and unvested restricted stock units will be accelerated to be vested in full and, with respect to the options, immediately exercisable at least six days prior to the closing of the Offer.  Any options that are not exercised prior to the closing of the Offer will be cancelled. Additionally, pursuant to the terms of the Merger Agreement, (i) each holder of a warrant originally issued by us on October 5, 2009 or February 23, 2012 will receive a lump-sum cash payment equal to (A) the total number of shares of our common stock issuable to such holder upon the exercise of the applicable warrant, multiplied by (B) the value of such warrant to purchase one share of our common stock, calculated in accordance with Appendix B of such warrant; and (ii) each holder of a warrant originally issued by us on March 8, 2014, or the 2014 Warrants, will receive (A) a lump-sum cash payment equal to (1) the total number of shares of our common stock issuable to such holder upon the exercise of the applicable warrant, multiplied by (2) the excess of (x) the Cash Consideration over (y) the per-share exercise price for such warrant and (B) one CVR for each share of our common stock underlying such warrant.

The Merger Agreement contains customary representations, warranties and covenants of the parties. We have agreed to refrain from engaging in certain activities until the effective time of the Merger. In addition, under the terms of the Merger Agreement, we

23

have agreed not to solicit or support any alternative acquisition proposals, subject to customary exceptions for us to respond to and support unsolicited proposals in the exercise of the fiduciary duties of our board of directors. We are obligated to pay a termination fee of $1.0 million to Ferrer in certain circumstances following termination of the Merger Agreement.  Additionally, if either the us or Ferrer terminates the Merger Agreement in accordance with its terms, then all outstanding unpaid principal and accrued interest owed on the Ferrer Note by us will become immediately due and payable to Ferrer.

The Merger is expected to close in the second quarter of 2016 and is subject to customary closing conditions. However, we have prepared this Management’s Discussion and Analysis of Financial Condition and Results of Operations and the forward-looking statements contained in this report as if we were going to remain an independent company. If the Merger is consummated, many of the forward-looking statements contained in this report would no longer be applicable.

For more information related to the Merger Agreement, please refer to our May 10, 2016 Current Report on Form 8-K. The foregoing description of the Merger Agreement is qualified in its entirety by reference to the full text of the Merger Agreement attached as Exhibit 2.1 to our May 10, 2016 Current Report on Form 8-K.

We believe that, based on our cash and cash equivalent balances at March 31, 2016, the additional $2.3 million drawn in April and May 2016 under that certain promissory note we issued to Ferrer in September 2015, or the Ferrer Note and our expected cash usage, we have sufficient capital resources to meet our anticipated cash needs until the end of June 2016. Changing circumstances may cause us to consume capital significantly faster or slower than we currently anticipate, or to alter our operations. Even if circumstances do not cause us to consume capital significantly faster or slower than we currently anticipate, we may be forced to significantly reduce our operations if our business prospects do not improve. If we are unable to source additional capital, we may be forced to shut down operations altogether.

AGITATION — ADASUVE (Staccato loxapine)

Episodes of agitation afflict many people suffering from major psychiatric disorders, including schizophrenia and bipolar disorder. In the United States, approximately 2.4 million adults have schizophrenia and approximately 5.7 million adults have bipolar disorder. Of these patients, approximately 900,000 adult patients with schizophrenia and 5 million adult patients with bipolar disorder are currently receiving pharmaceutical treatment and are the target patient population for ADASUVE. More than 90% of patients with schizophrenia and bipolar disorder will experience agitation in their lifetimes. Our primary market research indicates that approximately 50% of treated acute agitation episodes are treated in a hospital setting. In the hospital setting, patients are routinely treated in medical emergency departments, psychiatric emergency services and inpatient psychiatric units, which are the settings where ADASUVE may be used if such facilities are enrolled in the ADASUVE Risk Evaluation and Mitigation Strategy, or REMS, program.

Commercialization Strategy Overview

Our global commercialization strategy for ADASUVE is to use strategic collaborations to commercialize ADASUVE. We currently have one commercialization collaboration with Ferrer for the Ferrer Territories. We have reacquired the commercial rights for ADASUVE in the United States and are working to identify a new commercialization collaboration partner for the United States.  In the interim, we expect to provide product to the customers already purchasing ADASUVE, through distribution systems established by Teva.  The Teva Amendment gives us the ability to promote and distribute ADASUVE under the currently approved label for up to twelve months. We are continuing to seek additional commercialization collaborations to commercialize ADASUVE in the United States and countries outside the Ferrer Territories.

In December 2012, the FDA approved our NDA for Staccato loxapine, as ADASUVE (loxapine) Inhalation Powder 10 mg for the acute treatment of agitation associated with schizophrenia or bipolar disorder in adults. In the United States, ADASUVE must be administered only in healthcare facilities enrolled in the ADASUVE REMS program that have immediate access on-site to equipment and personnel trained to manage acute bronchospasm, including advanced airway management (intubation and mechanical ventilation). In connection with our reacquisition of the ADASUVE commercial U.S. rights, the ADASUVE NDA and other related regulatory documents were transferred to us and we have primary responsibility for all regulatory activities and requirements.  In December 2015, a supplemental New Drug Application or sNDA was submitted to the FDA, seeking certain changes in the product labeling and REMS.  The review period for this sNDA is projected to be six months.

In February 2013, the EC granted marketing authorization for ADASUVE in the EU. ADASUVE, 4.5 mg and 9.1 mg inhalation powder loxapine, pre-dispensed, is authorized in the EU for the rapid control of mild-to-moderate agitation in adult patients with schizophrenia or bipolar disorder. The ADASUVE marketing authorization requires that patients receive regular treatment

24

immediately after control of acute agitation symptoms, and that ADASUVE is administered only in a hospital setting under the supervision of a healthcare professional. The ADASUVE marketing authorization also states that a short- acting beta-agonist bronchodilator treatment should be available for treatment of possible severe respiratory side-effects, such as bronchospasm. The marketing authorization for ADASUVE is valid in all 28 EU Member States, plus Iceland, Liechtenstein and Norway. Beginning in August 2014, Ferrer began to receive individual country approvals in Latin America. As of May 6, 2016, Ferrer or its distributors currently markets ADASUVE in twenty-one countries of the Ferrer Territories. Ferrer has also received approval to market ADASUVE in ten additional Latin American countries. We expect Ferrer will launch in a number of European countries through 2016. In Latin America, we expect Ferrer will continue to work on product regulatory approvals and launch in already approved countries throughout 2016.

Until June 2015, we had primary responsibility for certain post-approval requirements outlined in the marketing authorisation for ADASUVE. Two of the five requirements have been completed and the data submitted to the European Medicines Agency, or the EMA. Work on the three additional requirements is ongoing. In June 2015, Ferrer assumed responsibility for these post-approval responsibilities.

Commercialization Strategy — Other Countries

We continue to seek additional strategic collaborators to commercialize ADASUVE in the United States and countries outside the Ferrer Territories.

Commercial Production Update

We are responsible for the global commercial manufacturing of ADASUVE in our facility in Mountain View, California for commercialization in the United States, the Ferrer Territories and in any potential future territories. This facility has been inspected by the U.S., EU and other country competent authorities and operates under applicable U.S., EU and other country regulations.

In 2015, Teva and Ferrer provided longer-term, ADASUVE orders, allowing us to manufacture ADASUVE in a consistent manner to take advantage of the efficiencies of continued batch production. Through the third quarter of 2015, we produced approximately 112,000 units of ADASUVE which completed the fulfillment of the Teva and Ferrer orders. We have completed the suspension of the ADASUVE commercial production operations and plan to resume commercial production in the future as additional commercial product is required by Ferrer or any future collaborators. We may also consider contracting with third party manufacturers for ADASUVE units if deemed more efficient, including third-party manufacturers with multi-product facilities. As a result of the suspension of ADASUVE commercial production, we reduced our headcount to approximately 27 employees.

ADASUVE is our only product approved for commercialization. In the United States, ADASUVE must be administered only in healthcare facilities enrolled in the ADASUVE REMS program that have immediate access on-site to equipment and personnel trained to manage acute bronchospasm, including advanced airway management (intubation and mechanical ventilation). If we or our future collaborators are not able to successfully commercialize ADASUVE in the U.S., or if Ferrer is not able to successfully commercialize ADASUVE in the Ferrer Territories, our ability to generate revenue will be jeopardized and, consequently, our business will be seriously harmed.

Product Candidate Development

We have retained all rights to the Staccato system and to our product candidates other than ADASUVE, the exclusive commercial rights to which we have licensed to Ferrer in the Ferrer Territories. We intend to develop certain product candidates internally and to identify external resources or collaborators to develop and commercialize other product candidates.

AZ-002 (Staccato alprazolam) for Acute Repetitive Seizures

Epilepsy, a disorder of recurrent seizures, affects approximately 2.5 million Americans, making it the third most common neurological disorder in the United States. ARS refers to seizures that are serial, clustered, or crescendo, and ones that are distinct from the patient’s usual seizure pattern with an onset easily recognized by caregiver and physician. Typically there is recovery between seizures. Among the implications of ARS are concerns for patient safety. Prolonged or recurrent seizure activity persisting for 30 minutes or more may result in serious injury, health impacts or death that correlate directly with seizure duration. ARS, if left untreated, has been reported to evolve into a state of persistent seizure, or status epilepticus, which has a 3% mortality rate in children and 26% in adults.

25

Benzodiazepines are considered to be medications of first choice for the treatment of acute seizures. Clinical advantages of benzodiazepines include relatively rapid onset of action, high efficacy and minimal toxicity. The rapidity by which a medication can be delivered to the systemic circulation and then to the brain plays a significant role in reducing the time needed to treat seizures and reducing the likelihood of damage to the central nervous system. Current standard of care for ARS is the rectal gel formulation of diazepam, which must be administered by a caregiver or healthcare professional. In our market research, patients surveyed have commented that they find that the rectal gel takes longer to work than they would like and that the route of administration is sub-optimal and cannot be used in public. Intravenous benzodiazepines are rapid acting, but must be administered by a healthcare professional in a medical facility.

The ability to treat quickly is clinically important to potentially prevent an epileptic event from evolving into status epilepticus or causing other serious complications. We believe a product that can be administered in the home setting to effectively treat ARS may result in avoiding a trip to the hospital for treatment or diminishing the need to use the rectal formulation of diazepam.

If approved, AZ-002 could reduce the use of IV or rectal benzodiazepines in treating patients who experience ARS. The potential benefits of AZ-002 may include a faster delivery to the blood stream, when compared to rectal delivery, and greater ease of use. AZ-002 could be administered after a first seizure in a cluster with the aim of preventing further seizures. The caregiver could provide dosing assistance between cluster seizures. We believe that alprazolam’s ability to inhibit anxiety, or anxiolytic action, may provide additional therapeutic benefits to ARS patients. We own full development and commercial rights to AZ-002. We have applied for orphan drug status with the FDA for AZ-002 and expect to apply for orphan drug status in the EU. There is no assurance that AZ-002 will receive such designation.

We initiated a Phase 2a proof-of-concept study for AZ-002 in January 2015. This AZ-002 Phase 2a study is an in-clinic, randomized, placebo-controlled, double-blind design, 5-way crossover evaluating patients with epilepsy using the Intermittent Photic Stimulation model, with the primary endpoint being reduction in mean Standardized Photosensitivity Range, or SPR.  The primary aim of this study is to assess the safety and the pharmacodynamic electroencephalographic effects of a single dose of AZ-002 at three dose strengths (0.5mg, 1.0mg and 2.0mg) as compared with a placebo (administered twice during the six-week protocol for each patient). This study has enrolled four patients to date (of the six initially planned) at three U.S. clinical centers. In December 2015, we announced results of the interim analysis of the study. The interim analysis showed that AZ-002 had dose-related effects on mean SPR (the primary endpoint of the study), no serious adverse effects and was well tolerated in the patients studied.  There were also dose-related changes in two visual-analogue scales for sedation and for alertness, which are established pharmacodynamic markers of benzodiazepine drug activity.  Importantly, in both measures the pharmacodynamic effect was demonstrated at the two-minute time point, which was the first assessment in the study, demonstrating the rapid onset of effect of alprazolam as delivered by the Staccato technology. Data from this clinical trial are expected to serve as the basis for dose determination in potential future efficacy and safety clinical studies. We expect to complete this study in the first half of 2016.

AZ-007 (Staccato zaleplon) for Insomnia

We are developing AZ-007 for the treatment of insomnia in patients who have difficulty falling asleep, including those patients with middle of the night awakening who have difficulty falling back asleep. Insomnia is the most prevalent sleep disorder, and we believe that it affects at least 15% to 20% of the United States population, with some estimates of up to 50% of Americans reporting difficulty getting a good night’s sleep at least a few nights a week. Insomnia can be due to a variety of causes, including depression, grief or stress, menopause, age, shifting work, or environmental disruption. Whatever the cause of insomnia, it can take its toll on both the afflicted and the non-afflicted. Sleep disturbances have a major negative impact on public health and economic productivity.

Although benzodiazepines have been the clinical standard in treatment for sleep disorders for decades, issues with drug misuse and dependency are common and concerning. Other current treatments for insomnia include non-benzodiazepine GABA-A receptor agonists, which include zolpidem, immediate release and controlled-release tablets, zaleplon, and eszopiclone, which have less abuse potential and fewer side effects than classical benzodiazepines and can be used for longer term treatment. Patients and physicians surveyed in market research suggest that current oral forms of these leading insomnia medications can take from 30-60 minutes to work, while promotions for insomnia medications cite 20-30 minutes. Compounds with a longer half-life keep patients asleep longer and if dosed in the middle of the night, can have residual side effects that can cause a “hangover” feeling the next day.

We believe the opportunity in insomnia is a product which achieves a balance in treating patients so they can fall asleep quickly, whether at bedtime or in the middle of the night, while enabling them to function well the next day without a groggy feeling that can impact driving, employment or leisure activities.

26

We believe there is a potentially large clinical need for a product which has the potential to lead to rapid and predictable onset of sleep in patients with middle of the night insomnia, coupled with a predictable duration of sleep and rapid, clear awakening has the potential to be satisfied by AZ-007.

We have completed Phase 1 testing for AZ-007. In the Phase 1 study, AZ-007 delivered an IV-like pharmacokinetic profile with a median time to peak drug concentration of 1.6 minutes. Pharmacodynamics, measured as sedation assessed on a 100 mm visual- analog scale, showed onset of effect as early as 2 minutes after dosing. We do not anticipate further development of AZ-007 without obtaining additional capital resources, but if we are able to secure additional funding, we plan to initiate a Phase 2 clinical study for AZ-007. The primary goal of this study will be to: (i) determine AZ-007’s effects and impact on sleep, as measured with polysomnography, (ii) to determine AZ-007’s residual effects after dosing, as measured in a driving simulator environment, and (iii) to collect additional safety data on AZ-007.

Financing update

In September 2015, we issued the Ferrer Note to Ferrer. The terms of the Ferrer Note provided that (i) Ferrer would loan us up to $5.0 million in tranches, (ii) the initial tranche of $3.0 million was received by us on September 28, 2015, (iii) another tranche of $1.0 million was received by us on March 21, 2016, (iv) the third tranche of $1.0 million was received by us on April 15, 2016, (v) interest accrues on the outstanding principal at the rate of 6% per annum, compounded monthly, through May 31, 2016, (vi) all outstanding principal and accrued interest under the Ferrer Note became due and payable upon Ferrer’s demand on May 31, 2016, (vii) we could prepay the Ferrer Note at any time without premium or penalty, and (viii) we issue 125,000 shares of our common stock to Ferrer as partial consideration for the loan. The common stock was issued to Ferrer pursuant to a stock issuance agreement and was not registered at the time of issuance under the Securities Act of 1933, as amended. On May 9, 2016 in connection with our execution of the Merger Agreement, we amended and restated the Ferrer Note in order to, among other things (i) increase the maximum principal amount of the Ferrer Note to $6.3 million, (ii) extend the maturity date of the Ferrer Note to September 30, 2016 and (iii) provide for certain events of default under the Ferrer Note in connection with the Merger. As of May 11, 2016, the outstanding principal amount of the Ferrer Note was $6.3 million.

In May 2013, we entered into a Convertible Promissory Note and Agreement to Lend, between us and Teva, or the Teva Note, pursuant to which we had the ability, upon written notice to Teva, to draw upon the Teva Note to fund agreed operating budgets related to ADASUVE. As of December 31, 2014, the aggregate drawdowns totaled $25.0 million.  In February 2016, we entered into an amendment to the Teva Note, or the Amended Teva Note. The Amended Teva Note provided that (i) we issue  2,172,886 shares of our common stock to Teva pursuant to a stock issuance agreement as consideration for a reduction in the outstanding balance of the Amended Teva Note by $5.0 million and forgiveness of all accrued and unpaid interest under the Amended Teva Note, (ii) we are obligated to repay the remaining $20.0 million outstanding balance of the Amended Teva Note in four annual consecutive payments of $5.0 million beginning in the first calendar year following the calendar year in which the aggregate annual net sales of ADASUVE and any other Staccato enabled products first reach $50.0 million in the United States, and (iii) we may prepay the outstanding balance of the Amended Teva Note.

In the fourth quarter of 2015, we did not make the quarterly interest payment due on December 15, 2015 for the non-recourse notes issued by Atlas in connection with our royalty securitization financing, or the Notes.  As a result, we received a notice of event of default from the trustee. The aggregate interest payments that were in default were approximately $4.2 million, which includes the interest due and payable since September 15, 2015. In January 2016, we entered into a forbearance agreement with the holders of the Notes whereby such holders would generally forbear from delivering an acceleration notice and exercising other remedies under the Notes for thirty day renewing periods through June 15, 2016. As a result of our default and the short forbearance time period, the principal balance of $45.0 million and the amortization of the debt discounts of $1.0 million related to the 2014 Warrants were reclassified from non-current liabilities to current liabilities since the fourth quarter of 2015. Additionally, the deferred interest charges associated with the royalty securitization financing that were being amortized over five years were reclassified from non-current assets to other current assets as of March 31, 2016 consistent with the related debt. In connection with the execution of the Merger Agreement, we entered into a Forbearance and Waiver Agreement, or the Second Forbearance Agreement with Atlas U.S. Royalty, LLC, a Delaware limited liability company and our wholly-owned subsidiary, or Atlas, Purchaser and the holders of the 2014 Warrants and the Notes. Pursuant to the terms of the Second Forbearance Agreement, the holders of the Notes agreed (i) to forbear on exercising all rights and remedies under that certain Indenture by and between Atlas and U.S. Bank National Association, as the trustee, or the Indenture, and the other documentation relating to the Notes and Atlas through the earlier of November 9, 2016 (subject to extension under certain circumstances) and the termination of the Merger Agreement and (ii) to ratify certain amendments to the Teva Agreement. Pursuant to the terms of the Second Forbearance Agreement, the holders of the Notes also agreed to the cancellation of the Notes and the discharge of the Indenture in connection with the consummation of the Offer and to take any and all actions necessary to effect the foregoing.  In addition, the holders of the 2014 Warrants agreed to the treatment of the 2014 Warrants in

27

connection with the Offer as described in the Merger Agreement effective as of the Merger.  Each of the holders of the Notes, the holders of the 2014 Warrants, Atlas and us also agreed to certain releases of claims effective upon the consummation of the Offer or, in the case of claims with respect to Purchaser and its affiliates, upon the execution of the Second Forbearance Agreement.

In connection with the execution of the Merger Agreement, the holders of the Notes each entered into a participation agreement with Atlas pursuant to which Atlas agreed to grant to the holders of the Notes contractual rights to receive payments from Atlas upon the receipt of certain payments and achievement of certain milestones in respect of the commercialization of ADASUVE within the Unites States.

Results of Operations

Comparison of Three Months Ended March 31, 2016 and 2015

Revenue

Revenues for the three months ended March 31, 2016 and 2015 were:

Product Revenue We began shipping commercial units and recognizing revenue on ADASUVE product shipments to Ferrer in the second quarter of 2013 and to Teva in the fourth quarter of 2013. We suspended our commercial production of ADASUVE in the third quarter of 2015. We have fulfilled all of the orders we received from Teva and Ferrer for commercial units of ADASUVE for the near and medium term and we are uncertain of when we will resume production. Accordingly, no additional revenue related to product shipments is expected to be earned beginning in the first quarter of 2016. If we contract with a third party to assume production responsibilities for ADASUVE, we may not recognize any future ADASUVE product revenue.

