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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-36152
 
 
Aerie Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
20-3109565
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
4301 Emperor Boulevard, Suite 400
Durham, North Carolina 27703
(919) 237-5300
(Address of principal executive offices, zip code and telephone number, including area code)
 
 
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:  ý    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:  ý    No:  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
ý
  
Accelerated filer
o
 
 
 
 
Non-accelerated filer
 
o (Do not check if a smaller reporting company)
  
Smaller reporting company
o
 
 
 
 
 
 
Emerging growth company
 
o
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  ý
As of May 2, 2018, there were 39,496,520 shares of the registrant’s common stock, par value $0.001, outstanding.
 


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TABLE OF CONTENTS
 
 
 
 
 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.



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Unless otherwise indicated or the context requires, the terms “Aerie,” “Company,” “we,” “us” and “our” refer to Aerie Pharmaceuticals, Inc. and its subsidiaries.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We may, in some cases, use terms such as “predicts,” “believes,” “potential,” “proposed,” “continue,” “estimates,” “anticipates,” “expects,” “plans,” “intends,” “may,” “would,” “could,” “might,” “will,” “should,” “exploring,” “pursuing” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements.
Forward-looking statements appear in a number of places throughout this report and include statements regarding our intentions, beliefs, projections, outlook, analyses or current expectations concerning, among other things:
the commercial launch and potential future sales of Rhopressa® (netarsudil ophthalmic solution) 0.02% (“Rhopressa®”) and RoclatanTM (netarsudil/latanoprost ophthalmic solution) 0.02%/0.005% (“RoclatanTM”) and any future product candidates, if approved;
our commercialization, marketing, manufacturing and supply management capabilities and strategies;
third-party payer coverage and reimbursement for Rhopressa® and RoclatanTM and any future product candidates, if approved;
the glaucoma patient market size and the rate and degree of market adoption of Rhopressa® and RoclatanTM and any future product candidates, if approved, by eye care professionals and patients;
the timing, cost or other aspects of the commercial launch of Rhopressa® and RoclatanTM and any future product candidates, if approved;
the success, timing and cost of our ongoing and anticipated preclinical studies and clinical trials for Rhopressa®, with respect to regulatory approval outside the United States, RoclatanTM and any future product candidates, including statements regarding the timing of initiation and completion of the studies and trials;
our expectations regarding the effectiveness of Rhopressa®, RoclatanTM and any future product candidates and results of our clinical trials and any potential preclinical studies;
the timing of and our ability to request, obtain and maintain U.S. Food and Drug Administration (“FDA”) or other regulatory authority approval of, or other action with respect to, as applicable, Rhopressa®, RoclatanTM and any future product candidates in the United States, Canada, Europe, Japan and elsewhere, including the expected timing of, and regulatory and/or other review of, filings for, as applicable, Rhopressa®, RoclatanTM and any future product candidates;
our expectations related to the use of proceeds from our financing activities;
our estimates regarding anticipated operating expenses and capital requirements and our needs for additional financing;
our plans to pursue development of additional product candidates and technologies in ophthalmology, including development of Rhopressa® and RoclatanTM for additional indications, our preclinical retina programs and other therapeutic opportunities, and our plans to explore possible uses of our existing proprietary compounds beyond glaucoma and ophthalmology;
the potential advantages of Rhopressa®, RoclatanTM and any future product candidates;
our ability to protect our proprietary technology and enforce our intellectual property rights;
our expectations regarding collaborations, licensing, acquisitions and strategic operations, including our ability to in-license or acquire additional ophthalmic products, product candidates or technologies; and

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our stated objective of building a major ophthalmic pharmaceutical company.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics, industry change and other factors beyond our control, and depend on regulatory approvals and economic and other environmental circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. We discuss many of these risks under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as filed with the Securities and Exchange Commission (“SEC”) on March 1, 2018, and other documents we have filed or furnished with the SEC.
In particular, FDA approval of Rhopressa® does not constitute FDA approval of RoclatanTM, and there can be no assurance that we will receive FDA approval for RoclatanTM or any future product candidates. FDA approval of Rhopressa® also does not constitute regulatory approval of Rhopressa® in jurisdictions outside the United States, and there can be no assurance that Rhopressa® will obtain regulatory approval in other jurisdictions. In addition, the preclinical research discussed in this report is preliminary and the outcome of such preclinical studies may not be predictive of the outcome of later clinical trials. Any future clinical trial results may not demonstrate safety and efficacy sufficient to obtain regulatory approval related to the preclinical research findings discussed in this report, and we may suspend or discontinue research programs at any time for any reason.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that we have a reasonable basis for each forward-looking statement contained in this report, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate, may differ materially from the forward-looking statements contained in this report. In addition, even if our results of operations, financial condition and liquidity, and events in the industry in which we operate, are consistent with the forward-looking statements contained in this report, they may not be predictive of results or developments in future periods.
Any forward-looking statements that we make in this report speak only as of the date of this report. Except as required by law, we are under no duty to update or revise any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this report.


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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AERIE PHARMACEUTICALS, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except share and per share data)
 
 
MARCH 31, 2018
 
DECEMBER 31, 2017
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
249,501

 
$
197,569

Short-term investments
84,476

 
52,086

Inventory
1,062

 

Prepaid expenses and other current assets
6,115

 
4,487

Total current assets
341,154

 
254,142

Property, plant and equipment, net
47,810

 
31,932

Other assets
2,079

 
4,202

Total assets
$
391,043

 
$
290,276

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
6,066

 
$
6,245

Accrued expenses and other current liabilities
19,070

 
18,939

Total current liabilities
25,136

 
25,184

Convertible notes, net
123,922

 
123,845

Other non-current liabilities
5,714

 
5,648

Total liabilities
154,772

 
154,677

Commitments and contingencies (Note 10)

 

Stockholders’ equity
 
 
 
Preferred stock, $0.001 par value; 15,000,000 shares authorized as of March 31, 2018 and December 31, 2017; None issued and outstanding

 

Common stock, $0.001 par value; 150,000,000 shares authorized as of March 31, 2018 and December 31, 2017; 39,503,110 and 36,947,637 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively
40

 
37

Additional paid-in capital
740,952

 
597,318

Accumulated other comprehensive loss
(157
)
 
(28
)
Accumulated deficit
(504,564
)
 
(461,728
)
Total stockholders’ equity
236,271

 
135,599

Total liabilities and stockholders’ equity
$
391,043

 
$
290,276


The accompanying notes are an integral part of these condensed consolidated financial statements.


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AERIE PHARMACEUTICALS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
(in thousands, except share and per share data)
 
 
THREE MONTHS ENDED MARCH 31,
 
2018
 
2017
Operating expenses
 
 
 
Selling, general and administrative
$
27,823

 
$
14,475

Research and development
12,972

 
10,954

Total operating expenses
40,795

 
25,429

Loss from operations
(40,795
)
 
(25,429
)
Other income (expense), net
96

 
(312
)
Net loss before income taxes
(40,699
)
 
(25,741
)
Income tax expense

 
46

Net loss
$
(40,699
)
 
$
(25,787
)
Net loss per common share—basic and diluted
$
(1.05
)
 
$
(0.76
)
Weighted average number of common shares outstanding—basic and diluted
38,598,827

 
33,777,395

 
 
 
 
Net loss
$
(40,699
)
 
$
(25,787
)
Unrealized loss on available-for-sale investments
(129
)
 
(37
)
Comprehensive loss
$
(40,828
)
 
$
(25,824
)

The accompanying notes are an integral part of these condensed consolidated financial statements.



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AERIE PHARMACEUTICALS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
 
 
THREE MONTHS ENDED 
 MARCH 31,
 
2018
 
2017
Cash flows from operating activities
 
 
 
Net loss
$
(40,699
)
 
$
(25,787
)
Adjustments to reconcile net loss to net cash used in operating activities
 
 
 
Depreciation
487

 
291

Amortization of debt discounts
77

 
76

Amortization and accretion of premium or discount on investments, net
(99
)
 
52

Stock-based compensation
8,719

 
4,850

Unrealized foreign exchange loss
150

 

Changes in operating assets and liabilities
 
 
 
Inventory
(969
)
 

Prepaid, current and other assets
(1,628
)
 
1,427

Accounts payable, accrued expenses and other current liabilities
(6,873
)
 
(5,763
)
Net cash used in operating activities
(40,835
)
 
(24,854
)
Cash flows from investing activities
 
 
 
Purchase of available-for-sale investments
(56,195
)
 
(45,561
)
Proceeds from sales and maturities of investments
23,775


12,860

Purchase of property, plant and equipment
(9,126
)
 
(904
)
Net cash used in investing activities
(41,546
)
 
(33,605
)
Cash flows from financing activities
 
 
 
Proceeds from sale of common stock, net
135,972

 

(Payments) proceeds related to issuance of stock for stock-based compensation arrangements, net
(1,420
)
 
48

Other
(239
)
 

Net cash provided by financing activities
134,313

 
48

Net change in cash and cash equivalents
51,932

 
(58,411
)
Cash and cash equivalents, at beginning of period
197,569

 
197,945

Cash and cash equivalents, at end of period
$
249,501

 
$
139,534

The accompanying notes are an integral part of these condensed consolidated financial statements.