Amortization of Deferred Revenues The upfront payments received from a Collaboration, License and Supply Agreement we executed with Ferrer in October 2011, or the Ferrer Agreement, are recognized as revenue over the period in which we complete our obligations under the Ferrer Agreement. The amount amortized can vary based on changes of the expected timing to complete our obligation and the receipt of any further upfront payments. Due to the amendment of the Ferrer Agreement, we accelerated the amortization period of the upfront payments for revenue recognition starting in June 2015 to December 2015 resulting in an increase in amortization of deferred revenue as compared to 2014. This reflects the potential period in which the technology transfer would occur for manufacturing capabilities. Prior to the amendment of the Ferrer Agreement, the estimated amortization periods ended March 2017.

Milestone Revenue There were no milestone revenues earned during the three months ended March 31, 2016 and 2015.

Royalty Revenue Royalty revenue was earned under the Teva Agreement for sales of ADASUVE in the U.S. Teva commercially launched ADASUVE in March 2014. We have reacquired the ADASUVE U.S. commercial rights and will not receive any future royalties under the Teva Agreement after the first quarter of 2016.

Cost of Goods Sold

Costs of goods sold include the direct costs incurred to manufacture products sold combined with allocated manufacturing overhead, which consists of indirect costs, including labor and facility overhead. The carrying cost of inventory is reduced so as to not be in excess of market value as determined by the contractual transfer prices to Ferrer and Teva. These amounts are expensed to cost of goods sold. Cost of goods sold consists mainly of excess manufacturing costs during the period in addition to the cost of the units shipped.

28

During the three months ended March 31, 2015, we recorded additional cost of goods sold related to $1.2 million of inventory with fixed expiration dates and $1.0 million of prepayments made to the supplier of our lower housing assembly all of which are in excess of our expected production needs prior to the planned suspension of production operations.

We contracted with Autoliv, through a third-party supplier, to build an additional manufacturing cell at a cost of approximately $2.4 million, or the New Cell. The New Cell was expected to be installed at Autoliv with the cell currently being utilized by Autoliv, or the Original Cell, to be installed at a second source supplier. Due to the Original Cell no longer being utilized and the uncertainty of the timing of engaging a second source supplier, we wrote down the Original Cell to $0, which resulted in an impairment of $1.4 million that was recognized as cost of goods sold in the three months ended March 31, 2015. The New Cell will be utilized if and when commercial production resumes.

In February 2016, we entered into the Teva Amendment, whereby we reacquired the ADASUVE commercial U.S. rights. As part of this exchange, all remaining ADASUVE inventory held by Teva was transferred to us along with a right to resell such inventory for up to one year. The Teva Amendment is intended to allow us to continue to provide ADASUVE product to patients and health care providers either on our own or through another unaffiliated partner, at which time all Teva license rights to ADASUVE would terminate. We accounted for the sub-license rights and the receipt of inventory under ASC 845, Nonmonetary Transaction. We concluded that the cost of the inventory transferred to us shall be based on the fair value of the inventory received as its fair value is more clearly evident than the fair value of the future milestone and royalty obligations relinquished. The fair value of the inventory was determined to be $0.9 million with an offsetting gain on exchange that is reflected as a non-operating line item within our consolidated statements of loss and comprehensive loss. However, given our continued operating losses, the uncertainty of when we will resume commercial production, the limited ability to sell the inventory, the twelve-month expiration of this inventory, and our ability to continue as a going concern, we subsequently fully impaired the inventory received by recording a $0.9 million, or $0.05 per share, impairment charge that was included in our cost of goods sold within our consolidated statements of loss and comprehensive loss.

Research and Development Expenses

Research and development expenditures made to advance ADASUVE and our product candidates, and, prior to commercial production of ADASUVE, develop our manufacturing capabilities during the three months ended March 31, 2016 and 2015 consisted of the following (in thousands):

The decrease of $1.4 million in research and development expenses during the three months ended March 31, 2016 as compared to the same period in 2015 was primarily due to the effects of the restructuring strategy inclusive of our reduction in employee headcount. With the suspension of commercial ADASUVE production operations in the third quarter of 2015, the decrease was partially offset by a larger percentage of fixed overhead costs being allocated to research and development expenses beginning in the fourth quarter of 2015.

We expect that research and development expenses will decrease during the fiscal year 2016 compared to 2015. We anticipate continuing to incur expenses related to our AZ-002 Phase 2a clinical trial, and, if financing is secured, expenses related to the clinical development of AZ-007.

General and Administrative Expenses

General and administrative expenses during the three months ended March 31, 2016 and 2015 consisted of the following (in thousands):

29

The decrease of $1.4 million in general and administrative expenses during the three months ended March 31, 2016 as compared to the same period in 2015 was primarily due to our reduction in employee headcount, decreased accounting fees due to the change in auditors, and lower consulting expenses.

We expect our general and administrative expenses in 2016 to continue to decrease as compared to 2015. We may further reduce our headcount if we do not secure additional funding.

Change in the Fair Value of Contingent Consideration Liability

In connection with our acquisition of all of the outstanding equity of Symphony Allegro, Inc., or Allegro, in the third quarter of 2009, we are obligated to pay the former stockholders of Allegro certain percentages of cash receipts that may be generated from future collaboration transactions for ADASUVE, AZ-104 and/or AZ-002. We measure the fair value of this contingent consideration liability on a recurring basis. Any changes in the fair value of this contingent consideration liability are recognized in earnings in the period of the change. Certain events, including, but not limited to, clinical trial results, regulatory approval or nonapproval of our submissions, the timing and terms of a strategic partnership, and the commercial success of ADASUVE, AZ-104, and/or AZ-002, could have a material impact on the fair value of the contingent consideration liability, and as a result, our results of operations.

During the three months ended March 31, 2016, we updated the discounted cash flow model to reflect adjusted U.S. ADASUVE milestones and royalties with any future U.S. collaborator and adjusted sales milestones for the ADASUVE Ferrer. These changes resulted in our recognizing a non-operating, non-cash gain of $0.2 million, or $0.009 per share during the three months ended March 31, 2016.

During the three months ended March 31, 2015 we updated the contingent liability fair value model primarily to reflect the projected uptake of ADASUVE in the U.S. market. As part of this process, we received updated projections from our collaboration partners in the first quarter of 2015 that indicated sales of ADASUVE would be lower in 2015 and 2016 than had been anticipated in the various projections and scenarios used to estimate the contingent consideration liability in previous periods. As a result of these lower projected sales and the decision to suspend our commercial production operations, we reevaluated the rate at which we believe sales will increase, the amount of peak sales, the period of time it will take to reach peak sales, the number of years at which peak sales would be achieved, and the related impact on the amount and timing of related royalties and milestones to be received. This evaluation resulted in a decrease to projected sales and the related milestones and royalties under the high, medium and low sales scenarios and a heavier weighting to the lower sales scenario. The change in projected product uptake, and the projected related sales milestone payments, resulted in our recognizing a non-operating, non-cash gain of $14.8 million. A payment of approximately $0.9 million was made during the same period to the former Allegro stockholders.

Gains from Restructuring of Financing Obligations and Inventory from Teva

During the three months ended March 31, 2016, we recorded a non-operating and non-cash gain of $3.5 million. In February 2016, we amended the license and supply agreement with Teva, or Teva Amendment, whereby we reacquired the ADASUVE commercial U.S. rights through an exclusive, royalty-free sub-license arrangement in exchange for the termination of all future milestone and royalty obligations that Teva had under the original agreement. As part of this exchange, all remaining ADASUVE inventory held by Teva was transferred to us along with a right to resell such inventory for up to one year. The Teva Amendment is intended to allow us to continue to provide ADASUVE product to patients and health care providers either on our own or through another unaffiliated partner, at which time all Teva license rights to ADASUVE would terminate. We accounted for the sub-license rights and the receipt of inventory under ASC 845, Nonmonetary Transaction. We concluded that the cost of the inventory transferred to us shall be based on the fair value of the inventory received as its fair value is more clearly evident than the fair value of the future milestone and royalty obligations relinquished. The fair value of the inventory was determined to be $0.9 million with an offsetting gain on exchange that is reflected as a non-operating line item within our consolidated statements of loss and comprehensive loss. However, given our continued operating losses, the uncertainty of when we will resume commercial production, the limited ability to sell the inventory, the twelve-month expiration of this inventory, and our ability to continue as a going concern, we subsequently fully impaired the inventory received by recording a $0.9 million impairment charge that was included in our cost of goods sold within our consolidated statements of loss and comprehensive loss. Our inventory was fully reserved as of March 31, 2016.

Additionally in February 2016, we entered into an amendment to the Teva Note, or the Amended Teva Note, which provided for (i) the issuance of 2,172,886 shares of our common stock to Teva pursuant to a stock issuance agreement as consideration for a reduction in the outstanding balance of the Amended Teva Note by $5.0 million and the forgiveness of all accrued and unpaid interest under the Amended Teva Note; (ii) the contingent repayment of the remaining $20.0 million outstanding balance of the Amended Teva Note in four annual consecutive payments of $5.0 million beginning on January 31 of the calendar year following the calendar

30

year in which aggregate annual net sales of ADASUVE and any other Staccato enabled products first reach $50.0 million in the United States; (iii) the elimination of the conversion feature, and (iv) the prepayment of the outstanding balance of the Amended Teva Note at any time without penalty. We assessed the note restructuring under ASC 470, Debt, and concluded that the transaction constituted a troubled debt restructuring as we are experiencing financial difficulty and the amended note contained a concession through a reduction in the effective interest rate from 5.2 percent to zero percent. At the date of restructuring, the carrying amount of the Teva Note was $23.1 million. As the restructuring involved a partial settlement by granting an equity interest and a modification of the terms of the remaining Teva Note, we first reduced the carrying amount by $0.6 million, representing the fair value of the 2,172,886 shares of our common stock granted based on the $0.28 per share price as of the restructuring date, net of $33,000 in direct issuance costs. The remaining carrying amount of $22.5 million was then written down to $20.0 million, representing the total future undiscounted cash payments of the Amended Teva Note and consisting entirely of the contingent repayments, resulting in a restructuring gain of $2.5 million, or $0.12 per share, that is reflected on our consolidated statements of loss and comprehensive loss. The remaining outstanding note of $20.0 million is classified as a non-current liability as of March 31, 2016.

Interest and Other Income/(Expense), Net

Interest and other income/(expense) was immaterial for the three months ended March 31, 2016 and 2015, respectively. The amounts generally represent income earned on our cash, cash equivalents, marketable securities and restricted cash. We expect interest income to remain nominal throughout 2016.

Interest Expense

Interest expense was $2.0 million and $2.2 million for the three months ended March 31, 2016 and 2015, respectively. The amounts represent interest on our borrowings from Teva, Ferrer, the March 2014 royalty securitization financing, and the amortization of the debt discounts on the 2014 Warrants. We expect interest expense to decrease in 2016 as a result of the Amended Teva Note due to the change of the effective interest rate from 5.2 percent to zero percent.

Liquidity and Capital Resources

Since inception, we have financed our operations primarily through private placements and public offerings of equity securities, debt financings, revenues primarily from licensing agreements and government grants, and payments from Allegro. We have received additional funding from interest earned on investments, as described below, and funds received upon exercises of stock options and exercises of purchase rights under our previous employee stock purchase plan and our 2015 Employee Stock Purchase Plan, or the 2015 ESPP. As of March 31, 2016, we had $4.5 million in cash and cash equivalents and we had no marketable securities. Our cash and cash equivalents balances are held in money market accounts, investment grade commercial paper and government-backed securities. Cash in excess of immediate requirements is invested with regard to liquidity, capital preservation and yield.

Cash Flows from Operating Activities. Net cash used in operating activities was $($4.3) million and $(12.7) million during the three months ended March 31, 2016 and 2015, respectively.

The net cash used in the three months ended March 31, 2016 primarily reflects the net loss of $3.4 million, the non-cash gains of $2.5 million and $0.9 million related to the restructuring of the Amended Teva Note and the fair value of the inventory that we received from Teva which was subsequently fully impaired, respectively, the change in our working capital of $0.5 million, amortization of debt discount and deferred interests of $0.6 million, depreciation and amortization of $0.6 million.

The net cash used in the three months ended March 31, 2015 primarily reflects the net loss of $0.4 million offset by the $14.8 million non-operating, non-cash gain related to the decrease in the contingent consideration liability, non-cash fixed asset impairment charge of $1.4 million, inventory write-off of $1.2 million, share-based compensation expense of $0.4 million and depreciation and amortization of $0.9 million. Cash flows from operating activities were also impacted by the decrease in accrued clinical and other accrued liabilities, primarily due to the payout of the amounts earned under our 2014 Cash Bonus Plan.

Cash Flows from Investing Activities. There were no investing activities during the three months ended March 31, 2016. Net cash provided by investing activities during the three months ended March 31, 2015 was $8.1 million which represented maturities, net of purchases, of available-for-sale securities.

Cash Flows from Financing Activities. Net cash provided by financing activities was $1.0 million and $0.5 million during the three months ended March 31, 2016 and 2015, respectively. Cash flows from financing activities have generally consisted of proceeds from the issuance of our common stock and net cash flows from our financing agreements. During the three months ended March 31,

31

2016, we received the second tranche of $1.0 million from the Ferrer Note which brought the outstanding balance of the Ferrer Note to $4.0 million as of March 31, 2016. In the three months ended March 31, 2015, our restricted cash balance decreased by $1.4 million and we made payments of $0.9 million to the former stockholders of Symphony Allegro.

We believe that with current cash and cash equivalent balances, the additional $2.3 million drawn in April and May 2016 under the Ferrer Note and our current expected cash usage, we have sufficient capital resources to meet our anticipated cash needs, at our expected cost levels until the end of June 2016. Changing circumstances may cause us to consume capital significantly faster or slower than we currently anticipate or to alter our operations. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available financial resources sooner than we currently expect. The key assumptions underlying these estimates include:

Even if circumstances do not cause us to consume capital significantly faster or slower than we currently anticipate, we may be forced to significantly reduce our operations if our business prospects do not improve. If we are unable to source additional capital, we may be forced to shut down operations altogether.

Our forecast of the period of time that our financial resources will be adequate to support operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed in “Risk Factors.” In light of the numerous risks and uncertainties associated with the commercialization of ADASUVE, the commercial manufacturing of ADASUVE, the development of our product candidates and the extent to which we enter into additional strategic collaborations with third parties to participate in development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials. Our future funding requirements will depend on many factors, including:

We will need to raise additional funds to support our operations, and such funding may not be available to us on acceptable terms, or at all. If we are unable to raise additional funds when needed, we may not be able to successfully commercialize ADASUVE, perform our post-approval commitments to the FDA and EC, or continue development of our product candidates or we could be required to delay, scale back or eliminate some or all of our development programs, or other operations. We may seek to raise additional funds through public or private financing, strategic collaborations or other arrangements. Any additional equity financing

32

may be dilutive to stockholders and debt financing, if available, may involve restrictive covenants. Applicable listing standards may affect our ability to consummate certain types of offerings of our securities in the future. In connection with the Ferrer Note, we issued Ferrer 125,000 shares of our unregistered common stock in September 2015 and we issued Teva 2,172,886 shares of our unregistered common stock in February 2016. Our October 2014 private sale of unregistered shares to Ferrer involved the sale of 2,000,000 shares of our common stock. We paid approximately $0.9 million of the proceeds from Ferrer to the former stockholders of Allegro during the three months ended March 31, 2015. Our royalty securitization financing involved the issuance of the 2014 Warrants which represent the right to purchase 345,661 shares of our common stock and requires interest payments by Atlas without recourse to us beginning in June 2014. Our February 2012 underwritten public offering involved the sale of 4,400,000 shares of our common stock and warrants to purchase an additional 4,400,000 shares of our common stock. If we raise funds through additional collaborative or licensing arrangements, we may be required to relinquish, on terms that are not favorable to us, rights to some of our technologies or product candidates that we would otherwise seek to develop or commercialize ourselves. Our failure to raise capital when needed may harm our business, financial condition, results of operations, and prospects.

Contractual Obligations

Building Lease

We lease a building with 65,604 square feet of manufacturing, office and laboratory facilities in Mountain View, California, which we began to occupy in the fourth quarter of 2007. The lease expires on March 31, 2018, and we have two options to extend the lease for five years each. We believe that the Mountain View facility is sufficient for our office, manufacturing and laboratory needs for at least the next three years.

Autoliv

In November 2007, we entered into a manufacturing and supply agreement, or the Manufacture Agreement, with Autoliv relating to the commercial supply of chemical heat packages that can be incorporated into our Staccato device. Autoliv had developed these chemical heat packages for us pursuant to a development agreement between Autoliv and us executed in October 2005.

We pay Autoliv a specified purchase price, which varies based on annual quantities ordered by us, per chemical heat package delivered. The initial term of the Manufacture Agreement expired on December 31, 2012, at which time the Manufacture Agreement automatically renewed for successive five-year renewal terms unless we or Autoliv notify the other party no less than 36 months prior to the end of the initial term.

In April 2014, we contracted with Autoliv, through a third-party supplier, to build an additional manufacturing cell at a cost of approximately $2.3 million. In December 2014, we amended the Manufacture Agreement with Autoliv, or the 2014 Amendment to extend the agreement through 2018. In addition, we have the right to engage a second source supplier and implement a manufacturing line transfer from Autoliv to manufacture and supply the chemical heat packages to us or our licensees.

Teva Note

In February 2016, we entered into the Amended Teva Note which provided that (i) we issue 2,172,886 shares of our common stock to Teva pursuant to a stock issuance agreement as consideration for a reduction in the outstanding balance of the Amended Teva Note by $5.0 million and forgiveness of all accrued and unpaid interest under the Amended Teva Note; (ii) we are obligated to repay the remaining $20.0 million outstanding balance of the Amended Teva Note in four annual consecutive payments of $5.0 million beginning in the first calendar year following the calendar year in which the aggregate annual net sales of ADASUVE and any other Staccato enabled products first reach $50.0 million in the United States; and (iii) we may prepay the outstanding balance of the Amended Teva Note. We assessed the note restructuring under ASC 470, Debt, and concluded that the transaction qualified as a troubled debt restructuring as we are experiencing financial difficulty and the Amended Teva Note contained a concession through a reduction in the effective interest rate from 5.2 percent to zero percent. At the date of restructuring, the carrying amount of the Teva Note was $23.1 million. As the restructuring involved a partial settlement by granting an equity interest and a modification of the terms of the remaining Teva Note, we first reduced the carrying amount by $0.6 million, representing the fair value of the 2,172,886 shares of our common stock granted based on the $0.28 per share price as of the restructuring date, net of $33,000 in direct issuance costs. The remaining carrying amount of $22.5 million was then written down to $20.0 million, representing the total future undiscounted cash payments of the Amended Teva Note and consisting entirely of the contingent repayments, resulting in a restructuring gain of $2.5 million, or $0.12 per share, that is reflected on our consolidated statements of loss and comprehensive loss. The remaining outstanding balance of $20.0 million of the Amended Teva Note is classified as a non-current liability as of March 31, 2016.

33

Royalty Securitization Financing

On March 18, 2014 we entered into a royalty securitization financing, which consisted of a private placement to qualified institutional buyers and accredited institutional investors of $45.0 million of the Notes issued by Atlas and the 2014 Warrants, which represent the right to purchase 345,661 shares of our common stock at a price of $0.01 per share exercisable for five years from the date of issuance. The Notes bear interest at 12.25% per annum payable quarterly beginning June 15, 2014. All royalty and milestone payments under the Teva Agreement, after paying interest, administrative fees and expenses, and any applicable taxes, will be applied to principal on the Notes until the Notes have been paid in full. From the proceeds of the transaction, we established a $6.9 million interest reserve account to cover potential shortfall in interest payments. The interest reserve account was fully utilized in 2015 to pay for interest on the Notes. All other payments of principal and interest on the Notes will be made from royalty revenues from sales in the U.S. of ADASUVE, as well as potential U.S. commercialization and regulatory milestone payments due to us. The Notes are secured by the right to receive royalty and milestone payments from the commercial sale of ADASUVE in the U.S. and our equity ownership in Atlas. The Notes have no other recourse to us. The Notes may not be redeemed at our option until after March 18, 2016, and may be redeemed after that date subject to the achievement of certain milestones and the payment of a redemption premium for any redemption occurring prior to March 19, 2019. The Notes are not convertible into Alexza equity, nor have we guaranteed them. We did not make the quarterly interest payment due on December 15, 2015 for the royalty securitization financing.  As a result, we received a notice of event of default from the trustee. The aggregate interest payments that were in default were approximately $4.2 million, which includes the interest due and payable since September 15, 2015. In January 2016, we entered into a forbearance agreement with the holders of the Notes whereby such holders would generally forbear from delivering an acceleration notice and exercising other remedies under the agreement for thirty day renewing periods through June 15, 2016. In connection with the execution of the Merger Agreement, we entered into the Second Forbearance Agreement with Atlas, Purchaser and the holders of the 2014 Warrants and the Notes. Pursuant to the terms of the Second Forbearance Agreement, the holders of the Notes agreed (i) to forbear on exercising all rights and remedies under the Indenture and the other documentation relating to the Notes and Atlas through the earlier of November 9, 2016 (subject to extension under certain circumstances) and the termination of the Merger Agreement and (ii) to ratify certain amendments to the Teva Agreement.  Pursuant to the terms of the Second Forbearance Agreement, the holders of the Notes also agreed to the cancellation of the Notes and the discharge of the Indenture in connection with the consummation of the Offer and to take any and all actions necessary to effect the foregoing.  In addition, the holders of the 2014 Warrants agreed to the treatment of the 2014 Warrants in connection with the Offer as described in the Merger Agreement effective as of the Merger.  Each of the holders of the Notes, the holders of the 2014 Warrants, Atlas and us also agreed to certain releases of claims effective upon the consummation of the Offer or, in the case of claims with respect to Purchaser and its affiliates, upon the execution of the Second Forbearance Agreement.

In connection with the execution of the Merger Agreement, the holders of the Notes each entered into a participation agreement with Atlas pursuant to which Atlas agreed to grant to the holders of the Notes contractual rights to receive payments from Atlas upon the receipt of certain payments and achievement of certain milestones in respect of the commercialization of ADASUVE within the Unites States.

Ferrer Note

In September 2015, we issued the Ferrer Note to Ferrer. The terms of the Ferrer Note provided that (i) Ferrer would loan us up to $5.0 million in tranches, (ii) the initial tranche of $3.0 million was received by us on September 28, 2015, (iii) another tranche of $1.0 million was received by us on March 21, 2016, (iv) the third tranche of $1.0 million was received by us on April 15, 2016, (v) interest accrues on the outstanding principal at the rate of 6% per annum, compounded monthly, through May 31, 2016, (vi) all outstanding principal and accrued interest under the Ferrer Note became due and payable upon Ferrer’s demand on May 31, 2016, (vii) we could prepay the Ferrer Note at any time without premium or penalty, and (viii) we issue 125,000 shares of our common stock to Ferrer as partial consideration for the loan. The common stock was issued to Ferrer pursuant to a stock issuance agreement and was not registered at the time of issuance under the Securities Act of 1933, as amended. On May 9, 2016 in connection with our execution of the Merger Agreement, we amended and restated the Ferrer Note in order to, among other things (i) increase the maximum principal amount of the Ferrer Note to $6.3 million, (ii) extend the maturity date of the Ferrer Note to September 30, 2016 and (iii) provide for certain events of default under the Ferrer Note in connection with the Merger. As of May 11, 2016, the outstanding principal amount of the Ferrer Note was $6.3 million.

34

Future Minimum Payment Schedule

Our scheduled future minimum contractual payments including interest at March 31, 2016, are as follows (in thousands):

The above table excludes the third tranche of $1.0 million and the final tranche of $1.3 million from the Ferrer Note that we received in April and May 2016, respectively, plus any payments pursuant to the $45.0 million from the Notes, which have a legal maturity date in 2027. The principal payments by Atlas under the royalty securitization financing will be dependent upon the timing and amounts of royalties and milestone payments received for the sale of ADASUVE in the U.S. We are obligated to repay the remaining $20.0 million outstanding balance of the Amended Teva Note in four annual consecutive payments of $5.0 million beginning in the first calendar year following the calendar year in which the aggregate annual net sales of ADASUVE and any other Staccato enabled products first reach $50.0 million in the United States.

As part of our purchase of all of the outstanding equity of Allegro in August 2009, we agreed to pay to the former stockholders of Allegro certain percentages of cash payments that may be generated from future collaboration transactions pertaining to ADASUVE/AZ-104 (Staccato loxapine) or AZ-002 (Staccato alprazolam). During the three months ended March 31, 2015, we made a payment to the stockholders of Allegro of $0.9 million as a result of the common stock sale to Ferrer in October 2014. No payment was made to the stockholders of Allegro during the three months ended March 31, 2016.

Critical Accounting Policies, Estimates and Judgments

There have been no material changes in our critical accounting policies, estimates and judgments during the three months ended March 31, 2016 compared to the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015.

Off Balance Sheet Arrangements

None.

Our exposure to market risk is confined to our cash, cash equivalents, marketable securities and restricted cash. The primary objective of our investment activities is to preserve our capital to fund operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of cash equivalents and marketable securities in a variety of securities of high credit quality. As of March 31, 2016, we had cash and cash equivalents of $4.5 million and we had no marketable securities. The securities in our investment portfolio are not leveraged, are classified as available-for-sale and are, due to their very short-term nature, subject to minimal interest rate risk. We currently do not hedge interest rate exposure. Because of the short-term maturities of our investments, we do not believe that an increase in market rates would have a material negative impact on the realized value of our investment portfolio. We actively monitor changes in interest rates. We perform quarterly reviews of our investment portfolio and believe we have minimal exposure related to mortgage and other asset-backed securities. We have no exposure to auction rate securities.

Evaluation of Disclosure Controls and Procedures:

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and

35

reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer (who also serves as our principal financial officer and principal accounting officer), as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, we are required to apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our management, with the participation of our Chief Executive Officer (who also serves as our principal financial officer and principal accounting officer) and outside counsel, has reviewed our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, our chief executive officer has concluded that, as of March 31, 2016, our internal disclosure controls and procedures were effective at the reasonable assurance level, except as otherwise noted below.

Changes in Internal Controls over Financial Reporting:

There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls:

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our Chief Executive Officer (who also serves as our principal financial officer and our principal accounting officer) has concluded, based on his evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were sufficiently effective to provide reasonable assurance that the objectives of our disclosure control system were met, except as noted above.

36

PART II. OTHER INFORMATION

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this Quarterly Report, before deciding whether to invest in shares of our common stock. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. The occurrence of any of the following risks could harm our business, financial condition or results of operations. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment. Except for the important risk factors relating to consummation of the proposed Merger with Ferrer, the following risk factors have been prepared as if our company were remaining independent.

Risks Relating to Our Proposed Merger with Ferrer

Our proposed Merger with Ferrer may not be completed within the expected timeframe, or at all, and the failure to complete the Merger could adversely affect our business and the market price of our common stock.

The announcement and pendency of Ferrer’s proposed acquisition of us pursuant to the Offer and subsequent Merger could adversely affect our business, financial condition and results of operations.

The announcement and pendency of the Offer and Merger could disrupt our business in the following ways, among others:

Any of the above matters could adversely affect our stock price or harm our financial condition, results of operations or business prospects.

37

Our executive officers and directors may have interests that are different from, or in addition to, those of our stockholders generally.

Our executive officers and directors may have interests in the Offer and Merger that are different from, or are in addition to, those of our stockholders generally. These interests include direct or indirect ownership of our common stock, stock options and RSUs, and the receipt of change in control or other severance payments and employment offers in connection with the proposed transactions.

The Merger Agreement contains provisions that could discourage or make it difficult for a third party to acquire our company prior to the completion of the Offer and the Merger.

The Merger Agreement contains provisions that make it difficult for us to entertain a third-party proposal to acquire us. These provisions include our agreement not to solicit or initiate any additional discussions with third parties regarding other proposals for our acquisition, as well as restrictions on our ability to respond to such proposals, subject to fulfillment of certain fiduciary requirements of our board of directors. The Merger Agreement also contains certain termination rights, including, under certain circumstances, a requirement for us to pay to Ferrer a termination fee of $1.0 million.

These provisions might discourage an otherwise-interested third party from considering or proposing an acquisition of our company, even one that may be deemed of greater value to our stockholders than the Offer and the Merger. Furthermore, even if a third party elects to propose an acquisition, our obligation to pay a termination fee may result in that third party’s offering of a lower value to our stockholders than such third party might otherwise have offered.

Lawsuits may be filed against us and the members of our board of directors arising out of our acquisition by Ferrer, which may delay or prevent the proposed transaction.

Putative stockholder class action complaints and other lawsuits may be filed against us, our board of directors, Ferrer and others in connection with the transactions contemplated by the Merger Agreement. The outcome of litigation is uncertain and we may not be successful in defending against any such future claims. Lawsuits that may be filed against us could delay or prevent our acquisition by Ferrer, divert the attention of our management and employees from our day-to-day business and otherwise adversely affect us financially.

Risks Relating to Our Business

We have concluded that due to our need for additional capital, and the uncertainties surrounding our ability to raise such funding, substantial doubt exists as to our ability to continue as a going concern.

We have incurred significant losses from operations since our inception and expect losses to continue for the foreseeable future. As of March 31, 2016, we had cash and cash equivalents of $4.5 million and a working capital deficiency of $52.9 million. We believe that, based on our cash and cash equivalent balances at March 31, 2016, the additional $2.3 million drawn in April and May 2016 under the Ferrer Note and our expected cash usage, we have sufficient capital resources to meet our anticipated cash needs until the end of June 2016. We have incurred significant losses from operations since our inception and expect losses to continue for the foreseeable future. In light of our ongoing costs and product candidate development, and our projected working capital needs, we expect to need to source additional capital to finance our ongoing operations in the next twelve months. We may not be able to source sufficient capital on acceptable terms, or at all, to continue to pursue approval to commercialize ADASUVE in the United States or other countries, to continue development of our other product candidates or to continue operations. We plan to source additional capital which may be used to fund strategic initiatives, operations and working capital, or development of product candidates. In addition to product revenues, royalties and milestone payments, we may finance our operations through additional distribution or licensing collaborations, sale of equity securities, or utilization of debt arrangements. Such funding may not be available or may be on terms that are not favorable to us. Our inability to source capital as and when needed could have a negative impact on our financial condition, results of operations or our ability to execute on our strategic initiatives. Even if we are able to source additional capital, we may be forced to significantly reduce our operations if our business prospects do not improve. If we are unable to source additional capital, we may be forced to shut down operations altogether.

On May 9, 2016, we entered into the Merger Agreement with Ferrer and Purchaser. The Offer and Merger are subject to certain closing conditions and there can be no assurance that such Offer or Merger will be completed. Additionally, if we are unable to complete the Merger, we will likely need to source additional financing to fund our operations.

38

Our audited consolidated financial statements for the fiscal year ended December 31, 2015 and our unaudited financial statements for the quarter ended March 31, 2016 were prepared on a going concern basis in accordance with United States generally accepted accounting principles. The going concern basis of presentation assumes that we will continue in operation for the next twelve months and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern. Our operating and capital plans for the next twelve months call for cash expenditure to exceed our current cash, cash equivalents and working capital. We concluded that due to our need for additional capital and the uncertainties surrounding our ability to raise such funding, substantial doubt exists as to our ability to continue as a going concern. We may be forced to reduce our operating expenses, raise additional funds, principally through the additional sales of our securities or debt financings, or enter into an additional corporate partnership to meet our working capital needs. However, we cannot guarantee that we will be able to obtain sufficient additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to us. If we are unable to raise sufficient additional capital or complete a strategic transaction, we may be unable to continue to fund our operations, develop our product candidates or realize value from our assets and discharge our liabilities in the normal course of business. These uncertainties raise substantial doubt about our ability to continue as a going concern. If we become unable to continue as a going concern, we may have to liquidate our assets, and might realize significantly less than the values at which they are carried on our financial statements, and stockholders may lose all or part of their investment in our common stock.

Our near-term prospects are dependent on ADASUVE. If we or our present and future collaborators are unable to successfully commercialize ADASUVE for the acute treatment of agitation in adults with schizophrenia or bipolar disease, our ability to generate significant revenue or achieve profitability will be adversely affected.

ADASUVE is our only product approved for marketing in the United States, the EU and certain Latin American countries, and our ability to generate revenue in the near term is entirely dependent upon sales of ADASUVE. We do not have any product approved for marketing outside of the United States, the EU or Latin America. We or our present and future collaborators may not be able to successfully commercialize ADASUVE for a number of reasons, including:

If we or our collaborator are unable to successfully commercialize ADASUVE for the treatment of agitation in adults with schizophrenia or bipolar disorder, our ability to generate revenue from royalties and product sales and achieve profitability will be adversely affected and our stock price would likely decline.

In February 2016, we entered into the Teva Amendment to reacquire the ADASUVE U.S. commercial rights and restructure our obligations under the Teva Note. The Teva Amendment provides for (i) the transfer of the NDA and related regulatory filings for

39

ADASUVE to us and the assumption of responsibility by us for all regulatory activities related to ADASUVE in the U.S. as soon as practicable; (ii) an exclusive license of Teva intellectual property with respect to ADASUVE, which intellectual property will be assigned to us in connection with a change of control or an exclusive license to ADASUVE in the United States to a third party; (iii) our undertaking responsibility for the REMS program, either through Teva’s vendors or vendors otherwise selected by us; (iv) the transfer from Teva of existing supplies of ADASUVE as well as all commercial, medical and academic materials, documents and relationships; (v) the right of us to sell Teva-labeled product in accordance with all applicable laws and Teva policies; and (vi) the satisfaction and termination of all payment obligations of the parties with respect to the commercialization of ADASUVE except as with respect to the Amended Teva Note and our issuance of 2,172,886 shares of our common stock to Teva. We cannot be assured that we will be able to resume production to continue product availability to patients and healthcare providers in the United States after the return of the rights to us. If we are not able to continue product availability to patients and healthcare providers in the United States, we will not be able to generate any commercial revenue from ADASUVE in the U.S.

We plan to identify a new U.S. commercial partner for ADASUVE in 2016, however, we cannot be assured that we will be successful or whether or not the terms of such collaboration would be on terms less favorable to us than those of our future collaborators.

We have a history of net losses. We expect to continue to incur substantial and increasing net losses for the foreseeable future, and we may never achieve or maintain profitability.

We are not profitable and have incurred significant net losses in each year since our inception, including net losses of $3.4 million, $21.3 million, $36.7 million, and $39.6 million for the three months ended March 31, 2016 and fiscal years ended December 31, 2015, 2014, and 2013, respectively. As of March 31, 2016 we had an accumulated deficit of $436.0 million and a stockholders’ deficit of $74.3 million. We expect to continue to incur substantial net losses and negative operating cash flow for the foreseeable future. These losses and negative operating cash flows have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital.

Because of the numerous risks and uncertainties associated with the commercialization of ADASUVE by us and Ferrer, our ability to supply commercial quantities of ADASUVE, and conduct pharmaceutical product development, we are unable to predict accurately the timing or amount of future revenues or expenses, or when, or if, we will be able to achieve or maintain profitability. In February 2016, we reacquired the U.S. rights for ADASUVE from Teva. We plan to identify a new U.S. commercial partner for ADASUVE in 2016, however, we cannot be assured that we will be successful or whether or not the terms of such collaboration would be on terms less favorable to us than those of our future collaborators. Even if we were to enter into such an agreement, we cannot be assured that we or a new collaborator would be able to successfully commercialize ADASUVE in the U.S.

To date, we have not generated any significant royalty revenue. We have financed our operations primarily through the sale of equity securities, equipment financing, debt financing, collaboration and licensing agreements, and government grants. The size of our future net losses will depend, in part, on the rate of growth or contraction of our expenses and the level and rate of growth, if any, of our revenues. Revenues from strategic collaborations are uncertain because we may not enter into any additional strategic collaborations or our current collaboration may have different results than we anticipate. If we or our collaborator are unable to successfully commercialize ADASUVE or one or more of our product candidates or if sales revenue from ADASUVE or any product candidate that receives marketing approval is insufficient, we will not achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability.

Our operating results are unpredictable and may fluctuate. If our operating results are below the expectations of securities analysts or investors, the trading price of our stock could decline.

Our operating results are difficult to predict and will likely fluctuate from quarter to quarter and year to year. ADASUVE sales will be difficult to predict from period to period. For example, we did not have any shipments of ADASUVE in the first quarter of  2016 and do not anticipate any product shipments through at least the second quarter of 2017. We believe that our quarterly and annual results of operations may be negatively affected by a variety of factors, including:

40

In addition, we measure compensation cost for stock-based awards made to employees at the grant date of the award, based on the fair value of the award, and recognize the cost as an expense over the employee’s requisite service period. As the variables that we use as a basis for valuing these awards change over time, including our underlying stock price, the magnitude of the expense that we must recognize may vary significantly. Any such variance from one period to the next could cause a significant fluctuation in our operating results.

For these reasons, it is difficult for us to accurately forecast future profits or losses. As a result, it is possible that in some quarters our operating results could be below the expectations of securities analysts or investors, which could cause the trading price of our common stock to decline, perhaps substantially.

We will need substantial additional capital in the future. If additional capital is not available, we will have to delay, reduce or cease operations.

We will need to source additional capital to fund our operations, to develop our product candidates and to support our commercial manufacturing capabilities. Our future capital requirements will be substantial and will depend on many factors including:

We believe that, based on our cash and cash equivalent balances at March 31, 2016, the additional $2.3 million drawn in April and May 2016 under the Ferrer Note and our expected cash usage, we have sufficient capital resources to meet our anticipated cash needs until the end of June 2016. Changing circumstances may cause us to consume capital significantly faster or slower than we currently anticipate, or to alter our operations. We have based these estimates on assumptions that may prove to be wrong, and we could exhaust our available financial resources sooner than we currently expect.  The key assumptions underlying these estimates include:

41

Even if circumstances do not cause us to consume capital significantly faster or slower than we currently anticipate, we may be forced to significantly reduce our operations if our business prospects do not improve. If we are unable to source additional capital, we may be forced to shut down operations altogether.

We may never be able to generate a sufficient amount of product or royalty revenue to cover our expenses. We did not generate any product revenues until the second quarter of 2013 and did not generate any royalty revenues until the second quarter of 2014. We suspended our commercial production operations during the third quarter of 2015 and fulfilled our close-out orders from Teva and shipped the last order from Ferrer in October 2015. We are uncertain when we will resume production and do not anticipate any product shipments through at least the second quarter of 2017 or until we find a partnering solution in the U.S. to replace Teva.  In February 2016, we entered into the Teva Amendment to reacquire the ADASUVE U.S. commercial rights for and restructure our obligations under the Teva Note. The Teva Amendment provides for (i) the transfer of the NDA and related regulatory filings for ADASUVE to us and the assumption of responsibility by us for all regulatory activities related to ADASUVE in the U.S. as soon as practicable; (ii) an exclusive license of Teva intellectual property with respect to ADASUVE, which intellectual property will be assigned to us in connection with a change of control or an exclusive license to ADASUVE in the United States to a third party; (iii) our undertaking responsibility for the REMS program, either through Teva’s vendors or vendors otherwise selected by us; (iv) the transfer from Teva of existing supplies of ADASUVE as well as all commercial, medical and academic materials, documents and relationships; (v) the right of us to sell Teva-labeled product in accordance with all applicable laws and Teva policies; and (vi) the satisfaction and termination of all payment obligations of the parties with respect to the commercialization of ADASUVE except as with respect to the Amended Teva Note and our issuance of 2,172,886 shares of our common stock to Teva . If we are not able to continue product availability to patients and healthcare providers in the United States, we will not be able to generate any commercial revenue from ADASUVE in the U.S. In addition, in connection with a royalty securitization financing we effected in March 2014, we contributed and sold our rights to U.S. ADASUVE royalties and milestone payments to Atlas, which issued $45.0 million of the Notes. Subsequently, in connection with the execution of the Merger Agreement, the holders of the Notes each entered into a participation agreement with Atlas pursuant to which Atlas agreed to grant to the holders of the Notes contractual rights to receive payments from Atlas upon the receipt of certain payments and achievement of certain milestones in respect of the commercialization of ADASUVE within the Unites States. We also entered into the Second Forbearance Agreement with the holders of the Notes in connection with the execution of the Merger Agreement. Pursuant to the terms of the Second Forbearance Agreement, the holders of the Notes agreed to forbear on exercising all rights and remedies under that the Indenture and the other documentation relating to the Notes and Atlas through the earlier of November 9, 2016 (subject to extension under certain circumstances) and the termination of the Merger Agreement. Pursuant to the terms of the Second Forbearance Agreement, the holders of the Notes also agreed to the cancellation of the Notes and the discharge of the Indenture in connection with the consummation of the Offer and to take any and all actions necessary to effect the foregoing. If we are not successful in consummating the Offer, then the Notes will not be cancelled and holders of the Notes will be able to exercise all rights and remedies available to them under the Indenture.