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AERIE PHARMACEUTICALS, INC.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. The Company
Aerie Pharmaceuticals, Inc. (“Aerie”), with its wholly-owned subsidiaries, Aerie Distribution, Inc., Aerie Pharmaceuticals Limited and Aerie Pharmaceuticals Ireland Limited (“Aerie Distribution,” “Aerie Limited” and “Aerie Ireland Limited,” respectively, together with Aerie, the “Company”), is an ophthalmic pharmaceutical company focused on the discovery, development and commercialization of first-in-class therapies for the treatment of patients with open-angle glaucoma and other diseases of the eye. The Company has its principal executive offices in Durham, North Carolina, and operates as one business segment.
The Company has a U.S. Food and Drug Administration (“FDA”) approved product, Rhopressa® (netarsudil ophthalmic solution) 0.02% (“Rhopressa®”), and an advanced-stage product candidate, RoclatanTM (netarsudil/latanoprost ophthalmic solution) 0.02%/0.005% (“RoclatanTM”), both designed to reduce elevated intraocular pressure (“IOP”) in patients with open-angle glaucoma or ocular hypertension. The Company intends to commercialize Rhopressa® and RoclatanTM, if approved, on its own in North American markets. The Company’s strategy also includes pursuing regulatory approval for Rhopressa® and RoclatanTM in Europe and Japan on its own.
Rhopressa® is a once-daily eye drop designed to reduce elevated IOP in patients with open-angle glaucoma or ocular hypertension that received FDA approval on December 18, 2017. The Company launched Rhopressa® in the United States at the end of April 2018. The Company also intends to file a marketing authorization application with the European Medicines Agency for Rhopressa® in the second half of 2018. Additionally, the Company completed a Phase 1 clinical trial and commenced a Phase 2 clinical trial in the United States, which are designed to meet the requirements of Japan’s Pharmaceuticals and Medical Devices Agency for potential regulatory submission of Rhopressa® in Japan. These clinical trials include Japanese and Japanese-American subjects to support subsequent Phase 3 registration trials that are expected to be conducted in Japan.
The Company’s advanced-stage product candidate, RoclatanTM, is a once-daily fixed-dose combination of Rhopressa® and latanoprost for which the Company plans to submit a New Drug Application to the FDA in the second quarter of 2018. The Company is currently conducting a Phase 3 trial, named Mercury 3, in Europe comparing RoclatanTM to Ganfort®, which if successful, is expected to improve its commercialization prospects in that region. Mercury 3 is not necessary for approval in the United States.
On July 31, 2017, the Company entered into a collaborative research, development and licensing agreement with DSM, a global science-based company headquartered in the Netherlands. The research collaboration agreement includes an option to license DSM’s bio-erodible polymer implant technology for evaluating its application to the delivery of certain Aerie compounds to treat ophthalmic diseases. This technology uses polyesteramide polymers to produce an injectable, thin fiber that is minute in size. Preclinical experiments have demonstrated early success in conjunction with Aerie’s preclinical molecule, AR-13503, including demonstration of linear, sustained elution rates over several months and achievement of target retinal drug concentrations.
On October 4, 2017, the Company entered into an Asset Purchase Agreement (the “Agreement”) with Envisia Therapeutics Inc. (“Envisia”) to acquire the rights to use PRINT® technology in ophthalmology, as well as rights relating to Envisia’s preclinical dexamethasone steroid implant for the potential treatment of diabetic macular edema that utilizes the PRINT® technology, referred to as AR-1105. The Company will also focus on using PRINT® to manufacture injectable implants containing AR-13503, potentially in conjunction with the bio-erodible polymer from DSM.
The Company had not yet commenced commercial operations as of March 31, 2018 and therefore had not generated product revenue. The Company launched Rhopressa® in the United States in late April 2018. As a result, Aerie commenced generating product revenues related to sales of Rhopressa® in the second quarter of 2018. The Company’s activities since inception have primarily consisted of developing product candidates, raising capital and performing research and development activities. The Company has incurred losses and experienced negative operating cash flows since inception. The Company has funded its operations primarily through the sale of equity securities (Note 8) and issuance of convertible notes (Note 7).
If the Company does not successfully commercialize Rhopressa®, RoclatanTM or any future product candidates, it may be unable to generate product revenue or achieve profitability. Accordingly, the Company may be required to obtain further funding through public or private offerings, debt financings, collaboration and licensing arrangements or other sources.

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Adequate additional funding may not be available to the Company on acceptable terms, or at all. If the Company is unable to raise capital when needed or on attractive terms, it may be forced to delay, reduce or eliminate its research and development programs or commercialization and manufacturing efforts.
2. Significant Accounting Policies
Basis of Presentation
The Company’s interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of management, the Company has made all necessary adjustments, which include normal recurring adjustments necessary for a fair statement of the Company’s consolidated financial position and results of operations for the interim periods presented. Certain information and disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 1, 2018 (“2017 Form 10-K”). The results for the three months ended March 31, 2018 are not necessarily indicative of the results to be expected for a full year, any other interim periods or any future year or period.
Principles of Consolidation
The interim condensed consolidated financial statements include the accounts of Aerie and its wholly-owned subsidiaries. All intercompany accounts, transactions and profits have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of income and expenses during the reporting periods. Significant items subject to such estimates and assumptions include the valuation of stock options and operating expense accruals. Actual results could differ from the Company’s estimates.
Cash Equivalents
The Company’s cash and cash equivalents, which include short-term highly liquid investments with original maturities of three months or less, are held at several financial institutions and at times may exceed insured limits. The Company has placed these funds in high quality institutions in order to minimize risk relating to exceeding insured limits.
Inventories
Prior to the date the Company obtains regulatory approval for any of its product candidates, manufacturing costs related to commercial production for such product candidate are expensed as selling, general and administrative expense. Once regulatory approval is obtained, the Company capitalizes such costs as inventory. Rhopressa® obtained FDA approval on December 18, 2017, but no inventory was produced from the FDA approval date through the end of 2017; therefore, no inventory was capitalized on the consolidated balance sheet as of December 31, 2017. The Company capitalized inventory manufactured and received during the three months ended March 31, 2018. All inventory on the condensed consolidated balance sheet as of March 31, 2018 was classified as finished goods.
Inventories are stated at the lower of cost or estimated realizable value. The Company determines the cost of inventory using the first-in, first-out (“FIFO”) method.
Property, Plant and Equipment, Net
Property, plant and equipment is recorded at historical cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets. Construction-in-progress reflects amounts incurred for property, plant or equipment construction or improvements that have not been yet placed in service, which primarily relates to the build-out of the Company’s manufacturing plant in Ireland (Note 5). Repairs and maintenance are expensed when incurred. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss is included in the determination of net loss.

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Estimated useful lives by major asset category are as follows:
Manufacturing equipment
10 years
Laboratory equipment
7 years
Furniture and fixtures
5 years
Software and computer equipment
3 years
Leasehold improvements
Lower of estimated useful life or term of lease
Investments
The Company determines the appropriate classification of its investments in debt and equity securities at the time of purchase. The Company’s investments are comprised of commercial paper and corporate bonds that are classified as available-for-sale in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 320, Investments—Debt and Equity Securities. The Company classifies investments available to fund current operations as current assets on its consolidated balance sheets. Investments are classified as long-term assets on the consolidated balance sheets if (i) the Company has the intent and ability to hold the investments for a period of at least one year and (ii) the contractual maturity date of the investments is greater than one year.
Available-for-sale investments are recorded at fair value, with unrealized gains or losses included in comprehensive loss on the condensed consolidated statements of operations and comprehensive loss and in accumulated other comprehensive loss on the condensed consolidated balance sheets. Realized gains and losses, interest earned on the Company’s cash, cash equivalents and investments, and amortization or accretion of discounts and premiums on investments are included as interest income within other income (expense), net. Interest income was $0.8 million and $0.3 million for the three months ended March 31, 2018 and 2017, respectively. There were no realized gains or losses recognized for the three months ended March 31, 2018 or 2017.
Fair Value Measurements
The Company records certain financial assets and liabilities at fair value in accordance with the provisions of ASC Topic 820, Fair Value Measurements and Disclosures. As defined in the guidance, fair value, defined as an exit price, represents the amount that would be received to sell an asset or pay to transfer a liability in an orderly transaction between market participants. As a result, fair value is a market-based approach that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering these assumptions, the guidance defines a three-tier value hierarchy that prioritizes the inputs used in the valuation methodologies in measuring fair value.
Level 1—Unadjusted quoted prices in active, accessible markets for identical assets or liabilities.
Level 2—Other inputs that are directly or indirectly observable in the marketplace.
Level 3—Unobservable inputs that are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
There were no transfers between the different levels of the fair value hierarchy during the three months ended March 31, 2018.
Stock-Based Compensation
The estimated fair value of options to purchase common stock is determined on the date of grant using the Black-Scholes option pricing model. Options granted to non-employees are revalued at each financial reporting period until the required service is performed. The fair value of restricted stock awards (“RSAs”) granted is based on the market value of Aerie’s common stock on the date of grant. Compensation expense related to time-based RSAs is expensed on a straight-line basis over the vesting period. For RSAs with non-market performance conditions, the Company evaluates the criteria for each grant to determine the probability that the performance condition will be achieved. Compensation expense for RSAs with non-market performance conditions is recognized over the respective service period when it is deemed probable that the performance condition will be satisfied. Upon issuance and at each reporting period, the fair value of each stock appreciation rights (“SARs”) award is estimated using the Black-Scholes option pricing model and is marked to market through stock-based compensation expense. SARs are liability-based awards as they may only be settled in cash. 