To date we have not recognized significant royalty revenues. Until we generate sufficient revenues to cover expenses, we expect to finance our future cash needs through public or private equity offerings, debt financings, strategic collaborations or licensing arrangements. Any financing transaction may contain unfavorable terms. For example, the terms of certain warrants we have issued in previous financings could require us to pay warrant holders a significant portion of the proceeds in a change of control transaction, potentially materially reducing the proceeds available to holders of our common stock. If we source additional funds by issuing equity securities our stockholders’ equity will be diluted and debt financing, if available, may involve restrictive covenants. If we source additional funds through strategic collaborations, we may be required to relinquish rights to ADASUVE, our product candidates or our technologies, or to grant licenses on terms that are not favorable to us. Complying with the terms of the foregoing rights and restrictions may make it more difficult to complete certain types of transactions and result in delays to our fundraising efforts.

We do not have sales and marketing capabilities, and consequently must rely on commercial collaborations to sell our products, and we and our collaborator may be unable to generate significant product revenue.

In December 2012, the FDA granted marketing approval for ADASUVE in the United States for the acute treatment of agitation associated with schizophrenia or bipolar disorder in adults. The approval of ADASUVE was our first regulatory approval. We do not have a sales and marketing organization and as a company, we do not have significant experience in the sales and distribution of pharmaceutical products.

42

In February 2016, we entered into the Teva Amendment to reacquire the ADASUVE U.S. commercial rights for and restructure our obligations under the Teva Note. We plan to identify a new U.S. commercial partner for ADASUVE in 2016, however, we cannot be assured that we will be successful or whether or not the terms of such collaboration would be on terms less favorable to us than those of our future collaborators. Also, the end of Teva’s commercialization efforts could have an effect on investors’ perception of potential sales of ADASUVE inside and outside the United States, which could also cause a decline in our stock price and may make it more difficult for us to enter into additional strategic collaborations. The Notes issued by Atlas in conjunction with our royalty securitization financing are secured by the right to receive U.S. ADASUVE royalty and milestone payments and our equity ownership in Atlas. In connection with the execution of the Merger Agreement, the holders of the Notes each entered into a participation agreement with Atlas pursuant to which Atlas agreed to grant to the holders of the Notes contractual rights to receive payments from Atlas upon the receipt of certain payments and achievement of certain milestones in respect of the commercialization of ADASUVE within the Unites States. We also entered into the Second Forbearance Agreement with the holders of the Notes in connection with the execution of the Merger Agreement. Pursuant to the terms of the Second Forbearance Agreement, the holders of the Notes agreed to forbear on exercising all rights and remedies under that the Indenture and the other documentation relating to the Notes and Atlas through the earlier of November 9, 2016 (subject to extension under certain circumstances) and the termination of the Merger Agreement. Pursuant to the terms of the Second Forbearance Agreement, the holders of the Notes also agreed to the cancellation of the Notes and the discharge of the Indenture in connection with the consummation of the Offer and to take any and all actions necessary to effect the foregoing. To date, royalties and milestone payments based on commercial sales of ADASUVE in the U.S. have not been sufficient to pay the amounts due under the Notes. If we are not successful in consummating the Offer and we do not voluntarily provide Atlas with the funds to make required payments as they come due, then the holders of the Notes may foreclose on the equity we own in Atlas and we could lose rights to receive future payments related to U.S. rights to ADASUVE.

In February 2013, the EC granted a marketing authorization for ADASUVE, as ADASUVE (Staccato loxapine) 4.5 mg or 9.1 mg, inhalation powder, pre-dispensed. In October 2011, we entered into a commercial collaboration with Ferrer pursuant to the Ferrer Agreement, to commercialize ADASUVE in the Ferrer Territories. The marketing authorization for ADASUVE is valid in all 28 EU Member States, plus Iceland, Liechtenstein and Norway. Beginning in August 2014, Ferrer began to receive individual country approvals in Latin America. As of May 6, 2016, Ferrer or its distributors, currently markets ADASUVE in twenty-one countries of the Ferrer Territories. Ferrer has also received approval to market ADASUVE in ten additional Latin American countries. Ferrer anticipates additional European and Latin American country approvals and launches in 2016. If Ferrer is unable to commercialize ADASUVE successfully in the various Ferrer Territories or if Ferrer is unable to fulfill the post-marketing authorization commitments that were required as part of the marketing authorization granted for ADASUVE in the EU, our revenue will suffer and our stock price may decline. The transfer of the MAA for ADASUVE to Ferrer was completed in August 2015.

We also intend to seek distribution collaborators in addition to Ferrer for ADASUVE and our product candidates. If we are unable to enter into an international or domestic distribution collaboration, we will be unable to generate revenues from countries outside the United States and the Ferrer Territories.

If we enter into additional strategic collaborations, we may be required to relinquish important rights to and control over the development of ADASUVE or our product candidates or otherwise be subject to terms unfavorable to us.

Our commercial relationship with Ferrer is, and any other strategic collaboration with pharmaceutical or biotechnology companies we may establish will be, subject to a number of risks including:

43

The REMS program for ADASUVE imposes, and any REMS on any other approved products may impose, regulatory burdens on the distribution and sales of ADASUVE or any other approved products and also on healthcare providers that may make the products commercially unattractive or impractical.

As a condition of FDA approval, we are required to have a REMS program for ADASUVE, and we may be required to implement a REMS program for any other product candidates we may develop. A REMS may include various elements, such as distribution of a medication guide or a patient package insert; implementation of a communication plan to educate healthcare providers of the drug’s risks; imposition of limitations on who may prescribe or dispense the drug, including training and certification requirements; or other measures that the FDA deems necessary to assure the safe use of the drug. The FDA has a wide degree of discretion in deciding which elements are necessary for the safe use of a product, and it may impose elements that significantly burden our ability to commercialize the product, or that burden healthcare providers to the extent that use of the product is severely curtailed.

For ADASUVE, the REMS program contains measures to ensure that the product is administered only in healthcare facilities enrolled in the ADASUVE REMS program that have immediate on-site access to equipment and personnel trained to manage acute bronchospasm, including advanced airway management (intubation and mechanical ventilation). The REMS program may not allow commercialization and use of ADASUVE in a commercially feasible manner. In the future, the FDA could impose additional REMS elements, such as if the REMS proves inadequate in managing the risk of bronchospasm associated with ADASUVE or if new safety risks emerge, and such additional elements could substantially burden or even eliminate our ability to commercialize ADASUVE in a feasible manner.

If we or our current and future collaborators are unable to successfully complete the ADASUVE post-marketing studies required by the FDA and EC, or if data generated from the post-marketing studies indicate safety concerns, our sales could be diminished and our ability to generate a profit could be negatively affected.

As a condition of U.S. ADASUVE approval, there are several required post-marketing studies, including a 10,000 patient observational clinical trial that is designed to gather patient safety data based on the “real-world” use of ADASUVE in the hospital setting and a clinical program designed to evaluate the safety and efficacy of ADASUVE in agitated adolescent patients. The data derived from any post-approval study or trial could result in additional restrictions on the commercialization of ADASUVE through changes to the approved ADASUVE label, additional goals or elements in the REMS program, the imposition of additional post-approval studies or trials, or even the withdrawal of the approval of ADASUVE. Our business, operations and stock price may be negatively affected if any of these or similar events occur.

As a condition of the ADASUVE EU marketing authorisation, we were responsible for conducting and funding the post-approval studies, including (i) a benzodiazepine interaction study, which has been completed, (ii) a controlled study to determine ADASUVE’s effect on cardiac rhythms, or a thorough QTc study, with two doses of ADASUVE, which has been completed, (iii) a clinical program designed to evaluate the safety and efficacy of ADASUVE in agitated adolescent patients, (iv) an observational clinical trial, and (v) a drug utilization clinical trial. As part of the transfer of the MAA to Ferrer in June 2015, Ferrer assumed responsibility for completing any outstanding studies. Results of the benzodiazepine interaction study and the thorough QTc study have been submitted to the EMA.

If we and our present or future collaborators are unable to fulfill the FDA or EU post-marketing obligations, or do not fulfill these obligations within an appropriate time, or if the EMA determines from the results of the completed benzodiazepine interaction

44

study or the completed thorough QTc study that ADASUVE poses or may pose actual or possible safety risks to some patients, the NDA could be suspended, withdrawn, or limited, and the current marketing authorization in the EU could be varied, suspended or withdrawn and our business, operations and stock price may be negatively affected.

Additionally, in February 2016 we reacquired the U.S. rights for ADASUVE from Teva including the assumption of responsibility by us for all regulatory activities related to ADASUVE in the United States as soon as practicable. We cannot be assured that we will be able to fulfill these FDA post-marketing obligations without the support of Teva.

If we do not produce our commercial devices cost effectively, we will never be profitable.

ADASUVE and our Staccato system-based product candidates contain electronic and other components in addition to the API. The cost to produce ADASUVE and our product candidates, and any additional approved products, will likely be higher per dose than the cost to produce intravenous or oral tablet products. This higher cost of goods may prevent us or our collaborators from ever selling any products at a profit. The development and production of our technology entail a number of technical challenges, including achieving adequate dependability in our production, that may be expensive or time consuming to solve. Any delay in or failure to develop and manufacture any future products in a cost effective way could prevent us from generating any meaningful revenues and prevent us from becoming profitable.

In October 2011, we committed to sell ADASUVE to Ferrer for a fixed transfer price, which is below our current production costs, and in May 2013, we committed to supply ADASUVE to Teva at a price based on costs of commercial production, which transfer price will convert to a fixed price upon achievement of costs equal to a specified per-unit price. In February 2016 we reacquired the U.S. rights for ADASUVE from Teva. We cannot be assured that the supply terms to a future collaborator, if any, will be on equivalent or better terms as with Teva. Our future manufacturing costs per unit will be dependent on future demand of ADASUVE. If we and our present and future collaborators do not generate sufficient demand, our manufacturing costs will exceed the fixed transfer price and will result in losses. If we are unable to generate profits from manufacturing our products, we may be required to seek alternative manufacturing strategies.

During 2013 and 2014, Alexza completed production of ADASUVE for commercial launch and initial stocking, which did not utilize Alexza’s full manufacturing capacity. In collaboration with Teva and Ferrer, Alexza conducted an analysis to evaluate need for the product and cost-effective strategies for ADASUVE commercial production. The analysis included supply chain requirements, production volume and timelines, batch sizes and possible scenarios to make global production more efficient and cost-effective. In the first quarter of 2015, Teva and Ferrer provided longer-term, ADASUVE orders, allowing us to manufacture ADASUVE in a consistent manner to take advantage of the efficiencies of continued batch production. During the third quarter of 2015, we completed all required ADASUVE production for Teva’s and Ferrer’s ADASUVE orders. As a result, we suspended our ADASUVE commercial manufacturing operations. We plan for ADASUVE commercial production to resume in the future as additional commercial product is required by Ferrer or any future collaborators. We may also consider contracting with third party manufacturers for ADASUVE units if deemed more efficient, including third-party manufacturers with multi-product facilities. We cannot predict when, if ever, we will begin to again commercially manufacture ADASUVE. If we do not restart our commercial manufacturing, we cannot predict if third-party manufacturers will be able to produce ADASUVE at a price which would allow us to generate profits.

The availability and amount of reimbursement for ADASUVE and our product candidates and the manner in which government and private payors may reimburse for our potential products is uncertain.

Many of the patients in the United States who seek treatment with ADASUVE or any other of our products that are approved for marketing will be eligible for Medicare benefits. Other patients may be covered by private health plans. The Medicare program is administered by CMS, and coverage and reimbursement for products and services under Medicare are determined pursuant to statute, regulations promulgated by CMS, and CMS’s subregulatory coverage and reimbursement determinations. CMS’s regulations and interpretive determinations are subject to change, as are the procedures and criteria by which CMS makes coverage and reimbursement determinations and the reimbursement amounts established by statute, particularly because of budgetary pressures facing the Medicare program. For example, we anticipate that ADASUVE will be used only in the hospital inpatient and hospital outpatient settings. In the hospital inpatient setting, Medicare does not provide separate reimbursement for drugs but pays for them as part of the payment for the hospital stay. In the hospital outpatient setting, the statute establishes the payment rate for new drugs and biologicals administered incident to a physician’s service that are granted “pass-through status” at the rate applicable in physicians’ offices (i.e., ASP plus six percent) for two to three years after FDA approval. For drugs and biologicals that do not have pass-through status, CMS establishes the payment rates by regulation. For 2015, these drugs are reimbursed at ASP plus six percent if they have an average cost per day exceeding $95; drugs with an average cost per day of less than $95 are not separately reimbursed. In future years, CMS could change both the payment rate and the average cost threshold, and these changes could adversely affect payment for

45

ADASUVE. In addition, the President has proposed and Congress has considered amending the statute to reduce Medicare’s payment rates for drugs and biologicals, and if such legislation is enacted, it could adversely affect payment for ADASUVE. Moreover, ADASUVE is different from many drugs covered by Medicare Part B because it is administered by a healthcare professional through a disposable inhaler.

Effective April 1, 2013, Medicare payments for all items and services, including drugs and biologicals, were reduced by up to 2% under the sequestration (i.e., automatic spending reductions) required by the Budget Control Act of 2011, Pub. L. No. 112-25, or BCA, as amended by the American Taxpayer Relief Act of 2012, Pub. L. 112-240, or ATRA. The BCA requires sequestration for most federal programs, excluding Medicaid, Social Security, and certain other programs, because Congress failed to enact legislation by January 15, 2012, to reduce federal deficits by $1.2 trillion over ten years. The BCA caps the cuts to Medicare payments or items and services at 2%, and requires the cuts to be implemented on the first day of the first month following the issuance of a sequestration order. The ATRA delayed implementation of sequestration from January 2, 2013, to March 1, 2013, and as a result, the Medicare cuts took effect April 1, 2013, and will remain in effect unless Congress enacts legislation to cancel the cuts. The cuts were originally scheduled to occur through 2021, but under the Bipartisan Budget Act of 2013, these cuts were extended through 2023. These cuts could adversely impact payment for ADASUVE and related procedures.

In March 2014, Teva announced the U.S. launch of ADASUVE. We expect ADASUVE to experience pricing pressures in the United States due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative proposals. We cannot be sure that reimbursement amounts, or the lack of reimbursement, will not reduce the demand for, or the price of, ADASUVE or any future products. If reimbursement is not available or is available only to limited levels, we or any collaborator may not be able to effectively commercialize ADASUVE or any future products, In addition, if we or any collaborator fail to successfully secure and maintain reimbursement coverage for ADASUVE or any future products or are significantly delayed in doing so, we or any collaborator will have difficulty achieving market acceptance of our products and our business will be harmed.

Payors also are increasingly considering new metrics as the basis for reimbursement rates, such as ASP, AMP and Actual Acquisition Cost. The existing data for reimbursement based on these metrics is relatively limited, although certain states have begun to survey acquisition cost data for the purpose of setting Medicaid reimbursement rates. CMS has made draft National Average Drug Acquisition Cost, or NADAC, and draft National Average Retail Price, or NARP, data publicly available on at least a monthly basis. In July 2013, CMS suspended the publication of draft NARP data, pending funding decisions. In November 2013, CMS moved to publishing final rather than draft NADAC data and has since made updated NADAC data publicly available on a weekly basis. Therefore, it may be difficult to project the impact of these evolving reimbursement mechanics on the willingness of payors to cover ADASUVE or any future products. As discussed below, once we or any collaborator begin to participate in government pricing programs, recent legislative changes to the 340B drug pricing program, and the Medicaid Drug Rebate program also could impact our revenues. We anticipate that a significant portion of our revenue from sales of ADASUVE will be obtained through government payors, including Medicaid, and any failure to qualify for reimbursement for ADASUVE under those programs would have a material negative effect on revenues from sales of ADASUVE.

The EU Member States are free to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices and/or reimbursement levels of medicinal products for human use. An EU Member State may approve a specific price or level of reimbursement for the medicinal product, or alternatively adopt a system of direct or indirect controls on the profitability of the company responsible for placing the medicinal product on the market, including volume-based arrangements and reference pricing mechanisms. We anticipate that pricing and reimbursement decisions concerning ADASUVE in the EU will have a significant impact on the sales of the product in the EU. Failure to obtain pricing and reimbursement for ADASUVE at an appropriate level in any of the EU Member States would, in part due to EU parallel trade rules, have a material adverse effect on revenues from sales of ADASUVE.

Healthcare law and policy changes, including those based on recently enacted legislation, may impact our business in ways that we cannot currently predict and these changes could have a material adverse effect on our business and financial condition.

Healthcare costs have risen significantly over the past decade. In March 2010, the Healthcare Reform Act, or PPACA, was adopted in the United States. The Healthcare Reform Act substantially changes the way health care is financed by both governmental and private insurers, and significantly impacts the pharmaceutical industry. The Healthcare Reform Act contains a number of provisions that are expected to impact our business and operations, in some cases in ways we cannot currently predict. Changes that may affect our business include those governing enrollment in federal and private healthcare programs, new Medicare reimbursement methods and rates, increased rebates and taxes on pharmaceutical products, expansion of the 340B program, and revised fraud and abuse and enforcement requirements. These changes will impact existing government healthcare programs and will result in the

46

development of new programs, including Medicare payment for performance initiatives and improvements to the physician quality reporting system and feedback program.

We anticipate that if we continue to commercialize ADASUVE in the United States or other potential product candidates, some of our revenue and the revenue from our future collaborators may be derived from U.S. government healthcare programs, including Medicare. We expect that the Healthcare Reform Act and other healthcare reform measures that may be adopted in the future could have an adverse effect on our industry generally and the ability to successfully commercialize ADASUVE or our product candidates or could limit or eliminate our spending on development projects.

The Healthcare Reform Act made significant changes to the Medicaid Drug Rebate program, in which we expect to participate. Effective March 23, 2010, rebate liability expanded from fee-for-service Medicaid utilization to include the utilization of Medicaid managed care organizations as well. With regard to the amount of the rebates owed, the Healthcare Reform Act increased the minimum Medicaid rebate from 15.1% to 23.1% of the average manufacturer price for most innovator products and from 11% to 13% for non-innovator products; changed the calculation of the rebate for certain innovator products that qualify as line extensions of existing drugs; and capped the total rebate amount for innovator drugs at 100% of the average manufacturer price. We expect that the increased minimum rebate of 23.1% will apply to ADASUVE. Finally, the Healthcare Reform Act requires pharmaceutical manufacturers of branded prescription drugs to pay a branded prescription drug fee to the federal government beginning in 2011. Each individual pharmaceutical manufacturer pays a prorated share of the branded prescription drug fee of $3.0 billion in 2015 (and set to increase in ensuing years), based on the dollar value of its branded prescription drug sales to certain federal programs identified in the law. Additional provisions of the Healthcare Reform Act, some of which became effective in 2011, may negatively affect our future revenues.

The Healthcare Reform Act also expanded the Public Health Service’s 340B drug pricing discount program, which we expect to participate in. The 340B pricing program requires participating manufacturers to agree to charge statutorily-defined covered entities no more than the 340B “ceiling price” for the manufacturer’s covered outpatient drugs. The Healthcare Reform Act expanded the 340B program to include additional types of covered entities: certain free-standing cancer hospitals, critical access hospitals, rural referral centers and sole community hospitals, each as defined by the Healthcare Reform Act. The Healthcare Reform Act, as drafted, exempted “orphan drugs” — those designated under section 526 of the FDCA — from the ceiling price requirements for these newly-eligible entities.

The Health Resources and Services Administration, or HRSA, which administers the 340B program, previously had issued a final regulation to implement the orphan drug exception that interpreted the orphan drug exception narrowly. That final regulation was vacated by the U.S. District Court for the District of Columbia on May 23, 2014 on the ground that HRSA did not have the authority to issue a regulation on this topic. On July 21 2014, HRSA issued an “interpretive” rule that again interprets the orphan drug exception narrowly, consistent with the invalidated final rule. Like the invalidated final rule, it exempts orphan drugs from the ceiling price requirements for the newly-eligible entities only when the orphan drug is used for its orphan indication. Under the interpretive rule, the newly-eligible entities are entitled to purchase orphan drugs at the ceiling price when the orphan drug is not used for its orphan indication. The uncertainty regarding how the statutory orphan drug exception will be applied will increase the complexity of compliance, will make compliance more time-consuming, and could negatively impact our results of operations. HRSA previously was expected to issue a comprehensive proposed regulation in 2014 that would have addressed many aspects of the 340B program. However, the invalidation of the orphan drug regulation on the ground that HRSA did not have rulemaking authority for that topic has raised questions regarding whether HRSA has the authority to issue the comprehensive regulation. We have applied for orphan drug status for AZ-002, and expect to apply for orphan drug status in the EU. There can be no assurance that AZ-002 will receive such designation, and should HRSA successfully attempt to limit the scope of the orphan drug exception in the future, this might have a negative impact on our business.