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Adoption of New Accounting Standards
In March 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (“SAB 118”), which adds guidance to clarify the treatment of income taxes based on changes enacted on December 22, 2017 in H.R. 1 (commonly referred to as the “Tax Act”). ASU 2018-05 incorporates references in ASC Topic 740 to SAB 118, which was issued on December 22, 2017, to address the application of U.S. GAAP in situations when a registrant may not have the necessary information available in reasonable detail to complete the accounting for certain income tax effects. The guidance became effective immediately upon the enactment of the Tax Act in accordance with U.S. GAAP which requires deferred tax assets and liabilities to be revalued during the period in which new tax legislation is enacted. The Company’s final impact assessment on the consolidated financial statements will be completed as additional information becomes available, but no later than one year from the enactment of the Tax Act.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when changes to the terms or conditions of share-based payment awards must be accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if the award’s fair value, vesting conditions and classification as an equity or liability instrument are the same immediately before and after the change. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. The guidance became effective for the Company beginning on January 1, 2018. The impact of the adoption of this guidance on its consolidated financial statements would be dependent on future modifications to share-based payment awards, if any.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which eliminates the exception to the principle in ASC Topic 740, Income Taxes, that generally requires comprehensive recognition of current and deferred income taxes for all intra-entity sales of assets other than inventory. As a result, a reporting entity would recognize the tax expense from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. This ASU became effective for the Company on January 1, 2018, and was required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to accumulated deficit as of the beginning of the period of adoption. At December 31, 2017, the Company had $2.1 million of income tax effects deferred from past intercompany transactions that were recorded as prepaid assets within other assets, net, at December 31, 2017 that were adjusted through accumulated deficit as of January 1, 2018.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which provides guidance related to the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. The guidance became effective for the Company beginning on January 1, 2018 and prescribes different transition methods for the various provisions. The adoption of ASU 2016-01 did not have a material impact on its consolidated financial statements and disclosures.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The standard states that an entity should recognize revenue based on the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB has subsequently issued amendments to ASU 2014-09 that have the same effective date of January 1, 2018. Revenue from sales of Rhopressa® following the commercial launch in April 2018, as well as any other future revenue arrangements, will be recognized under the provisions of ASC Topic 606.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires that financial assets measured at amortized cost be presented at the net amount expected to be collected. Currently, U.S. GAAP delays recognition of the full amount of credit losses until the loss is probable of occurring. Under this ASU, the income statement will reflect an entity’s current estimate of all expected credit losses. The measurement of expected credit losses will be based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down of the security. This ASU is effective for the Company beginning on January 1, 2020, with early adoption permitted beginning on January 1, 2019. The new guidance prescribes different transition methods for the various provisions. The Company does not expect the adoption of ASU 2016-13 to have a material impact on its consolidated financial statements and disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize a right of use asset and related lease liability for those leases classified as operating leases at the commencement date and for those leases that have lease terms of more than 12 months. The guidance is effective for the Company beginning on January 1, 2019, and all annual

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and interim periods thereafter, with early adoption permitted, and must be adopted using a modified retrospective transition approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, and provides for certain practical expedients. The Company is currently evaluating the impact of ASU 2016-02 on its consolidated financial statements and disclosures.
Net Loss per Common Share
Basic net loss per common share (“Basic EPS”) is calculated by dividing the net loss by the weighted average number of shares of common stock outstanding for the period, without consideration for potentially dilutive securities with the exception of warrants for common stock with a $0.05 exercise price, which are exercisable for nominal consideration and are therefore included in the calculation of the weighted average number of shares of common stock as common stock equivalents. Diluted net loss per share (“Diluted EPS”) gives effect to all dilutive potential shares of common stock outstanding during this period. For Diluted EPS, net loss used in calculating Basic EPS is adjusted for certain items related to the dilutive securities.
For all periods presented, Aerie’s potential common stock equivalents have been excluded from the computation of Diluted EPS as their inclusion would have had an anti-dilutive effect.
The potential common stock equivalents that have been excluded from the computation of Diluted EPS consist of the following: 
 
THREE MONTHS ENDED 
 MARCH 31,
 
2018
 
2017
2014 Convertible Notes
5,040,323

 
5,040,323

Outstanding stock options
7,125,947

 
5,708,215

Stock purchase warrants
157,500

 
157,500

Nonvested restricted stock awards
605,163

 
348,660

Total
12,928,933

 
11,254,698

 
3. Investments
Cash, cash equivalents and investments as of March 31, 2018 included the following: 
(in thousands)
AMORTIZED
COST
 
GROSS
UNREALIZED
GAINS
 
GROSS
UNREALIZED
LOSSES
 
FAIR
VALUE
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash and money market funds
$
237,514

 
$

 
$

 
$
237,514

Commercial paper
11,987

 

 

 
11,987

Total cash and cash equivalents
$
249,501

 
$

 
$

 
$
249,501

Investments:
 
 
 
 
 
 
 
Commercial paper (due within 1 year)
$
44,209

 
$

 
$

 
$
44,209

Corporate bonds (due within 1 year)
40,424

 

 
(157
)
 
40,267

Total investments
$
84,633

 
$

 
$
(157
)
 
$
84,476

Total cash, cash equivalents and investments
$
334,134

 
$

 
$
(157
)
 
$
333,977



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Cash, cash equivalents and investments as of December 31, 2017 included the following: 
(in thousands)
AMORTIZED
COST
 
GROSS
UNREALIZED
GAINS
 
GROSS
UNREALIZED
LOSSES
 
FAIR
VALUE
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash and money market funds
$
197,569

 
$

 
$

 
$
197,569

Total cash and cash equivalents
$
197,569

 
$

 
$

 
$
197,569

Investments:
 
 
 
 
 
 
 
Commercial paper (due within 1 year)
$
30,883

 
$

 
$

 
$
30,883

Corporate bonds (due within 1 year)
21,231

 

 
(28
)
 
21,203

Total investments
$
52,114

 
$

 
$
(28
)
 
$
52,086

Total cash, cash equivalents and investments
$
249,683

 
$

 
$
(28
)
 
$
249,655


4. Fair Value Measurements
The following tables summarize the fair value of financial assets and liabilities that are measured at fair value and the classification by level of input within the fair value hierarchy:
 
 
FAIR VALUE MEASUREMENTS AS OF
MARCH 31, 2018
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash and money market funds
$
237,514

 
$

 
$

 
$
237,514

Commercial paper

 
11,987

 

 
11,987

Total cash and cash equivalents
$
237,514

 
$
11,987

 
$

 
$
249,501

Investments:
 
 
 
 
 
 
 
Commercial paper
$

 
$
44,209

 
$

 
$
44,209

Corporate bonds

 
40,267

 

 
40,267

Total investments
$

 
$
84,476

 
$

 
$
84,476

Total cash, cash equivalents and investments
$
237,514

 
$
96,463

 
$

 
$
333,977

 
 
FAIR VALUE MEASUREMENTS AS OF
DECEMBER 31, 2017
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash and money market funds
$
197,569

 
$

 
$

 
$
197,569

Total cash and cash equivalents
$
197,569

 
$

 
$

 
$
197,569

Investments:
 
 
 
 
 
 
 
Commercial paper
$

 
$
30,883

 
$

 
$
30,883

Corporate bonds

 
21,203

 

 
21,203

Total investments
$

 
$
52,086

 
$

 
$
52,086

Total cash, cash equivalents and investments
$
197,569

 
$
52,086

 
$

 
$
249,655



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Convertible Notes
As of March 31, 2018 and December 31, 2017, the estimated fair value of the $125.0 million aggregate principal amount of senior secured convertible notes (the “2014 Convertible Notes”) was $299.0 million and $327.6 million, respectively. The estimated fair value of the 2014 Convertible Notes require the use of Level 3 unobservable inputs and subjective assumptions. The estimates presented are not necessarily indicative of amounts that could be realized in a current market exchange. The use of alternative market assumptions and estimation methodologies could have a material effect on these estimates of fair value.
5. Property, Plant and Equipment, Net
Property, plant and equipment, net consists of the following:
(in thousands)
 
MARCH 31, 2018
 
DECEMBER 31, 2017
Manufacturing equipment
 
$
2,102

 
$
2,082

Laboratory equipment
 
4,278

 
3,602

Furniture and fixtures
 
1,273

 
1,209

Software and computer equipment
 
2,168

 
1,932

Leasehold improvements
 
2,012

 
1,887

Construction-in-progress
 
39,499

 
24,228

 
 
51,332

 
34,940

Less: Accumulated depreciation
 
(3,522
)
 
(3,008
)
Total property, plant and equipment, net
 
$
47,810

 
$
31,932

Manufacturing Plant Build-Out
In January 2017, the Company entered into a Euro-denominated lease agreement, expiring in September 2037, for a new manufacturing plant in Athlone, Ireland, under which the Company is leasing approximately 30,000 square feet of interior floor space for build-out. The Company is permitted to terminate the lease beginning in September 2027.
The Company is not the legal owner of the leased space. However, in accordance with ASC Topic 840, Leases, the Company is deemed to be the owner of the leased space, including the building shell, during the construction period because of the Company’s expected level of direct financial and operational involvement in the substantial tenant improvements required. As a result, the Company capitalized approximately $4.2 million as a build-to-suit asset within property, plant and equipment, net and recognized a corresponding build-to-suit facility lease obligation as a liability on its condensed consolidated balance sheets equal to the estimated replacement cost of the building at the inception of the lease. Additionally, equipment and construction costs incurred as part of the build-out are also capitalized within property, plant and equipment, net, as construction-in-progress.
Rental payments made under the lease will be allocated to interest expense and the build-to-suit facility lease obligation based on the implicit rate of the build-to-suit facility lease obligation. The build-to-suit facility lease obligation was approximately $5.0 million as of March 31, 2018, of which $0.3 million was classified as other current liabilities as of March 31, 2018. The lease obligation is denominated in Euros and is remeasured to U.S. dollars at the balance sheet date with any foreign exchange gain or loss recognized within other income (expense), net on the condensed consolidated statements of operations and comprehensive loss. Unrealized foreign currency loss related to the remeasurement of the lease obligation was $0.1 million for the three months ended March 31, 2018 and was de minimis for the three months ended March 31, 2017.