The Healthcare Reform Act also obligates the Secretary of the HHS to create regulations and processes to improve the integrity of the 340B program and to update the agreement that manufacturers must sign to participate in the 340B program to obligate a manufacturer to offer the 340B price to covered entities if the manufacturer makes the drug available to any other purchaser at any price and to report to the government the ceiling prices for its drugs. HRSA has stated on its website that in 2015 it plans to issue a proposed guidance for notice and comment that will address key policy issues raised by various stakeholders committed to the integrity of the 340B program. HRSA also states it is planning to issue proposed rules pertaining to civil monetary penalties for manufacturers, calculation of the 340B ceiling price, and administrative dispute resolution. When this guidance is issued, it could affect our obligations under the 340B program in ways we cannot anticipate. In addition, legislation may be introduced that, if passed, would further expand the 340B program to additional covered entities or would require participating manufacturers to agree to provide 340B discounted pricing on drugs used in the inpatient setting.

47

Many of the Healthcare Reform Act’s most significant reforms started taking effect last year with more still pending, and the details will be shaped significantly as the various provisions become active, especially given the political nature of the law. In 2012, the Supreme Court of the United States heard challenges to the constitutionality of the individual mandate and the viability of certain provisions of the Healthcare Reform Act. The Supreme Court’s decision upheld most of the Healthcare Reform Act and determined that requiring individuals to maintain “minimum essential” health insurance coverage or pay a penalty to the Internal Revenue Service was within Congress’s constitutional taxing authority. However, the Supreme Court struck down a provision in the Healthcare Reform Act that penalized states that choose not to expand their Medicaid programs through an increase in the Medicaid eligibility income limit from a state’s current eligibility levels to 133% of the federal poverty limit. As a result of the Supreme Court’s ruling, it is unclear whether states will expand their Medicaid programs by raising the income limit to 133% of the federal poverty level and whether there will be more uninsured patients in 2016 than anticipated when Congress passed the Healthcare Reform Act. For each state that does not choose to expand its Medicaid program, there will be fewer insured patients overall. The reduction in the number of insured patients could impact the sales, business and financial condition.

While the constitutionality of key provisions of the Healthcare Reform Act was upheld by the Supreme Court, legislative changes to it remain possible. We expect that the Healthcare Reform Act, as currently enacted or as it may be amended in the future, and other healthcare reform measures that may be adopted in the future could have a material adverse effect on our industry generally and on our ability to successfully commercialize our product candidates or could limit or eliminate our future spending on development projects.

In addition to the Healthcare Reform Act, there will continue to be proposals by legislators at both the federal and state levels, regulators and third-party payors to keep these costs down while expanding individual healthcare benefits. Certain of these changes could impose limitations on the prices we will be able to charge for ADASUVE or any other product candidates that are approved or the amounts of reimbursement available for these products from governmental agencies or third-party payors, or may increase the tax obligations on life sciences companies such as ours. While it is too early to predict specifically what effect the Health Reform Act and its implementation or any future legislation or policies will have on our business, we believe that healthcare reform may have an adverse effect on our business and financial condition.

If future products are regulated solely as medical devices and we fail to complete the required IRS forms for exemptions, make timely semi-monthly payments of collected excise taxes, or submit quarterly reports as required by the Medical Device Excise Tax, we may be subject to penalties, such as Section 6656 penalties for any failure to make timely deposits.

Section 4191 of the Internal Revenue Code, enacted by Section 1405 of the Health Care and Education Reconciliation Act of 2010, Public Law 111-152 (124 Stat. 1029 (2010)), in conjunction with the Patient Protection and Affordable Care Act, Public Law 111-148 (124 Stat. 119 (2010)), imposed as of January 1, 2013, an excise tax on the sale of certain medical devices. The excise tax imposed by Section 4191 is 2.3% of the price for which a taxable medical device is sold within the U.S.

If FDA determines that any future company product is regulated as a medical device, the excise tax will apply to future sales of any company medical device listed with the FDA under Section 510(j) of the Federal Food, Drug, and Cosmetic Act and 21 C.F.R. Part 807, unless the device falls within an exemption from the tax, such as the exemption governing direct retail sale of devices to consumers or for foreign sales of these devices. We will need to assess to what extent this excise tax may impact the sales price and distribution agreements under which any of our products are sold in the U.S. If any product is regulated as a medical device, we expect general and administrative expense to increase due to the medical device excise tax. We will need to submit IRS forms applicable to relevant exemptions, make semi-monthly payments of any collected excise taxes, and make timely (quarterly) reports to the IRS regarding the excise tax. To the extent we do not comply with the requirements of the Medical Device Excise Tax we may be subject to penalties.

If we or any collaborator fail to comply with reporting and payment obligations under the Medicaid Drug Rebate program or other governmental pricing programs, including programs developed by countries outside the United States, after we or any collaborator begin to participate in such programs, we or any collaborator could be subject to additional reimbursement requirements, penalties, sanctions and fines which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

We expect to participate, or any collaborator to participate, in the Medicaid Drug Rebate program, established by the Omnibus Budget Reconciliation Act of 1990 and amended by the Veterans Health Care Act of 1992 as well as subsequent legislation. We also expect to participate, or any collaborator to participate, in and have certain price reporting obligations to several state Medicaid supplemental rebate programs, and we anticipate that we will have obligations to report ASP for the Medicare program for future product candidates. Under the Medicaid Drug Rebate program, we will be required to pay a rebate to each state Medicaid program for

48

our covered outpatient drugs that are dispensed to Medicaid beneficiaries and paid for by a state Medicaid program as a condition of having federal funds being made available to the states for our drugs under Medicaid and Medicare Part B. Those rebates will be based on pricing data that we will report on a monthly and quarterly basis to CMS, the federal agency that administers the Medicaid Drug Rebate program. These data will include the AMP and, in the case of innovator products, the best price, or BP, for each drug. The rebate liability resulting from this reporting will negatively impact our financial results.

The PPACA made significant changes to the Medicaid Drug Rebate program. Effective March 23, 2010, rebate liability expanded from fee-for-service Medicaid utilization to include the utilization of Medicaid managed care organizations as well. With regard to the amount of the rebates owed, the PPACA increased the minimum Medicaid rebate from 15.1% to 23.1% of the average manufacturer price for most innovator products and from 11% to 13% for non-innovator products; changed the calculation of the rebate for certain innovator products that qualify as line extensions of existing drugs; and capped the total rebate amount for innovator drugs at 100% of the average manufacturer price. We expect that the increased minimum rebate of 23.1% will apply to ADASUVE. In addition, the PPACA and subsequent legislation changed the definition of AMP. Finally, the PPACA requires pharmaceutical manufacturers of branded prescription drugs to pay a new branded prescription drug fee to the federal government beginning in 2011. Each individual pharmaceutical manufacturer will pay a prorated share of the branded prescription drug fee of $3.0 billion in 2014 (and set to increase in ensuing years) based on the dollar value of its branded prescription drug sales to certain federal programs identified in the law. Additional provisions of the Healthcare Reform Act, some of which became effective in 2011, may negatively affect our future revenues.

In the future, Congress could enact legislation that further increases Medicaid drug rebates or other costs and charges associated with participating in the Medicaid Drug Rebate program. The issuance of regulations and coverage expansion by various governmental agencies relating to the Medicaid Drug Rebate program will increase our costs and the complexity of compliance, will be time-consuming, and could have a material adverse effect on our results of operations.

Federal law requires that any company that participates in the Medicaid Drug Rebate Program also participate in the Public Health Service’s 340B drug pricing discount program in order for federal funds to be available for the manufacturer’s drugs under Medicaid and Medicare Part B. The 340B pricing program requires participating manufacturers to agree to charge statutorily-defined covered entities no more than the 340B “ceiling price” for the manufacturer’s covered outpatient drugs. These 340B covered entities include a variety of community health clinics and other entities that receive health services grants from the Public Health Service, as well as hospitals that serve a disproportionate share of low-income patients. The 340B ceiling price is calculated using a statutory formula, which is based on the average manufacturer price and rebate amount for the covered outpatient drug as calculated under the Medicaid rebate program. Changes to the definition of average manufacturer price and the Medicaid rebate amount under PPACA and CMS’s issuance of final regulations implementing those changes also could affect our 340B ceiling price calculations and negatively impact our results of operations once we or any collaborator begin to participate in the 340B program.

Compliance with the regulations associated with the 340B program will increase our costs and the complexity of compliance, will be time-consuming, and could have a material adverse effect on our results of operations once we or any collaborator begin to participate in the 340B program.

As described above, the Healthcare Reform Act expanded the 340B program to include additional types of covered entities but exempts “orphan drugs” — those designated under section 526 of the FDCA — from the ceiling price requirements for these newly-eligible entities. We believe our product candidate in active development, AZ-002 (Staccato alprazolam), could qualify for orphan drug status. HRSA previously had issued a final regulation to implement the orphan drug exception that interpreted the orphan drug exception narrowly. That final regulation was vacated by the U.S. District Court for the District of Columbia on May 23, 2014 on the ground that HRSA did not have the authority to issue a regulation on this topic. On July 21 2014, HRSA issued an “interpretive” rule that again interprets the orphan drug exception narrowly, consistent with the invalidated final rule. Like the invalidated final rule, it exempts orphan drugs from the ceiling price requirements for the newly-eligible entities only when the orphan drug is used for its orphan indication. Under the interpretive rule, the newly-eligible entities are entitled to purchase orphan drugs at the ceiling price when the orphan drug is not used for its orphan indication. The uncertainty regarding how the statutory orphan drug exception will be applied will increase the complexity of compliance, will make compliance more time-consuming, and could negatively impact our results of operations. HRSA previously was expected to issue a comprehensive proposed regulation in 2014 that would have addressed many aspects of the 340B program. However, the invalidation of the orphan drug regulation on the ground that HRSA did not have rulemaking authority for that topic has raised questions regarding whether HRSA has the authority to issue the comprehensive regulation.

The Healthcare Reform Act also obligates the Secretary of the HHS to create regulations and processes to improve the integrity of the 340B program and to update the agreement that manufacturers must sign to participate in the 340B program to obligate a manufacturer to offer the 340B price to covered entities if the manufacturer makes the drug available to any other purchaser at any

49

price and to report to the government the ceiling prices for its drugs. HRSA has stated that in 2015 it plans to issue a proposed guidance for notice and comment that will address key policy issues raised by various stakeholders committed to the integrity of the 340B program. HRSA also states it is planning to issue proposed rules pertaining to civil monetary penalties for manufacturers, calculation of the 340B ceiling price, and administrative dispute resolution.

Federal law also requires that a company that participates in the Medicaid Drug Rebate Program report ASP information to CMS for certain categories of drugs that are paid under Part B of the Medicare program. We anticipate that ADASUVE will fall into that category. Manufacturers calculate ASP based on a statutorily defined formula and interpretations of the statute by CMS as to what should or should not be considered in computing ASP. An ASP for each National Drug Code for a product that is subject to the ASP reporting requirement must be submitted to CMS no later than 30 days after the end of each calendar quarter. CMS uses these submissions to determine payment rates for drugs under Medicare Part B. Once we or any collaborator begin to participate in the Medicare program, changes affecting the calculation of ASP could affect the ASP calculations for our products and the resulting Medicare payment rate, and could negatively impact our results of operations once we begin to participate in the Medicare program.

Pricing and rebate calculations vary among products and programs. The calculations are complex and are often subject to interpretation by governmental or regulatory agencies and the courts. Once we or any collaborator begin to participate in the Medicaid program, the Medicaid rebate amount will be computed each quarter based on our submission to the CMS of our current AMP and BP for the quarter. If we become aware that our reporting for prior quarters was incorrect, or has changed as a result of recalculation of the pricing data, we or any collaborator will be obligated to resubmit the corrected data for a period not to exceed 12 quarters from the quarter in which the data originally were due. Such restatements and recalculations would serve to increase our costs for complying with the laws and regulations governing the Medicaid rebate program. Once we begin to participate in the Medicaid program, any corrections to our rebate calculations could result in an overage or underage in our rebate liability for past quarters, depending on the nature of the correction. Price recalculations also may affect the price that we or any collaborator will be required to charge certain safety-net providers under the Public Health Service 340B drug discount program.

Once we or any collaborator begin to participate in government pricing programs, we or any collaborator will be liable for errors associated with our submission of pricing data. In addition to retroactive rebates and the potential for 340B program refunds, if we or any collaborator are found to have knowingly submitted false average manufacturer price, average sales price, or best price information to the government, we or any collaborator may be liable for civil monetary penalties in the amount of $100,000 per item of false information. If a manufacturer is found to have made a misrepresentation in the reporting of ASP, the statute provides for civil monetary penalties of up to $10,000 for each misrepresentation for each day in which the misrepresentation was applied. Failure to submit monthly/quarterly average manufacturer price, average sales price, and best price data on a timely basis could result in a civil monetary penalty of $10,000 per day for each day the information is late beyond the due date. In the event that CMS were to terminate our rebate agreement after we or any collaborator begin to participate in the Medicaid program, no federal payments would be available under Medicaid or Medicare Part B for our covered outpatient drugs.

In September 2010, CMS and the Office of the Inspector General indicated that they intend to pursue more aggressively companies who fail to report these data to the government in a timely manner. Governmental agencies may also make changes in program interpretations, requirements or conditions of participation, some of which may have implications for amounts previously estimated or paid. We cannot assure you that our or any collaborator’s submissions, once we or any collaborator begin to submit pricing data to CMS, will not be found by CMS to be incomplete or incorrect.

Federal law requires that for a company to be eligible to have its products paid for with federal funds under the Medicaid and Medicare Part B programs, as well as to be purchased by certain federal agencies and grantees, it also must participate in the Department of Veterans Affairs (VA) Federal Supply Schedule, or FSS, pricing program. To participate, we or any collaborator will be required to enter into an FSS contract with the VA, under which we must make our innovator “covered drugs,” such as ADASUVE or other product candidates, available to the “Big Four” federal agencies — the VA, the Department of Defense, or DoD, the Public Health Service, and the Coast Guard — at pricing that is capped pursuant to a statutory federal ceiling price, or FCP, formula set forth in Section 603 of the Veterans Health Care Act of 1992, or VHCA. The FCP is based on a weighted average wholesaler price known as the “non-federal average manufacturer price,” or Non-FAMP, which manufacturers are required to report on a quarterly and annual basis to the VA. If a company misstates Non-FAMPs or FCPs it must restate these figures. Pursuant to the VHCA, knowing provision of false information in connection with a Non-FAMP filing can subject a manufacturer to penalties of $100,000 for each item of false information.

FSS contracts are federal procurement contracts that include standard government terms and conditions, separate pricing for each product, and extensive disclosure and certification requirements. All items on FSS contracts are subject to a standard FSS contract clause that requires FSS contract price reductions under certain circumstances where pricing is reduced to an agreed “tracking customer.” Further, in addition to the “Big Four” agencies, all other federal agencies and some non-federal entities are authorized to

50

access FSS contracts. FSS contractors are permitted to charge FSS purchasers other than the Big Four agencies “negotiated pricing” for covered drugs that is not capped by the FCP; instead, such pricing is negotiated based on a mandatory disclosure of the contractor’s commercial “most favored customer” pricing. We cannot anticipate the pricing structure we will enter into with respect to our products. The FSS contract price may have a material adverse effect on future revenues from sales of ADASUVE.

Once we or any collaborator enter into an FSS contract, if we or any collaborator overcharge the government in connection with the FSS contract, whether due to a misstated FCP or otherwise, we or any collaborator will be required to refund the difference to the government. Failure to make necessary disclosures and/or to identify contract overcharges could result in allegations under the Federal False Claims Act and other laws and regulations. Unexpected refunds to the government, and responding to a government investigation or enforcement action, would be expensive and time-consuming, and could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

If we or any collaborators fail to gain market acceptance among physicians, patients, third-party payors and the medical community, we will not become profitable.

The Staccato system is a fundamentally new method of drug delivery. ADASUVE or any future product based on our Staccato system may not gain market acceptance among physicians, patients, third-party payors and the medical community. If these products do not achieve an adequate level of acceptance, we will not meet our revenue guidance nor will we generate sufficient product or royalty revenues to become profitable. The degree of market acceptance of ADASUVE or any of our product candidates, if approved for commercial sale, will depend on a number of factors, including:

We are subject to significant ongoing regulatory obligations and oversight, which may result in significant additional expense and limit our and our collaborators’ ability to commercialize our products.

We and our collaborators are subject to significant ongoing regulatory obligations, such as safety reporting requirements, periodic and annual reporting requirements, and regulatory oversight of the promotion and marketing of our products. In addition, the manufacture, labeling, packaging, distribution, import, export, adverse event reporting, storage, advertising, promotion and recordkeeping for ADASUVE and any of our product candidates that may be approved by the FDA or foreign regulatory authorities

51

will be subject to extensive and ongoing regulatory requirements. We are responsible for completing several post-marketing requirements that were a condition to FDA approval of ADASUVE, including the responsibility for conducting a 10,000 patient observational clinical trial designed to gather patient safety data based on the real-world use of ADASUVE, as well as a clinical program addressing the safety and efficacy of ADASUVE in agitated adolescent patients. The adolescent efficacy study has been completed. With the reacquisition of commercial rights, we have the responsibility for the remaining post marketing requirements. As a condition of grant of EU marketing authorization for ADASUVE by the EC, we were responsible for the conduct and funding of post-authorization studies, including (i) a benzodiazepine interaction study, which has been completed, (ii) a controlled study to determine ADASUVE’s effect on cardiac rhythms, or a thorough QTc study, with two doses of ADASUVE, which has been completed, (iii) a clinical program designed to evaluate the safety and efficacy of ADASUVE in agitated adolescent patients, (iv) an observational clinical trial, and (v) a drug utilization clinical trial. As part of the transfer of the MAA to Ferrer in June 2015, Ferrer assumed responsibility for completing any outstanding EU studies.

The FDA and foreign regulatory authorities may also impose significant restrictions on the indicated uses or marketing of our future products, or impose requirements for burdensome post-approval study commitments. For example, ADASUVE’s U.S. labeling contains a “boxed warning” regarding the risks of bronchospasm caused by the product and the increased risk of death for elderly patients with dementia-related psychosis. Boxed warnings are used to highlight warning information that is especially important to the prescriber. Products with boxed warnings are subject to more restrictive advertising and promotion regulations than products without such warnings. The terms of any product approval, including labeling, may be more restrictive than we desire and could affect the commercial potential of the product. If we become aware of previously unknown problems with any of our products in the United States or overseas or at our contract manufacturers’ facilities, a regulatory agency may impose labeling changes or restrictions on our products, our collaborators, our manufacturers or on us. In such an instance, we could experience a significant drop in the sales of the affected products, our product revenues and reputation in the marketplace may suffer, and we could become the target of lawsuits.

The FDA and other governmental authorities, including foreign regulatory authorities, also actively enforce regulations prohibiting off-label promotion, and governments have levied large civil and criminal fines against companies for alleged improper promotion. Governments have also required companies to enter into corporate integrity agreements and/or non-prosecution agreements that impose significant reporting and other burdens on the affected companies.

We and our commercial collaborators are also subject to regulation by regional, national, state and local agencies, including the Drug Enforcement Administration, or DEA, the Department of Justice, the Federal Trade Commission, the Office of Inspector General of the U.S. Department of Health and Human Services and other regulatory bodies, as well as governmental authorities in those foreign countries in which we may in the future commercialize our products. The FDCA, the Public Health Service Act, the Social Security Act, and other federal and state statutes and regulations govern to varying degrees the research, development, manufacturing and commercial activities relating to prescription pharmaceutical products, including preclinical testing, approval, production, labeling, sale, distribution, import, export, post-market surveillance, advertising, dissemination of information, promotion, marketing, and pricing to government purchasers and government healthcare programs. Any manufacturing, licensing, or commercialization collaborators we have or may in the future have, including Ferrer, will be subject to many of the same requirements.

The Federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting, or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical companies on one hand and prescribers, purchasers and formulary managers on the other. Further, the Healthcare Reform Act, among other things, amends the intent requirement of the Federal Anti-Kickback Statute. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the Healthcare Reform Act provides that the government may assert that a claim including items or services resulting from a violation of the Federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the false claims statutes. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common manufacturer business arrangements and activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration may be subject to scrutiny if they do not qualify for an exemption or safe harbor. We intend to comply with the exemptions and safe harbors whenever possible, but our practices or those of our commercial collaborators may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability and may be subject to scrutiny.

The Federal False Claims Act prohibits any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to get a false claim paid. Many pharmaceutical and other healthcare companies have been investigated and have reached substantial financial settlements with the federal government under these laws for a variety of alleged marketing activities, including providing free product to customers with

52

the expectation that the customers would bill federal programs for the product; providing consulting fees, grants, free travel, and other benefits to physicians to induce them to prescribe our products; and inflating prices reported to private price publication services, which are used to set drug payment rates under government healthcare programs. Companies have been prosecuted for causing false claims to be submitted because of the marketing of their products for unapproved uses. Pharmaceutical and other healthcare companies have also been prosecuted on other legal theories of Medicare and Medicaid fraud.

The majority of U.S. states also have statutes or regulations similar to the Federal Anti-Kickback Statute and Federal False Claims Act, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Several states now require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products in those states and to report gifts and payments to individual health care providers in those states. Some of these states also prohibit certain marketing related activities including the provision of gifts, meals, or other items to certain health care providers. In addition, California, Connecticut, Nevada and Massachusetts require pharmaceutical companies to implement compliance programs or marketing codes.

Compliance with various federal and state laws is difficult and time consuming, and companies that violate them may face substantial penalties. The potential sanctions include civil monetary penalties, exclusion of a company’s products from reimbursement under government programs, criminal fines and imprisonment. Because of the breadth of these laws and the lack of extensive legal guidance in the form of regulations or court decisions, it is possible that some of our business activities or those of our commercial collaborators could be subject to challenge under one or more of these laws. Such a challenge could have a material adverse effect on our business and financial condition and growth prospects.

We or our commercial collaborators could become subject to government investigations and related subpoenas. Such subpoenas are often associated with previously filed qui tam actions, or lawsuits filed under seal under the Federal False Claims Act. Qui tam actions are brought by private plaintiffs suing on behalf of the federal government for alleged Federal False Claims Act violations. The time and expense associated with responding to such subpoenas, and any related qui tam or other actions, may be extensive, and we cannot predict the results of our review of the responsive documents and underlying facts or the results of such actions. Responding to government investigations, defending any claims raised, and any resulting fines, restitution, damages and penalties, settlement payments or administrative actions, as well as any related actions brought by stockholders or other third parties, could have a material impact on our reputation, business and financial condition and divert the attention of our management from operating our business.

The number and complexity of both federal and state laws continues to increase, and additional governmental resources are being added to enforce these laws and to prosecute companies and individuals who are believed to be violating them. In particular, the Healthcare Reform Act includes a number of provisions aimed at strengthening the government’s ability to pursue anti-kickback and false claims cases against pharmaceutical manufacturers and other healthcare entities, including substantially increased funding for healthcare fraud enforcement activities, enhanced investigative powers, amendments to the False Claims Act that make it easier for the government and whistleblowers to pursue cases for alleged kickback and false claim violations and, since last year, payments made on or after August 1, 2013, public reporting of payments by pharmaceutical manufacturers to physicians and teaching hospitals nationwide. While it is too early to predict what effect these changes will have on our business, we anticipate that government scrutiny of pharmaceutical sales and marketing practices will continue for the foreseeable future and subject us and our commercial collaborators to the risk of government investigations and enforcement actions. Responding to a government investigation or enforcement action would be expensive and time-consuming, and could have a material adverse effect on our business and financial condition and growth prospects.

Similar restrictions are imposed on the promotion and marketing of medicinal products in the EU and other countries. The applicable laws at EU level and in the individual EU Member States require promotional materials and advertising concerning medicinal products to comply with the product’s Summary of Product Characteristics, or SmPC, as approved by the competent authorities. The SmPC is the document that provides information to physicians concerning the safe and effective use of a medicinal product. Promotion of a medicinal product which does not comply with the SmPC is considered to constitute off-label promotion. The off-label promotion of medicinal products is prohibited in the EU. The applicable laws at both EU level and in the individual EU Member States also prohibit the direct-to-consumer advertising of prescription-only medicinal products. Violations of the rules governing the promotion of medicinal products in the EU could be penalized by administrative measures, fines and imprisonment.

Interactions between pharmaceutical companies and physicians are also governed by strict laws, regulations, industry self-regulation codes of conduct and physicians’ codes of professional conduct in the individual EU Member States. The provision of any inducement to physicians to prescribe, recommend, endorse, order, purchase, supply, use or administer a medicinal product is prohibited. A number of EU Member States have introduced additional rules requiring pharmaceutical companies to publically

53

disclose their interactions with physicians and to obtain approval from employers, professional organizations and/or competent authorities before entering into agreements with physicians. Violations of these rules could lead to the imposition of fines or imprisonment.

Laws, including those governing promotion, marketing and anti-kickback provisions, industry regulations and professional codes of conduct are often strictly enforced. Increasing regulatory scrutiny of the promotional activities of pharmaceutical companies has been observed in a number of EU Member States. The Bribery Act in the United Kingdom entered into force on 1 July 2011. This Act applies to any company incorporated in or “carrying on business” in the UK, irrespective of where in the world the alleged bribery activity occurs. Even though we strive for complete and continuous adherence to all laws and rules during our promotion and marketing activities, this Act could have implications for our interactions or those of Ferrer with physicians both in and outside the UK.

Payments made to physicians in certain EU Member States must be publically disclosed and this obligation will expand to other EU Member States. Moreover, agreements with physicians must often be the subject of prior notification and approval by the physician’s employer, his/her competent professional organization, and/or the competent authorities of the individual EU Member States. These requirements are provided in the national laws, industry codes, or professional codes of conduct, applicable in the EU Member States. Failure to comply with these requirements could result in reputational risk, public reprimands, administrative penalties, fines or imprisonment. Even in those countries where we are not directly responsible for the promotion and marketing of our products, inappropriate activity by our international distribution collaborators can have implications for us.

If we or any current or future collaborators fail to comply with applicable federal, state, local, or foreign regulatory requirements, we or they could be subject to a range of regulatory actions that could affect our or any collaborators’ ability to commercialize our products and could harm or prevent sales of the affected products, or could substantially increase the costs and expenses of commercializing and marketing our products. Any threatened or actual government enforcement action could also generate adverse publicity and require that we devote substantial resources that could otherwise be used in other aspects of our business.

We could be adversely affected by violations of applicable anti-corruption laws such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010.

Anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010, generally prohibit directly or indirectly giving, offering, or promising anything of value to improperly induce the recipient to act, or refrain from acting, in a manner that would confer a commercial advantage. The anti-bribery provisions of the U.S. Foreign Corrupt Practices Act generally prohibit directly or indirectly giving, offering or promising an inducement to a public official (broadly interpreted) to corruptly influence the official’s actions in order to obtain a commercial advantage. The U.K. Bribery Act of 2010 prohibits both domestic and international bribery, as well as bribery in both the private and public sectors. In addition, an organization that “fails to prevent bribery” by anyone associated with the organization may be charged under the U.K. Bribery Act unless the organization can establish the defense of having implemented “adequate procedures” to prevent bribery. In recent years, the U.S. Government has brought enforcement actions that resulted in significant monetary penalties against several multinational healthcare companies for violations of the U.S. Foreign Corrupt Practices Act stemming from illegal payments and other illegal benefits provided to non-U.S. healthcare professionals. We plan to adopt and implement policies and procedures designed to ensure that those involved in the marketing, sale, and distribution of our products are both aware of these legal requirements and committed to complying therewith. However, we cannot assure that these policies and procedures will protect us from potentially illegal acts committed by individual employees or agents. If we were found to be liable for anti-corruption law violations, we could be subject to criminal or civil penalties or other consequences that could have a material adverse effect on our business and financial condition.

If we do not establish additional strategic collaborations, we will have to undertake additional development and future commercialization efforts on our own, which would be costly and delay our ability to commercialize any future products.

An element of our business strategy is our intent to selectively collaborate with pharmaceutical, biotechnology and other companies to obtain assistance for the development and commercialization of ADASUVE and our product candidates. In October 2011, we entered into the Ferrer Agreement with Ferrer for the commercialization of ADASUVE in the Ferrer Territories. In May 2013, we entered into a commercial collaboration with Teva, granting Teva an exclusive license to develop and commercialize ADASUVE in the United States. In February 2016 we reacquired the U.S. rights for ADASUVE from Teva. We cannot be assured that we will be able to successfully commercialize ADASUVE in the U.S. As a result of our reacquisition of the U.S. rights to ADASUVE, we plan to identify a new U.S. commercial partner for ADASUVE in 2016, however, we cannot be assured that we will be successful or whether or not the terms of such collaboration would be on terms less favorable to us than those of the Teva

54

Agreement. We may never enter into additional strategic collaborations with third parties to develop and commercialize ADASUVE or our product candidates. Other than Ferrer, we do not currently have any strategic collaborations for ADASUVE or any of our product candidates. The Notes issued by Atlas in conjunction with our royalty securitization financing are secured by the right to receive royalty and milestone payments based on commercial sales of ADASUVE in the U.S. and our equity ownership in Atlas. In connection with the execution of the Merger Agreement, the holders of the Notes each entered into a participation agreement with Atlas pursuant to which Atlas agreed to grant to the holders of the Notes contractual rights to receive payments from Atlas upon the receipt of certain payments and achievement of certain milestones in respect of the commercialization of ADASUVE within the Unites States. We also entered into the Second Forbearance Agreement with the holders of the Notes in connection with the execution of the Merger Agreement. Pursuant to the terms of the Second Forbearance Agreement, the holders of the Notes agreed to forbear on exercising all rights and remedies under that the Indenture and the other documentation relating to the Notes and Atlas through the earlier of November 9, 2016 (subject to extension under certain circumstances) and the termination of the Merger Agreement. Pursuant to the terms of the Second Forbearance Agreement, the holders of the Notes also agreed to the cancellation of the Notes and the discharge of the Indenture in connection with the consummation of the Offer and to take any and all actions necessary to effect the foregoing. To date, royalties and milestone payments based on commercial sales of ADASUVE in the U.S. have not been sufficient to pay the amounts due under the Notes. If we are not successful in consummating the Offer and we do not voluntarily provide Atlas with the funds to make required payments as they come due, the holders of the Notes may foreclose on the equity we own in Atlas and we could lose rights to receive future payments related to U.S. rights to ADASUVE.

We face significant competition in seeking appropriate strategic collaborators, and these strategic collaborations can be intricate and time consuming to negotiate and document. We may not be able to negotiate additional strategic collaborations on acceptable terms, or at all. We are unable to predict when, if ever, we will enter into any additional strategic collaborations because of the numerous risks and uncertainties associated with establishing strategic collaborations. We are currently seeking collaborations to commercialize ADASUVE outside of the United States and the Ferrer Territories. If we are unable to negotiate additional strategic collaborations for ADASUVE outside of the United States and the Ferrer Territories, we may be unable to maximize ADASUVE’s commercial potential.

If we are unable to negotiate additional collaborations for ADASUVE or our product candidates we may be forced to curtail the development of a particular candidate, reduce or delay its development program, or one or more of our other development programs, delay its commercialization, or undertake development or commercialization activities at our own expense. In addition, we will bear all the risk related to the development of a product candidate. If we elect to increase our expenditures to fund development or commercialization activities on our own, we will need to obtain additional capital, which may not be available to us on acceptable terms, or at all. If we do not have sufficient funds, we will not be able to bring ADASUVE or our product candidates to market successfully and generate revenue or profit.

ADASUVE and any of our product candidates approved for marketing remain subject to ongoing regulatory review in the United States, the EU or in other countries. If we or any present or future collaborators fail to comply with the regulations, we could lose these approvals, and the sale of any future products could be suspended. If approval is denied or limited in a country, or if a country imposes post-marketing requirements, that decision could negatively affect our ability to market our product in such countries.

Even with regulatory approval to market a particular product candidate, the FDA, the EC or another foreign regulatory authority could condition approval on conducting additional costly post-approval studies or trials or could limit the scope of our approved labeling or could impose burdensome post-approval obligations, such as those required in the United States and in the post-marketing obligations required as part of a marketing authorization in the EU. Moreover, the product may later cause adverse effects that limit or prevent its widespread use, force us to withdraw it from the market, cause the FDA, the EC or another foreign regulatory authority to impose additional obligations or restriction on marketing, or impede or delay our ability to obtain regulatory approvals in additional countries. In addition, we will continue to be subject to FDA, EMA, EC and other foreign regulatory authority regulations, as well as periodic inspections to ensure adherence to applicable regulations. After receiving marketing approval, the FDA, the EC and other foreign regulatory authorities could impose extensive regulatory requirements on the manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion, distribution, and record keeping related to the product. The approval of the ADASUVE NDA requires that we implement, administer and assess at regular intervals a REMS program that, among other things, limits the use of ADASUVE to healthcare facilities enrolled in the ADASUVE REMS program.

In February 2016, we entered into the Teva Amendment to reacquire the ADASUVE U.S. commercial rights for and restructure our obligations under the Teva Note.

55

We plan to identify a new U.S. commercial partner for ADASUVE in 2016, however, we cannot be assured that we will be successful or whether or not the terms of such collaboration would be on terms less favorable to us than those of the Teva Agreement. Notes issued by Atlas in conjunction with the royalty securitization financing are secured by the right to receive U.S. ADASUVE royalty and milestone payments and our equity ownership in Atlas. In connection with the execution of the Merger Agreement, the holders of the Notes each entered into a participation agreement with Atlas pursuant to which Atlas agreed to grant to the holders of the Notes contractual rights to receive payments from Atlas upon the receipt of certain payments and achievement of certain milestones in respect of the commercialization of ADASUVE within the Unites States. We also entered into the Second Forbearance Agreement with the holders of the Notes in connection with the execution of the Merger Agreement. Pursuant to the terms of the Second Forbearance Agreement, the holders of the Notes agreed to forbear on exercising all rights and remedies under that the Indenture and the other documentation relating to the Notes and Atlas through the earlier of November 9, 2016 (subject to extension under certain circumstances) and the termination of the Merger Agreement. Pursuant to the terms of the Second Forbearance Agreement, the holders of the Notes also agreed to the cancellation of the Notes and the discharge of the Indenture in connection with the consummation of the Offer and to take any and all actions necessary to effect the foregoing. To date, royalties and milestone payments based on commercial sales of ADASUVE in the U.S. have not been sufficient to pay the amounts due under the Notes. If we are not successful in consummating the Offer and we do not voluntarily provide Atlas with the funds to make required payments as they come due, the Note holders may foreclose on the equity we own in Atlas and we could lose rights to receive future payments related to U.S. rights to ADASUVE.

As a condition to marketing authorization for ADASUVE granted by the EC in the EU, we are responsible for the conduct and funding of post-marketing studies, including (i) a benzodiazepine interaction study, which has been completed, (ii) a controlled study to determine ADASUVE’s effect on cardiac rhythms, or a thorough QTc study, with two doses of ADASUVE, which has been completed, (iii) a clinical program designed to evaluate the safety and efficacy of ADASUVE in agitated adolescent patients, (iv) an observational clinical study, and (v) a drug utilization study. Results of the benzodiazepine interaction study and the thorough QTc study have been submitted to the EMA. As part of the transfer of the MAA to Ferrer in June 2015, Ferrer assumed responsibility for completing any outstanding studies.

The costs associated with development and approval of study protocols and the completion of studies and clinical trials are significant. There are risks involved with relying on our own capabilities to perform the tasks required by the post-market studies for ADASUVE, as well as with entering into arrangements with third parties to perform these services. If we enter into an arrangement with a third party or parties to perform the tasks required for the ADASUVE post-market studies and trials, the expense of such outsourcing could be significant, decreasing the profitability of ADASUVE. Additionally, any third party with whom we may collaborate may not fulfill its obligations or carry out activities sufficiently to satisfy FDA, EC, EMA or other U.S. or foreign regulatory authority standards, which could result in increased expenses needed to remediate any deficiencies or could even result in an FDA, EC, EMA or other U.S. or foreign regulatory authority enforcement action, including the imposition of civil money penalties and the withdrawal of approval of the product in the U.S. Finally, the data derived from any post-market study or trial could result in additional restrictions on the commercialization of ADASUVE through changes to the approved ADASUVE label, a more burdensome REMS program, the imposition of additional post-market studies or trials, or could even lead to the withdrawal of the approval of the product.

If we or any current or future collaborators fail to comply with the regulatory requirements of the FDA, the EMA, the EC or other applicable U.S. and foreign regulatory authorities, or previously unknown problems with any future products, suppliers or manufacturing processes are discovered, we or our collaborators could be subject to administrative or judicially imposed sanctions, including:

56

If we or our current or future collaborators are subject to administrative or judicially-imposed sanctions arising out of enforcement of the FDA, EU or other applicable U.S. and foreign laws, it could impair our ability to manufacture and the ability of our current and future collaborators to successfully market ADASUVE, even if such an enforcement action does not relate specifically to ADASUVE. Such enforcement could have a significant impact on our financial condition and results.

Problems with the third parties that manufacture the API in ADASUVE or our product candidates may delay our clinical trials or subject us to liability.

We do not currently own or operate manufacturing facilities for clinical or commercial production of the API used in ADASUVE or any of our product candidates. We have no experience in API manufacturing, and we lack the resources and the capability to manufacture any of the APIs used in ADASUVE and our product candidates, on either a clinical or commercial scale. As a result, we rely on third parties to supply the API used in ADASUVE and each of our product candidates. We expect to continue to depend on third parties to supply the API for ADASUVE and our current and future product candidates and to supply the API for ADASUVE in commercial quantities.

An API manufacturer must meet high precision and quality standards for that API to meet regulatory specifications and comply with regulatory requirements. A contract manufacturer is subject to ongoing periodic unannounced inspection by the FDA and corresponding state and foreign authorities to ensure strict compliance with cGMP and other applicable government regulations and corresponding foreign standards. Additionally, a contract manufacturer must pass a pre-approval inspection by the FDA and corresponding foreign authorities to ensure strict compliance with cGMP prior to the FDA’s or corresponding foreign authorities’ approval of any product candidate for marketing. A contract manufacturer’s failure to conform to cGMP could result in a refusal by the FDA or a corresponding foreign authority to approve or a delay in their approval of a product candidate for marketing. We are ultimately responsible for confirming that the APIs used in ADASUVE and our product candidates are manufactured in accordance with applicable regulations.

Our third-party suppliers may not carry out their contractual obligations or meet our deadlines. In addition, the API they supply to us may not meet our specifications and quality policies and procedures or they may not be able to supply the API in commercial quantities. If we need to find alternative suppliers of the API used in ADASUVE or any of our product candidates, we may not be able to contract for such supplies on acceptable terms, if at all. Any such failure to supply or delay caused by such contract manufacturers would have an adverse effect on our ability to continue clinical development of our product candidates or commercialize ADASUVE.

If our third-party drug suppliers fail to achieve and maintain high manufacturing standards in compliance with cGMP regulations, we could be subject to certain product liability claims in the event such failure to comply resulted in defective products that caused injury or harm.

Unless our preclinical studies demonstrate an acceptable safety profile of our product candidates, we will not be able to pursue clinical development or commercialize our product candidates.

We must satisfy the FDA and other regulatory authorities abroad, through extensive preclinical studies, that our product candidates have an acceptable safety profile. Our Staccato system creates a condensation aerosol from drug compounds, and there currently are no approved products that use a similar method of drug delivery other than ADASUVE. Companies developing other inhalation products have not defined or successfully completed the types of preclinical studies we believe will be required for submission to regulatory authorities as we seek approval to conduct our clinical trials. We may not have conducted or may not conduct in the future the types of preclinical testing ultimately required by regulatory authorities, or future preclinical tests may indicate that our product candidates are not safe for use in humans. Preclinical testing is expensive, can take many years and has an uncertain outcome. In addition, success in initial preclinical testing does not ensure that later preclinical testing will be successful.