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6. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
 
(in thousands)
MARCH 31, 2018
 
DECEMBER 31, 2017
Accrued compensation and benefits (1)
$
4,246

 
$
7,886

Accrued consulting and professional fees
2,788

 
3,841

Accrued research and development expenses (2)
1,361

 
1,855

Accrued other (3)
10,675

 
5,357

Total accrued expenses and other current liabilities
$
19,070

 
$
18,939

 
(1)
The decrease in accrued compensation and benefits primarily relates to the payment of 2017 annual incentives during the three months ended March 31, 2018.
(2)
Comprised of accruals such as fees for investigative sites, contract research organizations, contract manufacturing organizations and other service providers that assist in conducting preclinical research studies and clinical trials.
(3)
Comprised of accruals related to commercial manufacturing activities, interest payable and other business-related expenses. The increase at March 31, 2018 as compared to December 31, 2017 is due to a $5.8 million increase in accrued property, plant and equipment purchases as of March 31, 2018, primarily related to the Company’s manufacturing plant build-out in Ireland.
7. Convertible Notes
In September 2014, Aerie issued $125.0 million aggregate principal amount of the 2014 Convertible Notes to Deerfield Partners, L.P., Deerfield International Master Fund, L.P., Deerfield Private Design Fund III, L.P., Deerfield Special Situations Fund, L.P. and Deerfield Special Situations International Master Fund, L.P., collectively with their transferees, “Deerfield.” The 2014 Convertible Notes were issued pursuant to a note purchase agreement (as amended and supplemented from time to time, the “Note Purchase Agreement”), dated as of September 8, 2014, among Aerie and the Deerfield entities party thereto.
The 2014 Convertible Notes bear interest at a rate of 1.75% per annum payable quarterly in arrears on the first business day of each January, April, July and October. The 2014 Convertible Notes mature on the seventh anniversary from the date of issuance, unless earlier converted.
The 2014 Convertible Notes are guaranteed on a senior secured basis by Aerie Distribution. The 2014 Convertible Notes constitute the senior secured obligations of Aerie and Aerie Distribution, collateralized by a first priority security interest in substantially all of the assets of Aerie and Aerie Distribution. The Note Purchase Agreement provides that, upon the request of Aerie, Deerfield will release all of the liens on the collateral and the security agreement will terminate if both of the following occur: (i) beginning one month after FDA approval of either Rhopressa® or RoclatanTM, shares of Aerie’s common stock have traded at a price above $30 per share (subject to adjustment for any subdivision or combination of outstanding common stock) for 30 consecutive trading days, and (ii) Aerie is prepared to close a financing that will be secured by a lien on Aerie’s assets, subject only to the release of the lien on Aerie’s assets held by Deerfield. Also, in connection with the assignment by Aerie of beneficial rights to its non-U.S. and non-Canadian intellectual property for Rhopressa® and RoclatanTM to Aerie Limited (the “IP Assignment”), Aerie granted Deerfield a security interest in certain intercompany promissory notes and pledged 65% of the voting stock of Aerie Limited. Upon the request of Aerie, Deerfield will release the lien on the intercompany promissory notes under certain circumstances.
The 2014 Convertible Notes are convertible at any time at the option of Deerfield, in whole or in part, into shares of common stock, including upon the repayment of the 2014 Convertible Notes at maturity (the “Conversion Option”). However, upon conversion, Deerfield (together with their affiliates) is limited to a 9.985% ownership cap in shares of common stock (the “9.985% Cap”). The 9.985% Cap would remain in place upon any assignment of the 2014 Convertible Notes by Deerfield.
The initial conversion price is $24.80 per share of common stock (equivalent to an initial conversion rate of 40.32 shares of common stock per $1,000 principal amount of 2014 Convertible Notes), representing a 30% premium over the closing price of the common stock on September 8, 2014. The conversion rate and the corresponding conversion price are subject to adjustment for stock dividends (other than a dividend for which Deerfield would be entitled to participate on an as-converted basis), stock splits, reverse stock splits and reclassifications. In addition, in connection with certain significant corporate transactions,

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Deerfield, at its option, may (i) require Aerie to prepay all or a portion of the principal amount of the 2014 Convertible Notes, plus accrued and unpaid interest, or (ii) convert all or a portion of the principal amount of the 2014 Convertible Notes into shares of common stock or receive the consideration Deerfield would have received had Deerfield converted the 2014 Convertible Notes immediately prior to the consummation of the transaction. The 2014 Convertible Notes provide for an increase in the conversion rate if Deerfield elects to convert their 2014 Convertible Notes in connection with a significant corporate transaction with the current maximum increase to the initial conversion rate being 12.07 shares of common stock per $1,000 principal amount of 2014 Conversion Notes, which decreases over time and is determined by reference to the price of the common stock prior to the consummation of the significant corporate transaction or the value of the significant corporate transaction.
The Note Purchase Agreement contains various representations and warranties, and affirmative and negative covenants, customary for financings of this type, including restrictions on the incurrence of additional debt and liens on Aerie’s and its subsidiaries’ assets. As of March 31, 2018, Aerie was in compliance with the covenants. The Note Purchase Agreement also provides for certain events of default, including the failure to pay principal and interest when due; inaccuracies in Aerie’s or Aerie Distribution’s representations and warranties to Deerfield; failure to comply with any of the covenants; Aerie’s or Aerie Distribution’s insolvency or the occurrence of certain bankruptcy-related events; certain judgments against Aerie and its subsidiaries; the suspension, cancellation or revocation of governmental authorizations that are reasonably expected to have a material adverse effect on Aerie’s business; the acceleration of a specified amount of indebtedness; and the failure to deliver shares of common stock upon conversion of the 2014 Convertible Notes. If any event of default were to occur, and continue beyond any applicable cure period, the holders of more than 50% of the aggregate principal amount of the then outstanding 2014 Convertible Notes would be permitted to declare the principal and accrued and unpaid interest to be immediately due and payable.
The Company recorded the 2014 Convertible Notes as long-term debt at face value less $2.1 million in debt discount and issuance costs incurred at the time of the transaction, which are being amortized to interest expense using the effective interest method through the maturity of the 2014 Convertible Notes.
The table below summarizes the carrying value of the 2014 Convertible Notes as of March 31, 2018 and December 31, 2017:
 
(in thousands)
MARCH 31, 2018
 
DECEMBER 31, 2017
Gross proceeds
$
125,000

 
$
125,000

Unamortized debt discount and issuance costs
(1,078
)
 
(1,155
)
Carrying value
$
123,922

 
$
123,845

Interest expense related to the 2014 Convertible Notes, including amortization of debt discount and issuance costs, was $0.5 million and $0.6 million for the three months ended March 31, 2018 and 2017, respectively.
8. Stockholders’ Equity
During the three months ended March 31, 2018, Aerie issued and sold approximately 1.0 million shares of Aerie’s common stock and received net proceeds of approximately $62.3 million, after deducting $0.5 million of fees and expenses, under the “at-the-market” sales agreement (“ATM”) that commenced in December 2017. There are no remaining shares available for issuance under the ATM that commenced in December 2017. In addition, the Company entered into an underwriting agreement, dated January 23, 2018, related to the registered public offering of approximately 1.3 million shares of Aerie’s common stock and received net proceeds of approximately $74.1 million, after deducting $0.9 million of underwriting discounts, fees and expenses. The transactions were made pursuant to an automatic shelf registration on Form S-3, filed with the SEC on September 15, 2016, that permits the offering, issuance and sale of an unlimited number of shares of common stock from time to time by Aerie.

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Warrants
As of March 31, 2018, the following equity-classified warrants to purchase common stock were outstanding: 
NUMBER OF
UNDERLYING
SHARES
 
EXERCISE
PRICE PER
SHARE
 
WARRANT
EXPIRATION
DATE
75,000
 
$5.00
 
February 2019
75,000
 
$5.00
 
November 2019
7,500
 
$5.00
 
August 2020
223,482
 
$0.05
 
December 2019
The warrants outstanding as of March 31, 2018 are all currently exercisable.
9. Stock-Based Compensation
Stock-based compensation expense for options granted, RSAs, performance stock awards (“PSAs”), SARs and stock purchase rights is reflected in the condensed consolidated statements of operations and comprehensive loss as follows: 
 
THREE MONTHS ENDED 
 MARCH 31,
(in thousands)
2018
 
2017
Selling, general and administrative
$
6,684

 
$
3,786

Research and development
2,035

 
1,064

Total
$
8,719

 
$
4,850

As of March 31, 2018, the Company had $77.8 million of unrecognized compensation expense related to options granted under its equity plans. This expense is expected to be recognized over a weighted average period of 3.2 years as of March 31, 2018.
As of March 31, 2018, the Company had $23.1 million of unrecognized compensation expense related to unvested RSAs, including PSAs. This expense is expected to be recognized over the weighted average period of 3.3 years as of March 31, 2018.
As of March 31, 2018, the Company had $1.6 million of unrecognized compensation expense related to unvested SARs granted under its equity plans. This expense is expected to be recognized over the weighted average period of 3.9 years as of March 31, 2018.
Equity Plans
The Company maintains three equity compensation plans, the 2005 Aerie Pharmaceutical Stock Plan (the “2005 Plan”), the 2013 Omnibus Incentive Plan (the “2013 Equity Plan”), which was amended and restated as the Aerie Pharmaceuticals, Inc. Amended and Restated Omnibus Incentive Plan (the “Amended and Restated Equity Plan”), as described below, and the Aerie Pharmaceuticals, Inc. Inducement Award Plan (the “Inducement Award Plan”), as described below. The 2005 Plan, the Amended and Restated Equity Plan and the Inducement Award Plan are referred to collectively as the “Plans.”
On October 30, 2013, the effective date of the 2013 Equity Plan, the 2005 Plan was frozen and no additional awards have been or will be made under the 2005 Plan. Any remaining shares available for future grant under the 2005 Plan were allocated to the 2013 Equity Plan.
On April 10, 2015, Aerie’s stockholders approved the adoption of the Amended and Restated Equity Plan and no additional awards have been or will be made under the 2013 Equity Plan. Any remaining shares available under the 2013 Equity Plan were allocated to the Amended and Restated Equity Plan. The Amended and Restated Equity Plan provides for the granting of up to 5,729,068 equity awards in respect of common stock of Aerie, including equity awards that were available for issuance under the 2013 Equity Plan. Additionally, the Amended and Restated Equity Plan provides for the granting of SARs awards, which the Company began granting to employees during the three months ended March 31, 2018.
On December 7, 2016, Aerie’s Board of Directors approved the Inducement Award Plan which provides for the granting of up to 418,000 equity awards in respect of common stock of Aerie and was subsequently amended during the year ended

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December 31, 2017 to increase the equity awards that may be issued by an additional 874,500 shares. Awards granted under the Inducement Award Plan are intended to qualify as employment inducement awards under NASDAQ Listing Rule 5635(c)(4).
The following table summarizes the stock option activity under the Plans: 
 
NUMBER OF
SHARES
 
WEIGHTED AVERAGE
EXERCISE PRICE
 
WEIGHTED
AVERAGE
REMAINING
CONTRACTUAL
LIFE (YEARS)
 