57

We may experience numerous unforeseen events during, or as a result of, the preclinical testing process, which could delay or prevent our ability to develop or commercialize our product candidates, including:

Any such events would increase our costs and could delay or prevent our ability to conduct clinical testing and commercialize our product candidates, which could adversely impact our business, financial condition and results of operations.

Failure or delay in commencing or completing clinical trials for our product candidates could harm our business.

Other than for ADASUVE, we have not completed all the clinical trials necessary to support an application with the FDA or other regulatory authorities abroad for approval to market any of our product candidates other than for ADASUVE in the United States and the European Union. Future clinical trials may be delayed or terminated as a result of many factors, including:

Any delay in commencing or completing clinical trials for our product candidates could delay commercialization of our product candidates and harm our business, financial condition and results of operations. It is possible that none of our product candidates will successfully complete clinical trials or receive regulatory approval, which would severely harm our business, financial condition and results of operations.

If our product candidates do not meet safety and efficacy endpoints in clinical trials, they will not receive regulatory approval, and we will be unable to market them.

The clinical development and regulatory approval process is extremely expensive and takes many years. Prior clinical trial program designs and results are not necessarily predictive of future clinical trial designs or results. Initial results may not be confirmed upon full analysis of the detailed results of a trial. Product candidates in later stage clinical trials may fail to show the desired safety and efficacy despite having progressed through initial clinical trials with acceptable endpoints. Whether an approval will be granted, and the timing of such approval cannot be accurately predicted. If we fail to obtain regulatory approval for ADASUVE in markets

58

outside of the United States and the Ferrer Territories or for our other product candidates in any markets where we seek regulatory approval, we will be unable to market and sell them in those locations and therefore we may never be profitable.

As part of the regulatory process, we must conduct clinical trials for each product candidate to demonstrate safety and efficacy to the satisfaction of the FDA, the EMA, the EC and other regulatory authorities abroad. The number and design of clinical trials that will be required varies depending on the product candidate, the condition being evaluated, the trial results and regulations applicable to any particular product candidate. In June 2008, we announced that our Phase 2a proof-of-concept clinical trial of AZ-002 (Staccato alprazolam) for the treatment of panic disorder did not meet either of its two primary endpoints. In September 2009, we announced that our Phase 2b clinical trial of AZ-104 (Staccato loxapine, low-dose) for the treatment of migraine did not meet its primary endpoint.

If our product candidates fail to show a clinically significant benefit compared to placebo, they will not be approved for marketing.

The design of our clinical trials is based on many assumptions about the expected effect of our product candidates, and if those assumptions prove incorrect, the clinical trials may not produce statistically significant results. For example, in 2008 we released the preliminary results from our Phase 2a clinical trial with AZ-002 in patients with panic disorder, a separate indication from our current AZ-002 indication of ARS. The study did not meet its two primary endpoints, which were the effect of AZ-002 on the incidence of a doxapram-induced panic attack and the effect of AZ-002 on the duration of a doxapram-induced panic attack, both as compared with placebo. Our Staccato system is not similar to other approved drug delivery methods, and there is no precedent for the application of detailed regulatory requirements to our product candidates. We cannot assure you that the design of, or data collected from, the clinical trials of our product candidates will be sufficient to support the FDA, the EC and other foreign regulatory approvals.

Regulatory authorities may not approve our product candidates even if they meet safety and efficacy endpoints in clinical trials.

The FDA, the EC and other foreign regulatory agencies can delay, limit or deny marketing approval for many reasons, including:

Part of the regulatory approval process includes compliance inspections of manufacturing facilities, processes, and products to ensure adherence to applicable regulations and guidelines. The regulatory agency may delay, limit or deny marketing approval of our other product candidates as a result of such inspections. Any delay in, or failure to receive or maintain, approval for any of our product candidates could prevent us from ever generating meaningful revenues or achieving profitability.

Our product candidates may not be approved even if they achieve their endpoints in clinical trials. Regulatory agencies, including the FDA, the EMA, the EC or their advisors may disagree with our trial design and our interpretations of data from preclinical studies and clinical trials. Regulatory agencies may change requirements for approval even after a clinical trial design has been approved. For example, ADASUVE and our other product candidates combine drug and device components in a manner that the FDA considers to meet the definition of a combination product under FDA regulations. The FDA exercises significant discretion over the regulation of combination products, including the discretion to require separate marketing applications for the drug and device components in a combination product. ADASUVE and our product candidates are being regulated as drug products under the NDA process administered by the FDA. The FDA could in the future require additional regulation of ADASUVE or our product candidates under the medical device provisions of the FDCA. Our systems are designed to comply with cGMP and, where applicable, the QSR, which sets forth the FDA’s cGMP requirements for medical devices, and other applicable government regulations and corresponding foreign standards. If we fail to comply with these regulations, it could have a material adverse effect on our business and financial condition.

Regulatory agencies also may approve a product candidate for fewer or more limited indications than requested or may grant approval subject to the performance of post-marketing studies, such as the FDA’s requirement that we perform a Phase 4 observational study and a study in adolescent patients for ADASUVE. Similarly, as a condition to the marketing authorization for ADASUVE in the EU, we were responsible for the conduct and funding of post-authorization studies, including (i) a benzodiazepine interaction study, which has been completed, (ii) a controlled study to determine ADASUVE’s effect on cardiac rhythms, or a thorough QTc study, with two doses of ADASUVE, which has been completed, (iii) a clinical program designed to evaluate the safety

59

and efficacy of ADASUVE in agitated adolescent patients, (iv) an observational clinical study, and (v) a drug utilization study. In addition, regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates. As part of the transfer of the MAA to Ferrer in June 2015, Ferrer assumed responsibility for completing any outstanding studies

We rely on third parties to conduct our preclinical studies and our clinical trials. If these third parties do not perform as contractually required or expected, we may not be able to obtain regulatory approval for our product candidates, or we may be delayed in doing so.

We rely on third parties, such as contract research organizations, medical institutions, academic institutions, clinical investigators and contract laboratories, to conduct our preclinical studies and clinical trials. We are responsible for confirming that our preclinical studies are conducted in accordance with applicable regulations and that each of our clinical trials is conducted in accordance with its general investigational plan and protocol. The FDA and equivalent other country regulatory authorities require us to comply with regulations and standards, commonly referred to as Good Laboratory Practices, or GLP, for conducting and recording the results of our preclinical studies and with Good Clinical Practices, or GCP, for conducting, monitoring, recording and reporting the results of clinical trials, to assure that data and reported results are accurate and that the clinical trial participants are adequately protected. Our reliance on third parties does not relieve us of these responsibilities. If the third parties conducting our clinical trials do not perform their contractual duties or obligations, do not meet expected deadlines, fail to comply with the FDA or and equivalent other country regulatory authorities GLP or GCP regulations and standards, do not adhere to our clinical trial protocols or otherwise fail to generate reliable clinical data, we may need to enter into new arrangements with alternative third parties and our clinical trials may be extended, delayed or terminated or may need to be repeated, and we may not be able to obtain regulatory approval for or commercialize the product candidate being tested in such trials.

If we experience problems with the manufacturers of components of ADASUVE or our product candidates, our ability to supply ADASUVE and our other product candidates will be impaired, our sales may be lower than expected and our development programs may be delayed and we may be subject to liability.

We outsource the manufacturing of the components of our Staccato system, including the printed circuit boards, the plastic airways, and the chemical heat packages to be used in our commercial single dose device. We have no experience in the manufacturing of components, other than our chemical heat packages, and we currently lack the resources and the capability to manufacture them, on either a clinical or commercial scale. As a result, we rely on third parties to supply these components. We expect to continue to depend on third parties to supply these components for ADASUVE and our current product candidates and any devices based on the Staccato system we develop in the foreseeable future.

The third-party suppliers of the components of our Staccato system must meet high precision and quality standards for our finished devices to comply with regulatory requirements. A contract manufacturer is subject to ongoing periodic unannounced inspection by the FDA and corresponding state and foreign authorities to ensure that our finished devices remain in strict compliance with the QSR, and other applicable government regulations and corresponding foreign standards. We are ultimately responsible for confirming that the components used in the Staccato system are manufactured in accordance with specifications, standards and procedures necessary to ensure that our finished devices comply with the QSR or other applicable regulations.

Our third party suppliers may not comply with their contractual obligations or meet our deadlines, or the components they supply to us may not meet our specifications and quality policies and procedures. If we need to find alternative suppliers of the components used in the Staccato system, we may not be able to contract for such components on acceptable terms, if at all. Any such failure to supply or delay caused by such contract manufacturers would have an adverse effect on our ability to manufacture commercial quantities of ADASUVE and on our ability to continue clinical development of our product candidates or commercialize ADASUVE. In April 2014, we contracted with Autoliv to build two additional manufacturing cells, but we or a third party may not be able to use the cells to manufacture heat packages of sufficient quality, in sufficient quantity or at low enough cost to become profitable.

In addition, the heat packages used in the single dose version of our Staccato system are manufactured using certain energetic, or highly combustible, materials that are used to generate the rapid heating necessary for vaporizing the drug compound while avoiding degradation. Manufacture of products containing energetic materials is regulated by the U.S. government. We have entered into a manufacture agreement with Autoliv for the manufacture of the heat packages in the commercial design of our single dose version of our Staccato system. If Autoliv fails to manufacture the heat packages to the necessary specifications, or does not carry out its contractual obligations to supply our heat packages to us, or if the FDA requires different manufacturing or quality standards than those set forth in our manufacture agreement, our clinical trials or commercialization efforts may be delayed, suspended or terminated

60

while we seek additional suitable manufacturers of our heat packages, which may prevent us from commercializing ADASUVE or our product candidates that utilize the single dose version of the Staccato system.

In the first quarter of 2015, Teva and Ferrer provided longer-term, ADASUVE orders, allowing us to manufacture ADASUVE in a consistent manner to take advantage of the efficiencies of continued batch production. During the third quarter of 2015, we completed all required ADASUVE production for Teva’s and Ferrer’s ADASUVE orders. As a result, we suspended our ADASUVE commercial manufacturing operations. We plan for ADASUVE commercial production to resume in the future as additional commercial product is required by Ferrer or any future collaborators. We may also consider contracting with third party manufacturers for ADASUVE units if deemed more efficient, including third-party manufacturers with multi-product facilities. We cannot predict when, if ever, we will begin to again commercially manufacture ADASUVE. If we do not restart our commercial manufacturing, we cannot predict if third-party manufacturers will be able to produce ADASUVE at a price which would allow us to generate profits.

Product candidates that we may develop may require expensive carcinogenicity tests.

We combine small molecule drugs with our Staccato system to create proprietary product candidates. Some of these drugs may not have previously undergone carcinogenicity testing that is now generally required for marketing approval. We may be required to perform carcinogenicity testing with product candidates incorporating drugs that have not undergone carcinogenicity testing or may be required to do additional carcinogenicity testing for drugs that have undergone such testing. Any carcinogenicity testing we are required to complete will increase the costs to develop a particular product candidate and may delay or halt the development of such product candidate.

If some or all of our patents expire, are invalidated or are unenforceable, or if some or all of our patent applications do not yield issued patents or yield patents with narrow claims, competitors may develop competing products using our or similar intellectual property and our business will suffer.

Our success will depend in part on our ability to obtain and maintain patent and trade secret protection for our technologies, ADASUVE and our product candidates both in the United States and other countries. We do not know whether any patents will issue from any of our pending or future patent applications. In addition, a third party may successfully circumvent our patents. Our rights under any issued patents may not provide us with sufficient protection against competitive products or otherwise cover commercially valuable products or processes.

The degree of protection for our proprietary technologies, ADASUVE and our product candidates is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:

On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. The United States Patent and Trademark Office has developed regulations and procedures to govern administration of the Leahy-Smith Act, but many of the substantive changes to patent law associated with the

61

Leahy-Smith Act, particularly the first inventor to file provisions, only became effective 18 months after its enactment. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.

Even if valid and enforceable patents cover ADASUVE, our product candidates and our technologies, the patents will provide protection only for a limited amount of time.

Our current patents or any future patents that may be issued regarding ADASUVE or our product candidates or methods of using them, can be challenged by our competitors who can argue that our patents are invalid and/or unenforceable. Third parties may challenge our rights to, or the scope or validity of, our patents. Patents also may not protect ADASUVE or our product candidates if competitors devise ways of making these or similar product candidates without legally infringing our patents. The FDCA and the FDA regulations and policies provide incentives to manufacturers to challenge patent validity or create modified, non-infringing versions of a drug or device in order to facilitate the approval of generic substitutes. These same types of incentives encourage manufacturers to submit new drug applications that rely on literature and clinical data not prepared for or by the drug sponsor.

Our potential strategic collaborators’ ability to obtain patents is uncertain because, to date, some legal principles remain unresolved, there has not been a consistent policy regarding the breadth or interpretation of claims allowed in patents in the United States, and the specific content of patents and patent applications that are necessary to support and interpret patent claims is highly uncertain due to the complex nature of the relevant legal, scientific and factual issues. Furthermore, the policies governing pharmaceutical and medical device patents outside the United States may be even more uncertain. Changes in either patent laws or interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection.

We also rely on trade secrets to protect our technology, especially where we do not believe that patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. The employees, consultants, contractors, outside scientific collaborators and other advisors of our company and our strategic collaborators may unintentionally or willfully disclose our confidential information to competitors. Enforcing a claim that a third party illegally obtained and is using our trade secrets is expensive and time consuming and the outcome is unpredictable. Failure to protect or maintain trade secret protection could adversely affect our competitive business position.

Our research and development collaborators may have rights to publish data and other information in which we have rights. In addition, we sometimes engage individuals or entities to conduct research that may be relevant to our business. The ability of these individuals or entities to publish or otherwise publicly disclose data and other information generated during the course of their research is subject to certain contractual limitations. These contractual provisions may be insufficient or inadequate to protect our trade secrets and may impair our patent rights. If we do not apply for patent protection prior to such publication or if we cannot otherwise maintain the confidentiality of our technology and other confidential information, then our ability to receive patent protection or protect our proprietary information may be jeopardized.

Litigation or other proceedings or third-party claims of intellectual property infringement could require us to spend time and money and could shut down some of our operations.

Our commercial success depends in part on not infringing patents and proprietary rights of third parties. Others have filed, and in the future are likely to file, patent applications covering products that are similar to ADASUVE or our product candidates, as well as methods of making or using similar or identical products. We are aware of certain pending U.S. patent applications related generally to a systemic respiratory delivery of loxapine. If these patent applications result in issued patents and we wish to use the claimed technology, we would need to obtain a license from the third party. We may not be able to obtain these licenses at a reasonable cost, if at all.

In addition, administrative proceedings, such as interferences and reexaminations before the U.S. Patent and Trademark Office, could limit the scope of our patent rights. We may incur substantial costs and diversion of management and technical personnel as a result of our involvement in such proceedings. In particular, our patents and patent applications may be subject to interferences in which the priority of invention may be awarded to a third party. We do not know whether our patents and patent applications would be entitled to priority over patents or patent applications held by such a third party. Our issued patents may also be subject to reexamination proceedings. We do not know whether our patents would survive reexamination in light of new questions of patentability that may be raised following their issuance.

62

Third parties may assert that we are employing their proprietary technology or their proprietary products without authorization. In addition, third parties may already have or may obtain patents in the future and claim that use of our technologies or our products infringes these patents. We could incur substantial costs and diversion of management and technical personnel in defending against any of these claims. Furthermore, parties making claims against us may be able to obtain injunctive or other equitable relief, which could effectively block our ability to further develop, commercialize and sell any future products and could result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties. We may not be able to obtain these licenses at a reasonable cost, if at all. In that event, we could encounter delays in product introductions while we attempt to develop alternative methods or products. In the event we cannot develop alternative methods or products, we may be effectively blocked from developing, commercializing or selling any future products. Defense of any lawsuit or failure to obtain any of these licenses would be expensive and could prevent us from commercializing any future products.

We review from time to time publicly available information concerning the technological development efforts of other companies in our industry. If we determine that these efforts violate our intellectual property or other rights, we intend to take appropriate action, which could include litigation. Any action we take could result in substantial costs and diversion of management and technical personnel in enforcing our patents or other intellectual property rights against others. Furthermore, the outcome of any action we take to protect our rights may not be resolved in our favor.

Competition in the pharmaceutical industry is intense. If our competitors are able to develop and market products that are more effective, safer or less costly than ADASUVE or any future products that we may develop, our commercial opportunity will be reduced or eliminated.

We face competition from established as well as emerging pharmaceutical and biotechnology companies, academic institutions, government agencies and private and public research institutions. Our commercial opportunity will be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer side effects or are less expensive than ADASUVE or any future products that we may develop and commercialize. In addition, significant delays in the development or commercialization of ADASUVE or our product candidates could allow our competitors to bring products to market before us and impair our ability to commercialize ADASUVE or our product candidates.

We anticipate that ADASUVE will compete with various injectable formulations of other antipsychotic and benzodiazepine drugs and oral, orally-disintegrating tablet and liquid formulations of other antipsychotic drugs and benzodiazepine drugs. Only the injectable antipsychotics are approved for the treatment of agitation.

We anticipate that, if approved, AZ-002 would compete with the oral tablet forms of alprazolam and possibly IV, oral and rectal forms of other benzodiazepines.

We anticipate that, if approved, AZ-007 would compete with non-benzodiazepine GABA-A receptor agonists, selective melatonin receptor agonists, orexin receptor antagonists or histamine (H1) receptor antagonists that are approved or in development. We are aware of more than 13 approved generic versions of zolpidem, or zaleplon, oral tablets, including one version of zolpidem intended to treat middle of the night awakening, that has been approved by the FDA. Additionally, we are aware of one product that completed Phase 2 development for the treatment of insomnia.

Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Established pharmaceutical companies may invest heavily to discover quickly and develop novel compounds or drug delivery technology that could make ADASUVE or our product candidates obsolete. Smaller or early stage companies may also prove to be significant competitors, particularly through strategic collaborations with large and established companies. In addition, these third parties compete with us in recruiting and retaining qualified scientific, sales, marketing, and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies and technology licenses complementary to our programs or advantageous to our business. Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA or equivalent other country regulatory authorities’ approval or discovering, developing and commercializing products before we do. If we are not able to compete effectively against our current and future competitors, our business will not grow and our financial condition will suffer.

63

If we lose our key personnel or are unable to attract and retain additional personnel, we may be unable to develop or commercialize ADASUVE or our product candidates.

We are highly dependent on our President and Chief Executive Officer, Thomas B. King, the loss of whose services might adversely impact the achievement of our objectives. In addition, recruiting and retaining qualified clinical, scientific and engineering personnel to manage clinical trials of our product candidates and to perform future research and development work will be critical to our success. There is currently a shortage of skilled executives in our industry, which is likely to continue. As a result, competition for skilled personnel is intense and the turnover rate can be high. Although we believe we will be successful in attracting and retaining qualified personnel, competition for experienced management and clinical, scientific and engineering personnel from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms. In addition, we do not have employment agreements with any of our employees, and they could leave our employment at will. We have change of control agreements with our executive officers and vice presidents that provide for certain benefits upon termination or a change in role or responsibility in connection with a change of control of our company. We do not maintain life insurance policies on any employees. Failure to attract and retain personnel would prevent us from developing and commercializing ADASUVE and our product candidates.

The reduction of our workforce in 2015, and any future workforce and expense reductions, may have an adverse impact on our internal programs and may divert management attention.

We have substantially reduced the number of our executive and non-executive officers within the last 12 months. Additionally, the suspension of our ADASUVE commercial production included dismissal of a large number of our staff, some of whom had advanced or specialized skills. As a result, our headcount has decreased from 75 full-time employees at March 31, 2015 to approximately 27 full time employees at March 31, 2016. This workforce reduction was primarily implemented to preserve our capital resources and to manage our operating expenses. This workforce reduction may also limit our ability to complete our corporate objectives. We may also be required to implement further workforce and expense reductions in the future. Further workforce and expense reductions could result in reduced progress on our internal programs. In addition, employees, whether or not directly affected by a reduction, may seek future employment with our business partners or competitors. While our employees are required to sign a confidentiality agreement at the time of hire, the confidential nature of certain proprietary information may not be maintained in the course of any such future employment. In addition, the implementation of expense reduction programs may result in the diversion of efforts of our executive management team and other key employees, which could adversely affect our business.

If plaintiffs bring product liability claims or lawsuits (including, but not limited to, consumer protection, mass tort or class actions) against us or our present and future collaborators, we may incur substantial liabilities and may be required to limit commercialization of ADASUVE or product candidates that we may develop.

As the supplier of ADASUVE to Ferrer and any future collaborators, we are obligated to deliver commercial supply from a qualified manufacturing facility in accordance with certain specifications. In addition, we are obligated to supply ADASUVE free from product defects or manufacturing defects from our manufacture of ADASUVE. The development, manufacture, testing, marketing and sale of combination pharmaceutical and medical device products, like ADASUVE, entail significant risk of product liability claims, lawsuits (including, but not limited to consumer protection, mass tort or class actions), safety alerts or recalls. We may be held liable if any product we develop or manufacture causes injury or is found otherwise unsuitable or unsafe during product design testing, manufacturing, marketing or sale, including, but not limited to quality issues, component failures, manufacturing flaws, unanticipated or improper uses of ADASUVE or any future products, design defects, inadequate disclosure of product-related risks or product-related information, or for unlawful, unfair or fraudulent competition or business practices relating to such products. Side effects of, or design or manufacturing defects in, the products tested or commercialized by us or any collaborator could result in exacerbation of a clinical trial participant or patient’s condition, serious injury or impairment, even death and/or out-of-pocket expenditures. This could result in product liability claims, lawsuits, safety alerts and/or recalls for ADASUVE or any future products, including those in clinical testing, to be commercialized, or already commercialized. Product liability claims or lawsuits may be brought by individuals seeking relief for themselves, by persons seeking to represent a class of claimants/plaintiffs, or by a large number of individual claimants in a coordinated or mass tort litigation or class action. We cannot predict the frequency, outcome, or cost to defend or resolve such product liability claims or lawsuits.

While we have not had to defend against any product liability claims or other lawsuits to date, we face greater risk of product liability claims or lawsuits as we or any collaborator commercialize ADASUVE or other future products. As ADASUVE or any future product is more widely prescribed, we believe it is likely that product liability claims or lawsuits will eventually be brought against us. Regardless of merit or eventual outcome, such claims or lawsuits may result in decreased demand for any products or product candidates that we may develop, injury to our reputation, withdrawal of clinical trials, issuance of safety alerts, recall of products under investigation or already commercialized, costs and legal fees to defend and resolve litigation, injunctive relief, disgorgement of

64

profits, or substantial monetary awards to clinical trial participants or patients, loss of revenue, and the inability to commercialize any products we develop. Safety alerts or recalls could result in the FDA or similar government agencies in the United States, or abroad, investigating or bringing enforcement actions regarding any products and/or practices, with resulting significant costs and negative publicity, all of which could materially adversely affect us.

Product liability insurance is expensive, can be difficult to obtain and may not be available in the future on acceptable terms, if at all. We currently have product liability insurance that covers commercial product and clinical trials. Partly as a result of product liability lawsuits related to pharmaceutical and medical device products, product liability and other types of insurance have become more difficult and costly for pharmaceutical and medical device companies to obtain. Insurance may be prohibitively expensive, or may not fully cover our potential liabilities. Inability to maintain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims or lawsuits could impede or negatively affect the commercialization of ADASUVE or our product candidates. If we are sued for any injury caused by any product, our liability could exceed our insurance coverage and total assets. In addition, there is no guarantee that insurers will pay for defense and indemnity of claims or lawsuits or that coverage will be adequate or otherwise available.

A successful claim or lawsuit brought against us in excess of available insurance coverage could subject us to significant liabilities and could have a materially adverse effect on our business, financial condition, results of operations and growth prospects. Such claims could also harm our reputation and the reputation of ADASUVE or any future products, adversely affecting our ability to develop and market any products successfully. In addition, defending a product liability claim or lawsuit is expensive and can divert the attention of key employees from operating our business.

Product recalls and safety alerts may be issued at our discretion or at the discretion of our suppliers, collaborators, government agencies, and other entities that have regulatory authority for medical device and pharmaceutical sales. Any recall of ADASUVE could materially adversely affect our business by rendering us unable to sell ADASUVE for some time, causing us to incur significant recall costs and by adversely affecting our reputation. A recall could also result in product liability claims.

Our product candidate AZ-002 contains a drug substance that is regulated by the U.S. Drug Enforcement Administration. Failure to comply with applicable regulations and requirements could harm our business.

The Controlled Substances Act imposes various registration, recordkeeping and reporting requirements, procurement and manufacturing quotas, labeling and packaging requirements, security controls and a restriction on prescription refills on certain pharmaceutical products. The DEA regulates drug substances as Schedule I, II, III, IV or V substances, with Schedule I substances considered to present the highest potential for abuse and Schedule V substances the lowest potential for abuse relative to the other schedules in the CSA. Alprazolam, the API in AZ-002, is regulated as a Schedule IV substance and zaleplon, the API in AZ-007, is regulated as a Schedule IV substance. AZ-002 and AZ-007 are subject to DEA regulations relating to registration, security, record keeping and reporting, distribution and, if approved, physician prescription procedures, and DEA regulations may impact the availability of the scheduled substance available for clinical trials and commercial distribution. The DEA periodically inspects facilities for compliance with its rules and regulations. Failure to comply with current and future regulations of the DEA could lead to a variety of sanctions, including revocation, or denial of renewal, of DEA registrations, injunctions, or civil or criminal penalties and could harm our business, financial condition and results of operations.

The single dose version of our Staccato system contains materials that are regulated by the U.S. government, and failure to comply with applicable regulations could harm our business.

The single dose version of our Staccato system uses energetic materials to generate the rapid heating necessary for vaporizing the drug, while avoiding degradation. Manufacture of products containing energetic materials is controlled by the Bureau of Alcohol, Tobacco, Firearms and Explosives, or ATF. Technically, the energetic materials used in our Staccato system are classified as “low explosives,” and the ATF has granted us a license/permit for the manufacture of such low explosives. Additionally, due to inclusion of the energetic materials in our Staccato system, the United States Department of Transportation, or DOT, might regulate shipments of the single dose version of our Staccato system. However, the DOT has granted the single dose version of our Staccato system “Not Regulated as an Explosive” status. Failure to comply with the current and future regulations of the ATF or DOT could subject us to future liabilities and could harm our business, financial condition and results of operations. Furthermore, these regulations could restrict our ability to expand our facilities or construct new facilities or could require us to incur other significant expenses in order to maintain compliance.

65

We use hazardous chemicals and highly combustible materials in our business. Any claims relating to improper handling, storage or disposal of these materials could be time consuming and costly.

Our research and development processes involve the controlled use of hazardous materials, including chemicals. We also use energetic materials in the manufacture of the chemical heat packages that are used in our single dose devices. Our operations produce hazardous waste. We cannot eliminate the risk of accidental contamination or discharge or injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We could be subject to civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials. In addition, claimants may sue us for injury or contamination that results from our use of these materials and our liability may exceed our total assets. Compliance with environmental and other laws and regulations may be expensive, and current or future regulations may impair our research, development or production efforts.

Certain of our suppliers are working with these types of hazardous and energetic materials in connection with our component manufacturing agreements. In the event of a lawsuit or investigation, we could be held responsible for any injury caused to persons or property by exposure to, or release of, these hazardous and energetic materials. Further, under certain circumstances, we have agreed to indemnify our suppliers against damages and other liabilities arising out of development activities or products produced in connection with these agreements.

We will need to implement additional systems, procedures and controls in the future as we grow and to satisfy new reporting requirements as a commercial entity.

Numerous laws and regulations affect commercial companies, including, but not limited to, the Federal Anti-Kickback, False Claims Act, the Federal Physician Payment Sunshine Act, the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010. The rules make it more difficult and costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage as compared to the policies generally available to public companies. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or our board committees or as executive officers.

Compliance with the Federal Anti-Kickback, False Claims Act, the Federal Physician Payment Sunshine Act, the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010 and other regulations will continue to increase our costs and require additional management resources. As we grow, we will need to continue to implement additional reporting systems, procedures and controls to satisfy new reporting requirements. We currently do not have an internal audit group. In addition, we may need to hire additional legal and accounting staff with appropriate experience and technical knowledge, and we cannot assure you that if additional staffing is necessary that we will be able to do so in a timely fashion.

Our business is subject to complex corporate governance, public disclosure and accounting requirements that could adversely affect our business and financial results.

We are subject to changing rules and regulations of federal and state governments, the SEC, and the NASDAQ Capital Market. These entities have issued a significant number of new and increasingly complex requirements and regulations over the course of the last several years and continue to develop additional regulations and requirements. On July 21, 2010, the Dodd-Frank Wall Street Reform and Protection Act, or the Dodd-Frank Act, was enacted. The Dodd-Frank Act contains significant corporate governance and executive compensation-related provisions, some of which the SEC, has implemented by adopting additional rules and regulations in areas such as the compensation of executives, referred to as “say-on-pay.” We cannot assure you that we are or will be in compliance with all potentially applicable regulations. If we fail to comply with the Sarbanes Oxley Act of 2002, the Dodd-Frank Act and associated SEC rules, or any other regulations or if our interpretations of these rules and regulations differ from the regulating bodies, we could be subject to a range of consequences, including restrictions on our ability to sell equity securities or otherwise raise capital funds, the de-listing of our common stock from the NASDAQ Capital Market, suspension or termination of our clinical trials, restrictions on future products or our manufacturing processes, significant fines, or other sanctions or litigation. Any of such consequences could have a material adverse effect on our business, results of operations and the price of our common stock. Our efforts to comply with these requirements have resulted in, and are likely to continue to result in, an increase in expenses and a diversion of management’s time from other business activities.

66

Our facility is located near known earthquake fault zones, and the occurrence of an earthquake or other catastrophic disaster could damage our facility and equipment, which could cause us to curtail or cease operations.

Our facility, which is the location where the final manufacturing of our product occurs, is located in the San Francisco Bay Area near known earthquake fault zones and, therefore, is vulnerable to damage from earthquakes. We are also vulnerable to damage from other types of disasters, such as power loss, fire, floods and similar events. If any disaster were to occur, our ability to operate our business could be seriously impaired. We currently may not have adequate insurance to cover our losses resulting from disasters or other similar significant business interruptions, and we do not plan to purchase additional insurance to cover such losses due to the cost of obtaining such coverage. Any significant losses that are not recoverable under our insurance policies could seriously impair our business, financial condition and results of operations.

Significant disruptions of information technology systems or breaches of data security could adversely affect our business.

We are increasingly dependent on information technology systems and infrastructure, including mobile technologies, to operate our business. In the ordinary course of our business, we collect, store and transmit large amounts of confidential information, including intellectual property, proprietary business information and personal information. It is critical that we do so in a secure manner to maintain the confidentiality and integrity of such confidential information. We have also outsourced elements of our information technology infrastructure, and as a result we manage a number of third party vendors who may or could have access to our confidential information. The size and complexity of our information technology systems, and those of third-party vendors with whom we contract, make such systems potentially vulnerable to breakdown, malicious intrusion, security breaches and other cyber attacks. In addition, the prevalent use of mobile devices that access confidential information increases the risk of data security breaches, which could lead to the loss of confidential information, trade secrets or other intellectual property. While we have implemented security measures to protect our data security and information technology systems, such measures may not prevent the adverse effect of such events. Significant disruptions of our information technology systems or breaches of data security could adversely affect our business. Such disruptions could also result in government investigations, fines, or penalties, and/or lawsuits directly or indirectly related to breach of data security, also adversely affecting our business.

EU Member States and other jurisdictions have adopted data protection laws and regulations which impose significant compliance obligations. For example, the EU Data Protection Directive, as implemented into national laws by the EU Member States, imposes strict obligations and restrictions on the ability to collect, analyze and transfer personal data, including health data from clinical trials and adverse event reporting. Furthermore, there is a growth towards the public disclosure of clinical trial data in the EU which adds to the complexity of processing health data from clinical trials. Such public disclosure obligations are provided in the new EU Clinical Trials Regulation, EMA disclosure initiatives, and voluntary commitments by industry. Data protection authorities from the different EU Member States may interpret the EU Data Protection Directive and national laws differently, which adds to the complexity of processing personal data in the EU. Moreover, guidance on implementation and compliance practices are often updated or otherwise revised. Failing to comply with these laws could lead to government enforcement actions and significant penalties against us, and adversely impact our operating results. The EU Data Protection Directive prohibits the transfer of personal data to countries outside of the European Economic Area, or EEA, that are not considered by the European Commission to provide an adequate level of data protection. This includes the United States. A proposal for an EU Data Protection Regulation, intended to replace the current EU Data Protection Directive, is currently under consideration and, if adopted, could lead to additional and stricter requirements and penalties in the event of non-compliance.

Regulations related to conflict minerals could adversely impact our business.

The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of tin, tantalum, tungsten and gold, known as conflict minerals, originating from the Democratic Republic of Congo, or the DRC, and adjoining countries. As a result, in August 2012 the SEC adopted annual disclosure and reporting requirements for public companies that use conflict minerals mined from the DRC and adjoining countries in their products. We have determined that we use at least one of these conflict minerals in the manufacture of ADASUVE and our other product candidates, although we have not yet determined the source of the conflict minerals that we use. These new disclosure requirements require us to use diligent efforts to determine which conflict minerals we use and the source of those conflict minerals, and disclose the results of our findings. There are and will be costs associated with complying with these disclosure requirements, including those costs incurred in conducting diligent efforts to determine which conflict minerals we use and the sources of conflict minerals used in ADASUVE and our other product candidates. Further, the implementation of these rules could adversely affect the sourcing, supply and pricing of materials used in ADASUVE and our other product candidates. As there may be only a limited number of suppliers offering conflict free conflict minerals, and we cannot be sure that we will be able to obtain necessary conflict free conflict minerals in sufficient quantities or at competitive prices. In addition, we may face reputational challenges if we determine that ADASUVE and our other

67

product candidates contain minerals not determined to be conflict free or if we are unable to sufficiently verify the origins for all conflict minerals used in ADASUVE and our other product candidates through the procedures we may implement. If we determine to redesign ADASUVE and our other product candidates to not use conflict minerals, we would incur costs associated with doing so.

Risks Relating to Owning Our Common Stock

Our stock price has been and may continue to be extremely volatile.

Our common stock price has experienced large fluctuations. In addition, the trading prices of life science and biotechnology company stocks in general have experienced extreme price fluctuations in recent years. The valuations of many life science companies without consistent product revenues and earnings are extraordinarily high based on conventional valuation standards, such as price to revenue ratios. These trading prices and valuations may not be sustained. Any negative change in the public’s perception of the prospects of life science or biotechnology companies could depress our stock price regardless of our results of operations. Other broad market and industry factors may decrease the trading price of our common stock, regardless of our performance. Market fluctuations, as well as general political and economic conditions such as terrorism, military conflict, recession or interest rate or currency rate fluctuations, also may decrease the trading price of our common stock. In addition, our stock price could be subject to wide fluctuations in response to various factors, including:

68

In the past, stockholders have often instituted securities class action litigation after periods of volatility in the market price of a company’s securities. If a stockholder files a securities class action suit against us, we would incur substantial legal fees, and our management’s attention and resources would be diverted from operating our business in order to respond to the litigation.

If we sell shares of our common stock in future financings, existing common stockholders will experience immediate dilution and, as a result, our stock price may go down.

We will need to source additional capital to fund our operations to develop our product candidates. We may obtain such financing through the sale of our equity securities from time to time. As a result, our existing common stockholders will experience immediate dilution upon any such issuance. For example, in February 2012, we issued 4,400,000 shares of our common stock and warrants to purchase up to an additional 4,400,000 shares of our common stock in an underwritten public offering; in March 2012, we issued 241,936 shares of our common stock in a private placement to Ferrer; in July 2012 we issued 80,429 shares of our common stock to Azimuth in consideration for its execution and delivery of the Purchase Agreement; in August and September 2012, we issued an aggregate of 3,489,860 shares of our common stock to Azimuth under the Purchase Agreement; in May 2013, we issued 1,437,481 shares of our common stock to Azimuth under the Purchase Agreement; in October 2014, we issued 2,000,000 shares of our common stock in a private placement to Ferrer;  in September 2015 we issued 125,000 shares of our unregistered common stock to Ferrer pursuant to the Ferrer Note and a stock issuance agreement; and in February 2016 we issued 2,172,886 shares of our unregistered common stock to Teva pursuant to a stock issuance agreement as consideration for the reduction of the outstanding principal by $5 million, and the forgiveness of all accrued but unpaid interest, under the Teva Note. If we enter into other financing transactions in which we issue equity securities in the future, our existing common stockholders will experience immediate dilution upon any such issuance.

If we fail to maintain compliance with the listing requirements of The NASDAQ Capital Market, we may be delisted and the price of our common stock and our ability to access the capital markets could be negatively impacted.

Our common stock is listed on The NASDAQ Capital Market. To maintain the listing of our common stock on The NASDAQ Capital Market, we are required to meet certain listing requirements, including, among others:

In addition to the above requirements, we must meet at least one of the following requirements:

On June 19, 2015, we received a notice from The NASDAQ Stock Market indicating that our common stock had not met the $35 million market value of listed securities requirement for 30 consecutive business days and that, if we were unable to demonstrate compliance with this requirement during the applicable grace periods, our common stock would be delisted after that time. In accordance with the NASDAQ Marketplace Rules, we were provided an initial compliance period of 180 calendar days from the date of the notice to regain compliance with the minimum market value of listed securities requirement. To regain compliance, the minimum market value of our common stock must meet or exceed $35 million for a minimum of 10 consecutive business days during the grace period. 

On December 17, 2015, we received notice from the NASDAQ Staff indicating that our common stock had not met the $35 million market value of listed securities requirement for 30 consecutive business days and that we did not regain compliance with this requirement within the 180 day grace period, and, accordingly, we would be subject to delisting from The NASDAQ Capital Market unless we timely requested a hearing before the NASDAQ Listing Qualifications Panel, or the Panel, to review this determination.

Additionally, on January 20, 2016, we received a notice from The NASDAQ Stock Market  indicating that our common stock does not meet the continued listing requirement as set forth in NASDAQ Rule 5550(a)(2) based on the closing bid price of our common stock for the preceding 30 business days. The minimum closing bid price required to maintain continued listing on The NASDAQ Capital Market is $1.00 per share. Under NASDAQ Rule 5810(c)(3)(A), we have a 180 calendar day grace period from the date of the notice to regain compliance by meeting the continued listing standard. The continued listing standard will be met if our

69

common stock has a minimum closing bid price of at least $1.00 per share for a minimum of 10 consecutive business days during the 180 calendar day grace period. If we do not regain compliance within the 180 calendar day grace period, we will be afforded an additional 180 calendar day compliance period, provided that on the 180^th day of the first grace period we (i) meet the applicable market value of publicly held shares requirement for continued listing and all other applicable requirements for initial listing on The NASDAQ Capital Market (except for the bid price requirement) based on our most recent public filings and market information and (ii) notify NASDAQ of our intent to cure this deficiency.

We requested a hearing with NASDAQ to review our December 2015 delisting determination. This hearing occurred in February 2016. On March 7, 2016, the Panel issued a determination granting our request for the continued listing of our Common Stock on The NASDAQ Capital Market. Our continued listing on The NASDAQ Capital Market is subject to, among other things, evidence of our compliance with the minimum $35.0 million market value of listed securities requirement by June 14, 2016. In order to satisfy the market value of listed securities requirement, we must evidence a market capitalization of at least $35.0 million for a minimum of 10 consecutive business days on or before June 14, 2016.

There can be no assurance that we will be successful in providing timely evidence of compliance with the terms of the Panel’s decision or otherwise maintaining our listing of the Common Stock on The NASDAQ Capital Market. If we are not successful in maintaining our listing, it could impair the liquidity and market price of our common stock. In addition, the delisting of our common stock from a national exchange could materially adversely affect our ability to access capital markets. As of May 11, 2016, the total market value of our publicly held shares of our common stock (excluding shares held by our executive officers, directors, affiliates and 10% or more stockholders) was $17.6 million, the total market value of our listed securities was $20.0 million and the closing bid price of our common stock was $0.92 per share. As of March 31, 2016, we had a stockholders’ deficit of $74.3 million.

70

PART II. OTHER INFORMATION

None.

Recent Sales of Unregistered Equity Securities

The information regarding the issuance of unregistered shares of our common stock to Teva under Item 3.02 of our Current Report on Form 8-K as filed with the SEC on February 24, 2016 is hereby incorporated by reference.

Use of Proceeds from the Sale of Registered Securities

Not applicable.

Issuer Purchases of Equity Securities

None.

None.

Not applicable.

Not Applicable.

See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.

71

SIGNATURES

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