AGGREGATE
INTRINSIC
VALUE
(000’s)
Options outstanding at December 31, 2017
6,457,343

 
$
22.15

 

 


Granted
793,236

 
55.47

 
 
 
 
Exercised
(41,857
)
 
19.61

 
 
 
 
Canceled
(82,775
)
 
46.18

 
 
 
 
Options outstanding at March 31, 2018
7,125,947

 
$
25.57

 
7.2
 
$
207,230

Options exercisable at March 31, 2018
4,427,796

 
$
14.58

 
6.1
 
$
175,649

The following table summarizes the RSAs, including PSAs, activity under the Plans: 
 
NUMBER OF
SHARES
 
WEIGHTED AVERAGE
FAIR VALUE PER SHARE
Nonvested RSAs at December 31, 2017
447,049

 
$
41.08

Granted
242,201

 
55.45

Vested
(83,571
)
 
32.13

Canceled
(516
)
 
56.25

Nonvested RSAs at March 31, 2018
605,163

 
$
48.05

The vesting of the RSAs is time and service based with terms of one to four years. During the year ended December 31, 2017, the Company granted 98,817 RSAs with non-market performance conditions that vest upon the satisfaction of certain performance conditions and service conditions.
During the three months ended March 31, 2018, the Company granted 53,000 SARs awards at a weighted average exercise price of $55.15 and had a weighted average remaining contractual life of 4.9 years. All of these awards were outstanding at March 31, 2018.
Holders of these SARs are entitled under the terms of the Plans to receive cash payments calculated based on the excess of the Company’s common stock price over the target price in their award; consequently, these awards are accounted for as liability-classified awards and the Company measures compensation cost based on their estimated fair value at each reporting date, net of actual forfeitures, if any.
10. Commitments and Contingencies
The Company may periodically become subject to legal proceedings and claims arising in connection with its business. Except as previously disclosed for matters which have now concluded, the Company is not a party to any known litigation, is not aware of any unasserted claims and does not have contingency reserves established for any litigation liabilities.
11. Subsequent Events
On April 30, 2018, the Company announced the commercial launch of Rhopressa® in the United States. The Company hired a commercial team that includes approximately 100 sales representatives to target approximately 14,000 high prescribing eye care professionals throughout the United States. Rhopressa® is now in national and regional U.S. pharmaceutical distributors, and patients have access to Rhopressa® through pharmacies across the United States. As a result, Aerie commenced generating product revenues related to sales of Rhopressa® in the second quarter of 2018. Rhopressa® is a once-daily eye drop designed to

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reduce elevated IOP in patients with open-angle glaucoma or ocular hypertension that received FDA approval on December 18, 2017.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following management’s discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes that appear elsewhere in this report and with our audited financial statements and related notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as filed with the SEC on March 1, 2018 (“2017 Form 10-K”). This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Please see “Special Note Regarding Forward-Looking Statements” for additional factors relating to such statements, and see “Risk Factors” in our 2017 Form 10-K and other documents we have filed or furnished with the SEC for a discussion of certain risk factors applicable to our business, financial condition and results of operations. Past operating results are not necessarily indicative of operating results in any future periods.
Overview
We are an ophthalmic pharmaceutical company focused on the discovery, development and commercialization of first-in-class therapies for the treatment of patients with open-angle glaucoma and other diseases of the eye. Our strategy is to commercialize our U.S. Food and Drug Administration (“FDA”) approved product, Rhopressa® (netarsudil ophthalmic solution) 0.02% (“Rhopressa®”), in North American markets and advance our product candidate, RoclatanTM (netarsudil/latanoprost ophthalmic solution) 0.02%/0.005% (“RoclatanTM”), to regulatory approval. We launched Rhopressa® in the United States at the end of April 2018. Rhopressa® is now in national and regional U.S. pharmaceutical distributors, and patients have access to Rhopressa® through pharmacies across the United States. We expect to execute formulary contracts to enable commercial insurance coverage in 2018 and Medicare Part D program coverage in 2019. We expect preferred formulary coverage for the majority of commercial plans by the end of 2018, and preferred formulary coverage for the majority of Medicare Part D plans commencing in 2019. We hired a commercial team that includes approximately 100 sales representatives to target approximately 14,000 high prescribing eye care professionals throughout the United States. This sales force is responsible for sales of Rhopressa®, and will also be responsible for sales of RoclatanTM, if approved.
We also seek to enhance our longer-term commercial potential by identifying and advancing additional product candidates. This may be accomplished through our internal discovery efforts, our entry into potential research collaborations or in-licensing arrangements or our acquisition of additional ophthalmic products or technologies or product candidates that complement our current product portfolio, such as our collaboration with DSM, a global science-based company headquartered in the Netherlands, whereby we have access to their bio-erodible polymer technology, and our acquisition of assets from Envisia Therapeutics Inc. (“Envisia”), designed to advance our progress in developing potential future product candidates to treat retinal diseases, as discussed below.
Our strategy also includes developing our business outside of North America, including obtaining regulatory approval in Europe and Japan on our own for Rhopressa® and RoclatanTM. If we obtain regulatory approval, we currently expect to commercialize Rhopressa® and RoclatanTM in Europe on our own, and likely partner for commercialization in Japan.
In January 2017, we announced that we are building a new manufacturing plant in Athlone, Ireland. This will be our first manufacturing plant, which is expected to produce commercial supplies of Rhopressa® and, if approved, RoclatanTM. Commercial supply from our Ireland manufacturing plant is expected to be available by 2020. We will continue to use product sourced from our current contract manufacturer based in the United States. Our current contract manufacturer started producing commercial supply of Rhopressa® in 2017. We are also in the process of adding a second contract manufacturer, which we expect may produce commercial supply by as early as the end of 2018.
We own the worldwide rights to all indications for Rhopressa® and RoclatanTM. We have patent protection for Rhopressa® and RoclatanTM in the United States through at least 2030 and internationally, through dates ranging from 2030 to 2037. Our intellectual property portfolio contains patents and pending patent applications related to composition of matter, pharmaceutical compositions, methods of use, and synthetic methods.
Product and Product Candidate Overview
Rhopressa®, our product approved by the FDA, represents the first of a new drug class for reducing intraocular pressure (“IOP”) in patients with glaucoma in over 20 years. Rhopressa® has demonstrated that it reduces IOP through Rho kinase (“ROCK”) inhibition, its mechanism of action (“MOA”), by which Rhopressa® increases the outflow of aqueous humor through the trabecular meshwork (“TM”), which accounts for approximately 80% of fluid drainage from a healthy eye. Our late-stage pipeline consists of RoclatanTM, a single-drop fixed-dose combination of Rhopressa® and latanoprost, which reduces IOP through the same MOA as Rhopressa®, along with a second MOA that utilizes the ability of latanoprost to increase the

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outflow of aqueous humor through the uveoscleral pathway, the eye’s secondary drain. Both are taken once-daily in the evening and have shown in preclinical and clinical trials to be effective in reducing IOP, with a favorable safety profile.
Rhopressa® 
Rhopressa® is a once-daily eye drop designed to reduce elevated IOP in patients with open-angle glaucoma or ocular hypertension. Rhopressa® received approval from the FDA on December 18, 2017, two months earlier than the scheduled Prescription Drug User Fee Act date of February 28, 2018. The active ingredient in Rhopressa®, netarsudil, is a ROCK inhibitor. Based on clinical data, we expect that Rhopressa® will have the potential to compete with non-PGA (prostaglandin analog) products as a preferred adjunctive therapy to PGAs, due to its targeting of the diseased TM, its demonstrated ability to reduce IOP at consistent levels across tested baselines, and its preferred once-daily dosing relative to currently marketed non-PGA products. Adjunctive therapies currently represent nearly one-half of the glaucoma prescription market in the United States, according to IQVIA (formerly known as IMS Health). We believe that Rhopressa® may also become a preferred therapy where PGAs are contraindicated, for patients who do not respond to PGAs and for patients who choose to avoid the cosmetic issues associated with PGA products.
Rocket 4, one of our Phase 3 registration trials for Rhopressa®, was designed to generate adequate six-month safety data for European regulatory approval, along with efficacy and safety data from our other Phase 3 registration trials for Rhopressa®, Rocket 1 and Rocket 2. We expect to file a marketing authorization application (“MAA”) for Rhopressa® with the European Medicines Agency (“EMA”) in the second half of 2018. We also completed a Phase 1 clinical trial and commenced a Phase 2 clinical trial in the United States, which are designed to meet the requirements of Japan’s Pharmaceuticals and Medical Devices Agency for potential regulatory submission of Rhopressa® in Japan. These clinical trials include Japanese and Japanese-American subjects to support subsequent Phase 3 registration trials that are expected to be conducted in Japan.
RoclatanTM 
Our advanced-stage product candidate, RoclatanTM, is a once-daily fixed-dose combination of Rhopressa® and latanoprost. We believe, based on our clinical data, that RoclatanTM has the potential to provide a greater IOP-reducing effect than any currently marketed glaucoma medication. Therefore, we believe that RoclatanTM, if approved, could compete with both PGA and non-PGA therapies and become the product of choice for patients requiring maximal IOP reduction, including those with higher IOPs and those who present with significant disease progression despite use of currently available therapies.
We have completed two Phase 3 registration trials for RoclatanTM. The first Phase 3 registration trial for RoclatanTM, named “Mercury 1,” was a 12-month safety trial with a 90-day efficacy readout. Mercury 1 achieved its primary efficacy endpoint of demonstrating statistical superiority of RoclatanTM to each of its components, including Rhopressa® and the market-leading PGA, latanoprost, and the safety and tolerability results showed no drug-related serious adverse events. On July 19, 2017, we announced the Mercury 1 12-month safety results, noting the safety results for RoclatanTM showed no treatment-related serious adverse events and minimal evidence of treatment-related systemic effects. There were no new adverse events that developed over the 12-month period relative to the 90-day results, and there were no drug-related serious or systemic adverse events.
The second Phase 3 registration trial for RoclatanTM, named “Mercury 2,” was a 90-day efficacy and safety trial also designed to demonstrate statistical superiority of RoclatanTM to each of its components. The Mercury 2 trial design was identical to that of Mercury 1, except that Mercury 2 was a 90-day trial without the additional nine-month safety extension included in Mercury 1. Both Mercury 1 and Mercury 2 achieved their 90-day primary efficacy endpoints of demonstrating statistical superiority of RoclatanTM over each of its components at all measured time points in patients with maximum baseline IOPs of above 20 mmHg to below 36 mmHg. We expect to submit a New Drug Application (“NDA”) for RoclatanTM to the FDA in the second quarter of 2018.
Mercury 1 and Mercury 2 will also be used for European approval of RoclatanTM, and we initiated a third Phase 3 registration trial for RoclatanTM, named “Mercury 3,” in Europe during the third quarter of 2017. Mercury 3, a six-month safety trial, is designed to compare RoclatanTM to Ganfort®, a fixed-dose combination product of bimatoprost, a PGA, and timolol marketed in Europe. If successful, Mercury 3 is expected to improve our commercialization prospects in Europe. We currently expect to read out topline 90-day efficacy data for the trial in 2019 and to submit an MAA with the EMA for RoclatanTM thereafter.
Pipeline Opportunities
Our stated objective is to build a major ophthalmic pharmaceutical company. We are evaluating possible uses of our existing proprietary portfolio of ROCK inhibitors beyond glaucoma and ophthalmology. Our owned preclinical small molecule, AR-13503, has demonstrated the potential for the treatment of diabetic retinopathy and wet age-related macular degeneration (“AMD”) by inhibiting ROCK and Protein kinase C. AR-13503 has shown lesion size decreases in an in

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vivo preclinical model of wet AMD at levels similar to the current market-leading wet AMD anti-vascular endothelial growth factor (“anti-VEGF”) product. When used in combination with the market-leading anti-VEGF product, AR-13503 produced greater lesion size reduction than the anti-VEGF product alone in a model of proliferative diabetic retinopathy. This molecule has not yet been tested in humans in a clinical trial setting. Pending additional studies, AR-13503 may have the potential to provide an entirely new mechanism and pathway to treat diabetic retinopathy, wet AMD and related diseases of the retina, such as diabetic macular edema (“DME”). We expect to submit an Investigational New Drug application (“IND”) for AR-13503 in 2019. Since AR-13503 is a small molecule with a short half-life, and the aforementioned diseases are located in the back of the eye, a delivery mechanism is needed to deliver the molecule to the back of the eye for a sustained delivery period.
To that end, on July 31, 2017, we announced that we entered into a collaborative research, development and licensing agreement with DSM. The research collaboration agreement includes an option to license DSM’s bio-erodible polymer implant technology for sustained delivery of certain Aerie compounds to treat ophthalmic diseases. This technology uses polyesteramide polymers to produce an injectable, thin fiber that is minute in size. Preclinical experiments have demonstrated early success in conjunction with AR-13503, including demonstration of linear, sustained elution rates over several months and achievement of target retinal drug concentrations.
Further, on October 4, 2017, we acquired the rights to use PRINT® technology in ophthalmology and certain other assets from Envisia. The PRINT® technology is a proprietary system capable of creating precisely-engineered sustained-release products utilizing fully-scalable manufacturing processes. In addition, we acquired Envisia’s intellectual property rights relating to Envisia’s preclinical dexamethasone steroid implant for the potential treatment of DME that also utilizes the PRINT® technology, which we refer to as AR-1105. We expect to submit an IND for AR-1105 near the end of 2018. We will also focus on using PRINT® to manufacture injectable implants containing AR-13503, potentially in conjunction with the bio-erodible polymer from DSM.
We may continue to enter into research collaboration arrangements, license, acquire or develop additional product candidates and technologies to broaden our presence in ophthalmology, and we continually explore and discuss potential additional opportunities for new ophthalmic products, delivery alternatives and new therapeutic areas with potential partners. We are also currently screening our owned library of ROCK inhibitors for indications beyond ophthalmology, considering third-party studies and trials have demonstrated potential for ROCK inhibition in treating certain disease categories. We are initially focused on exploring potential opportunities for our molecules in pulmonary health, dermatology and cancers.
Financial Overview
Our cash, cash equivalents and investments totaled $334.0 million as of March 31, 2018. We believe our cash, cash equivalents and investments balances are adequate to provide for our current ongoing needs, though there may be need for additional financing activity as we continue to grow, including the potential use of a line of credit to finance the potential growth in our inventories and accounts receivable now that Rhopressa® is launched in the United States. See “—Liquidity and Capital Resources” below for further discussion.
We have incurred net losses since our inception in June 2005. As a result of the commercial launch of Rhopressa® in the United States in late April 2018, we commenced generating product revenues from sales of Rhopressa® in the second quarter of 2018. We will not generate any revenue from RoclatanTM or any future product candidates unless and until we obtain regulatory approval and commercialize such products.
Historically, our operations had primarily been limited to research and development and raising capital. As of March 31, 2018, we had an accumulated deficit of $504.6 million. We recorded net losses of $40.7 million and $25.8 million for the three months ended March 31, 2018 and 2017, respectively. Our capital resources and business efforts are largely focused on activities relating to the commercialization of Rhopressa®, advancing our product pipeline, international expansion and construction of our manufacturing facility in Athlone, Ireland. We expect to continue to incur operating losses until such a time when one or more of our products is commercially successful, if at all. If we do not successfully commercialize Rhopressa® or RoclatanTM or any future product candidates, if approved, we may be unable to generate product revenue or achieve profitability. We may be required to obtain further funding through public or private offerings, debt financing, collaboration and licensing arrangements or other sources. Adequate additional funding may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on acceptable terms, we may be forced to delay, reduce or eliminate our research and development programs or commercialization or manufacturing efforts.

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Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salaries, benefits and stock-based compensation for all officers and employees in general management, sales and marketing, manufacturing, finance, and administration. Other significant expenses include pre-approval commercial-related manufacturing costs, pre-launch sales and marketing planning activities, facilities expenses and professional fees for audit, tax, legal and other services.
We expect that our selling, general and administrative expenses will be higher in 2018 as compared to 2017 due to the commercialization efforts for Rhopressa®, including the hiring of sales representatives and additional employees focused on sales, marketing and manufacturing activities.
Research and Development Expenses
We expense research and development costs to operations as incurred. Research and development expenses consist primarily of costs incurred for the research and development of our preclinical and clinical candidates, including employee-related expenses for research and development personnel.
Excluding the $24.8 million of expense recognized in 2017 related to the Envisia asset acquisition, we expect that our research and development expenses will increase in 2018 as compared to 2017 due to clinical trial activities for both Rhopressa® and RoclatanTM for jurisdictions outside of the United States and for research initiatives aimed at advancing our pipeline, including our preclinical molecules and technologies focused on retinal diseases.
Other Income (Expense), Net
Other income (expense) primarily includes interest income, interest expense, and foreign exchange gains and losses. Interest income primarily consists of interest earned on our cash, cash equivalents and investments, and amortization or accretion of discounts and premiums on our investments. Interest expense consists of interest expense under the 2014 Convertible Notes, including the amortization of debt discounts and issuance costs. Foreign exchange gains and losses are primarily due to the remeasurement of our Euro-denominated liability related to our build-to-suit lease obligation, which is held by a subsidiary with a U.S. dollar functional currency.
Critical Accounting Policies and Use of Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, costs and expenses and related disclosures. We evaluate our estimates and judgments on an ongoing basis. Significant estimates include assumptions used in the determination of accrued expenses, fair value measurements, acquisitions and stock-based compensation. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our critical accounting policies and significant estimates have not materially changed since the date we filed our 2017 Form 10-K. For more information on our critical accounting policies and estimates, refer to our 2017 Form 10-K.


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Results of Operations
Comparison of the Three Months Ended March 31, 2018 and 2017
The following table summarizes the results of our operations for the three months ended March 31, 2018 and 2017: 
 
THREE MONTHS ENDED 
 MARCH 31,
 
CHANGE
 
%
CHANGE
 
2018
 
2017
 
 
 
(in thousands, except percentages)
Selling, general and administrative expenses
$
27,823

 
$
14,475

 
$
13,348

 
92
%
Research and development expenses
12,972

 
10,954

 
2,018

 
18
%
Total operating expenses
40,795

 
25,429

 
15,366

 
60
%
Loss from operations
(40,795
)
 
(25,429
)
 
(15,366
)
 
60
%
Other income (expense), net
96

 
(312
)
 
408

 
NM

Net loss before income taxes
$
(40,699
)
 
$
(25,741
)
 
$
(14,958
)
 
58
%
Selling, general and administrative expenses
Selling, general and administrative expenses increased by $13.3 million for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017. This increase was primarily associated with the expansion of our employee base to support the growth of our operations as well as expenses incurred in connection with our commercial launch of Rhopressa®. Employee-related expenses increased by $8.3 million primarily due to increased headcount and an increase in stock-based compensation expense of $2.9 million. Expenses related to our pre-launch sales and marketing activities increased by $3.2 million for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017.
Research and development expenses
Research and development expenses increased by $2.0 million for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017. This increase is primarily comprised of an increase of $2.5 million of employee-related expenses, including stock-based compensation, and an increase of $0.7 million related to preclinical programs, partially offset by a $2.5 million decrease in expenses related to RoclatanTM, as the Phase 3 trials for the United States were in process during 2017. These trials were completed prior to December 31, 2017, and we expect to file an NDA for RoclatanTM with the FDA during the second quarter of 2018. Research and development expenses for RoclatanTM totaled $0.9 million and $3.4 million for the three months ended March 31, 2018 and 2017, respectively. Research and development expenses for Rhopressa® totaled $1.0 million and $1.2 million for the three months ended March 31, 2018 and 2017, respectively. 
Other income (expense), net
Other income (expense), net consists of the following:
 
THREE MONTHS ENDED 
 MARCH 31,
 
CHANGE
 
%
CHANGE
 
2018
 
2017
 
 
 
(in thousands, except percentages)
Interest income
$
810

 
$
296

 
$
514

 
NM

Interest expense
(507
)
 
(597
)
 
90

 
(15
)%
Other income (expense)
(207
)
 
(11
)
 
(196
)
 
NM

 
$
96

 
$
(312
)
 
$
408

 
 
The change in other income (expense), net for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017 relates to an increase in interest income primarily due to the increase in our cash, cash equivalents and investments balances, partially offset by an increase in unrealized foreign exchange loss included in other expense related to the remeasurement of our Euro-denominated build-to-suit lease obligation, which is held by a subsidiary with a U.S. dollar functional currency.

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Liquidity and Capital Resources
Since our inception, we have funded operations primarily through the sale of equity securities and the issuance of convertible notes. We have incurred losses and experienced negative operating cash flows since our inception and anticipate that we will continue to incur losses until such a time when one or more of our products is commercially successful, if at all. We received FDA approval for Rhopressa® on December 18, 2017, and launched Rhopressa® in the United States in late April 2018, and as a result, we commenced generating product revenues related to sales of Rhopressa® in the second quarter of 2018.
Sources of Liquidity
During the three months ended March 31, 2018, we issued approximately 2.3 million shares of our common stock, for which we received net proceeds of approximately $136.4 million, after deducting fees and expenses. This includes approximately $62.3 million of net proceeds from our “at-the-market” sales agreement (“ATM”) and approximately $74.1 million of net proceeds from the issuance of shares of our common stock pursuant to an underwriting agreement related to a registered public offering.
As of March 31, 2018, our principal sources of liquidity were our cash, cash equivalents and investments, which totaled approximately $334.0 million.
Cash Flows
The following table summarizes our sources and uses of cash: 
 
THREE MONTHS ENDED 
 MARCH 31,
 
2018
 
2017
 
(in thousands)
Net cash (used in) provided by:
 
 
 
Operating activities
$
(40,835
)
 
$
(24,854
)
Investing activities
(41,546
)
 
(33,605
)
Financing activities
134,313

 
48

Net change in cash and cash equivalents
$
51,932

 
$
(58,411
)
Operating Activities
During the three months ended March 31, 2018 and 2017, net cash used in operating activities was $40.8 million and $24.9 million, respectively. The increase in cash used in operating activities during the three months ended March 31, 2018 as compared to the three months ended March 31, 2017 was primarily due to the expansion of our employee base, as well as an increase in cash used for commercial operations and manufacturing activities in preparation for the launch of Rhopressa®.
Investing Activities
During the three months ended March 31, 2018, our investing activities used net cash of $41.5 million primarily related to purchases of available-for-sale investments of $56.2 million and purchases of fixed assets of $9.1 million primarily related to the build-out of our manufacturing plant in Ireland. These purchases were partially offset by sales and maturities of available-for-sale investments of $23.8 million. During the three months ended March 31, 2017, our investing activities used net cash of approximately $33.6 million primarily related to purchases of available-for-sale investments of $45.6 million partially offset by maturities of available-for-sale investments of $12.9 million.
Financing Activities
During the three months ended March 31, 2018 and 2017, our financing activities provided net cash of $134.3 million and $48.0 thousand, respectively. The net cash provided by financing activities for the three months ended March 31, 2018 was primarily related to the issuance and sale of common stock pursuant to our prior “at-the-market” sales agreement and underwriting agreement related to a registered public offering, from which we received total net proceeds of approximately $136.0 million, net of expenses paid during the period. The net proceeds were partially offset by $1.4 million net cash used for stock-based compensation arrangements, primarily related to taxes paid on employees’ behalf through withholding of shares on restricted stock awards. The net cash provided by financing activities for the three months ended March 31, 2017 was primarily related to proceeds of $0.7 million from exercises of stock options and stock purchase rights under our employee stock

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purchase plan, which were offset by taxes paid on employees’ behalf through withholding of shares on restricted stock awards of $0.7 million.
Operating Capital Requirements
We expect to incur ongoing operating losses until such a time when Rhopressa® is, or RoclatanTM or any other products that may be approved in the future are, commercially successful, if at all.
Our principal liquidity requirements are for: working capital; future increased operational expenses; commercialization and manufacturing activities; expenses associated with developing our pipeline opportunities, including pursuing strategic growth opportunities; costs associated with executing our international expansion strategy, including clinical and potential commercialization activities in Europe and Japan; contractual obligations; capital expenditures, including completing our manufacturing plant in Ireland; and debt service payments.
In January 2017, we entered into a lease agreement for a new manufacturing plant in Ireland under which we are leasing approximately 30,000 square feet of interior floor space for build-out. Capital expenditures related to the manufacturing plant totaled approximately $15.2 million during the three months ended March 31, 2018
We believe that our cash, cash equivalents and investments as of March 31, 2018 will provide sufficient resources to support our commercial activities for Rhopressa® through at least the next twelve months and to support the expected approval and planned commercialization of RoclatanTM in the United States.
Our future funding requirements will depend on many factors, including, but not limited to the following:
costs of commercialization activities for Rhopressa® and RoclatanTM and any future product candidates, if approved, including the costs and timing of establishing product sales, marketing, manufacturing and distribution capabilities, and related product sales performance;
commercial performance of Rhopressa® and RoclatanTM or any future product candidates, if approved;
costs, timing and outcome of seeking regulatory approval;
timing and costs of our ongoing and future clinical trials and preclinical studies;
costs to complete our new manufacturing plant in Ireland;
costs of any follow-on development or products, including the exploration and/or development of any additional indications or additional opportunities for new ophthalmic product candidates, delivery alternatives and new therapeutic areas;
costs of any new business strategies;
costs of operating as a public company, including legal, compliance, accounting and investor relations activities;
terms and timing of any acquisitions, collaborations, licensing, consulting or other arrangements; and
filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against intellectual property related claims.
We based our projections on assumptions that may prove to be incorrect or unreliable or may change due to circumstances beyond our control, and as a result, we may consume our available capital resources earlier than we originally projected. We may need to obtain additional financing to fund our future operations or we may decide, based on various factors, that additional financings are desirable. If such funding is required, we cannot guarantee that it will be available to us on favorable terms, if at all.
Outstanding Indebtedness
As of March 31, 2018, our total indebtedness consisted of our $125.0 million aggregate principal amount of 2014 Convertible Notes. For a discussion of the 2014 Convertible Notes, see Note 7 to our condensed consolidated financial statements included in this report.

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Contractual Obligations and Commitments
There have been no material changes to our contractual obligations and commitments as included in our 2017 Form 10-K.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements as defined under SEC rules.
Recent Accounting Pronouncements
For a discussion of recently issued accounting standards, see Note 2 to our condensed consolidated financial statements included in this report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We have market risk exposure to interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. Our cash and cash equivalents as of March 31, 2018 totaled $249.5 million. Our investments totaled $84.5 million as of March 31, 2018 and consisted of commercial paper and corporate bonds. We had cash, cash equivalents and investments of $249.7 million as of December 31, 2017. Given the short-term nature of our cash, cash equivalents and investments and our investment policy, a sudden change in market interest rates would not be expected to have a material impact on our financial condition or results of operations. We do not engage in any hedging activities against changes in interest rates. The 2014 Convertible Notes carry a fixed interest rate and, as such, are not subject to interest rate risk.
Aerie faces market risks attributable to fluctuations in foreign currency exchange rates and exposure on the remeasurement of foreign currency-denominated monetary assets or liabilities into U.S. dollars. In particular, our operations and subsidiary in Ireland may enter into certain obligations or transactions in Euros or other foreign currencies, but has a U.S. dollar functional currency. We currently do not have any derivative instruments or a foreign currency hedging program. To date and during the three months ended March 31, 2018, foreign currency exposure and foreign currency financial instruments have not been material.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)), as of the end of the period covered by this report. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2018, the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Changes in Internal Control Over Financial Reporting
There have been no changes 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.

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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We may periodically become subject to legal proceedings and claims arising in connection with our business. Except as previously disclosed for matters which have now concluded, we are not a party to any known litigation, are not aware of any unasserted claims and do not have contingency reserves established for any litigation liabilities.
Item 1A. Risk Factors
You should consider carefully the risks set forth under “Risk Factors” in our 2017 Form 10-K, and other documents that we have filed or furnished with the SEC. There have been no material changes to these risk factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
We did not have any sales of unregistered equity securities during the three months ended March 31, 2018.
Use of Proceeds from Registered Securities
On September 15, 2016, we filed a shelf registration statement on Form S-3 (the “2016 Registration Statement”). The 2016 Registration Statement permits the offering, issuance and sale by us of our common stock. On December 19, 2017, we filed a prospectus supplement to the base prospectus dated September 15, 2016 (the “2017 Prospectus Supplement”), which permitted the offering, issuance and sale by us of up to a maximum aggregate offering price of $75.0 million of our common stock pursuant to an “at-the-market” sales agreement.
The ATM commenced in December 2017 and during the three months ended March 31, 2018, approximately 1.0 million shares were issued and sold under the ATM, and we received net proceeds of approximately $62.3 million, after deducting fees and expenses. The “at-the-market” offering that commenced on December 19, 2017 was completed in January 2018. There are no remaining shares available for issuance under the 2017 Prospectus Supplement.
Any remaining net proceeds from these sales are held as cash deposits and in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S. government securities.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.

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Item 6. Exhibits
10.1*
 
 
 
 
31.1*
 
 
 
31.2*
 
 
 
32.1**
 
 
 
32.2**
 
 
 
 
101.INS***
 
XBRL Instance Document.
 
 
 
101.SCH***
 
XBRL Taxonomy Extension Schema Document.
 
 
 
101.CAL***
 
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
101.LAB***
 
XBRL Taxonomy Extension Label Linkbase Database.
 
 
 
101.PRE***
 
XBRL Taxonomy Extension Presentation Linkbase Document.
 
 
 
101.DEF***
 
XBRL Taxonomy Extension Definition Linkbase Document.
*
Filed herewith.
**
Furnished herewith.
***
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language):
 
(i) Condensed Consolidated Balance Sheets at March 31, 2018 and December 31, 2017 (unaudited), (ii) Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2018 and 2017 (unaudited), (iii) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017 (unaudited) and (iv) Notes to Condensed Consolidated Financial Statements (unaudited).






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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.
 
 
 
 
 
 
 
 
 
 
AERIE PHARMACEUTICALS, INC.
 
 
 
Date: May 9, 2018
 
 
 
/s/ RICHARD J. RUBINO
 
 
 
 
Richard J. Rubino
 
 
 
 
Chief Financial Officer
 
 
 
 
(Principal Financial and Accounting Officer)






26
Exhibit


Exhibit 10.1
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the “Agreement”) made this 19th of January, 2018 (the “Effective Date”) is by and between Aerie Pharmaceuticals, Inc., a Delaware corporation with principal executive offices at 135 US Highway 206, Suite 9, Bedminster, NJ 07921 (the “Company”), and John LaRocca, residing at XXXXXXXXXXXXX (the “Executive”).
W I T N E S S E T H:
WHEREAS, Company desires to employ Executive as General Counsel; and
WHEREAS, Executive desires to accept such employment and to serve the Company in such capacity, upon the terms and subject to the conditions contained in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties hereto hereby agree as follows:
1.
Employment. The Company agrees to employ Executive, and Executive agrees to be employed by the Company, upon the terms and subject to the conditions of this Agreement.
2.Term. Subject to Sections 8 and 9 hereof, the Company agrees to employ Executive and Executive agrees to be employed by the Company, in each case pursuant to this Agreement, for a period commencing on February 19, 2018 or sooner (the “Start Date”) and ending on the third anniversary of the Start Date (the “Initial Term”). This Agreement will renew automatically for successive one (1) year periods (each, a “Renewal Period”) unless either party gives notice of non-renewal at least 90 days prior to the end of the Initial Term or the then-current Renewal Period, as applicable (the Initial Term and any Renewal Period are collectively referred to as the “Term”). Each additional Renewal Period shall be added to the end of the next scheduled expiration date of the Initial Term or Renewal Period, as applicable, as of the first day after the last day on which notice may be given pursuant to the preceding sentence.
3.Duties; Place of Performance; Etc.
(a)Executive shall serve as General Counsel of the Company and shall report to the Chairman & Chief Executive Officer of the Company (the “CEO”). Subject to the direction of the Chairman & CEO and the Board of Directors (the “Board”), as applicable, Executive shall have such powers and perform such duties as are reasonably determined by the Chairman & CEO and the Board, but shall be consistent with the duties customarily performed by the General Counsel of a similarly situated company in the United States.
(b)Executive shall devote substantially all of his business time, attention and energies to the business and affairs of the Company and shall use his best efforts to advance the interests of the Company and shall not during the Term be actively engaged in any other business activity, whether or not such business activity is pursued for gain, profit or other pecuniary advantage, which will interfere with the performance by Executive of his duties hereunder or Executive’s availability to perform such duties or that will adversely affect, or negatively reflect upon, the Company. Following execution of this Agreement, should Executive be, or desire to become, engaged as a consultant, owner, director officer or advisor of any other venture, Executive must obtain the prior written consent of the Board, which consent may be withheld in the Board’s sole discretion.
(c)The duties to be performed by Executive hereunder shall be performed primarily at the offices of the Company or such other place as the Board may authorize; provided, however, that Executive understands that his duties will require periodic travel, which may be substantial at times.





4.Compensation. As full compensation for the performance by Executive of his duties under this Agreement, the Company shall pay Executive as follows:
(a)Base Salary. The Company shall pay Executive an annual base salary (the “Base Salary”) equal to Four Hundred and Fifteen Thousand Dollars ($415,000), payable in accordance with the Company’s normal payroll practices. Executive’s Base Salary may be increased at the discretion of the Board but may not be decreased by the Board except as a proportional reduction, as to the salaries of all other officers of the Company at the level of Vice President and above as part of an overall reduction in salaries decided by the Board in good faith as being in the best interests of the Company and its stockholders, and will only be so reduced during such time as all such other executive officer salaries remain so reduced.
(b)Performance Bonus.
(i)During the Term, Executive shall also be eligible to receive an annual cash performance bonus (the “Performance Bonus”) based on a target equal of fifty percent (50%) of Executive’s Base Salary. The actual amount of such Performance Bonus shall be determined by the Board, or a designated committee thereof, and shall be based on the achievement of specific performance objectives to be established by the Chairman & CEO and approved by the Board, or a designated committee thereof, on an annual basis (the “Performance Goals”). Executive’s Performance Bonus with respect to calendar year 2018 will be calculated on a pro rata basis from the Start Date.
(ii)During the Term of this Agreement, Executive and the Chairman & CEO shall meet no later than the end of each year to mutually determine Executive’s performance objectives for the subsequent calendar year, which objectives shall be approved by the Board, or a designated committee thereof. If Executive and the Chairman & CEO are unable to agree upon such objectives for the relevant year despite mutual good faith efforts to do so, then the objectives will be determined in the good faith discretion by the Chairman & CEO no later than January 15th and will be communicated promptly to Executive in writing after being so determined and will be deemed to have been accepted by Executive.
(iii)Any Performance Bonus payable to Executive pursuant to this Section 4(b) shall be paid to Executive on or before March 15th of the subsequent calendar year, subject to continued employment through the date of payment.
 
(c)Withholding. The Company shall withhold all applicable federal, state and local taxes and social security and such other amounts as may be required by law from all amounts payable to Executive under this Section 4.
(d)Equity Grants.
(i)Stock Options. As soon as practicable after the Start Date, the Company will grant to Executive an option (the “Initial Option”) pursuant to the Company’s Inducement Award Plan (the “Inducement Plan”) to purchase 70,000 shares of common stock of the Company (the “Initial Option Shares”). The exercise price per share of Executive’s Initial Option will be equal to the closing NASDAQ quote on the date that the Initial Option is granted. The Initial Option shall vest, subject to Executive’s continued employment, as follows: (A) one-quarter of the Initial Option Shares shall vest and become exercisable on the first anniversary of the Start Date (the “Initial Vesting Date”) and (B) the balance of the Initial Option Shares shall vest and become exercisable in thirty-six (36) equal monthly installments on each consecutive monthly anniversary of the Initial Vesting Date. The final terms of the Initial Option shall be set forth in an individual option award agreement to be provided to Executive and in the Inducement Plan.
(ii)Restricted Stock. As soon as practicable after the Start Date, the Company will grant to Executive 18,000 shares of restricted common stock of the Company (the “Restricted Stock”) pursuant to the Inducement Plan. The Restricted Stock shall vest, subject to Executive’s continued employment, in four equal annual installments on each of the first four annual anniversaries of the Start Date. The final terms of the Restricted Stock





shall be set forth in an individual restricted stock award agreement to be provided to Executive and in the Inducement Plan.
(iii)Additional Equity Grants. During the Term hereof, Executive will be eligible to receive equity incentive awards, which may be in the form of stock options, restricted stock grants or other equity incentive awards under or outside of the Company’s Amended and Restated Omnibus Incentive Plan and under any successor equity incentive plans of the Company, as the Board in its sole discretion determines to be appropriate.
(e)Expenses. The Company shall reimburse Executive for all normal, usual and necessary expenses incurred by Executive in furtherance of the business and affairs of the Company, including reasonable travel and entertainment, upon timely receipt by the Company of appropriate vouchers or other proof of Executive’s expenditures and otherwise in accordance with any expense reimbursement policy as may from time to time be adopted by the Company.
(f)Insurance.
(i)Executive shall be designated as a named insured on any directors’ and officers’ liability insurance the Company may have.
(ii)The Company will provide Executive, at the Company’s expense, with a life insurance benefit plan with terms and coverage appropriate for Executive’s position with the Company, which policy amount shall be equal to no less than one year’s Base Salary in effect at the time the policy was acquired.
(g)Executive Benefits. Executive will receive the Company’s standard employee benefits package (including health and disability insurance with ninety-five percent (95%) of the cost paid by the Company, participation in the Company’s 401(k) plan subject to the terms and conditions thereof) as such package and policies are in effect from time to time, and as such benefits package may be adjusted by the Board in good faith during the Term hereof, as applicable to all employees, which benefits package can be increased, but cannot be decreased unless such decrease is effected in connection with, and is proportional to, an overall reduction in the relevant benefits to all executive officers, and will only be so reduced during such time as all such other relevant executive officer benefits remain so reduced.
(h)Vacation. Executive shall, during the Term, be entitled to four (4) weeks of vacation per annum, in addition to nationally recognized holidays and sick days provided as part of the Company’s benefit programs.
5.Confidential Information and Inventions.
(a)Executive recognizes and acknowledges that in the course of his duties he is likely to receive confidential or proprietary information owned by the Company, its Affiliates or third parties with whom the Company or any such Affiliates has an obligation of confidentiality. Accordingly, during and after the Term, Executive agrees to keep confidential and not disclose or make accessible to any other person or use for any other purpose other than in connection with the fulfillment of his duties under this Agreement, any Confidential and Proprietary Information (as defined below) owned by, or received by or on behalf of, the Company or any of its Affiliates. “Confidential and Proprietary Information” shall include, but shall not be limited to, confidential or proprietary scientific or technical information, data, formulas and related concepts, business plans (both current and under development), client lists, promotion and marketing programs, trade secrets, or any other confidential or proprietary business information relating to development programs, costs, revenues, marketing, investments, sales activities, promotions, credit and financial data, manufacturing processes, financing methods, plans or the business and affairs of the Company or of any Affiliate or client of the Company. Additionally, information that, by its nature and content, would be readily recognized by a reasonable person to be proprietary to the Company shall also be deemed Confidential and Proprietary Information. Executive expressly acknowledges the trade secret status of the Confidential and Proprietary Information and that the Confidential and Proprietary Information constitutes a protectable business interest of the Company. Executive agrees not to:





(i)use any such Confidential and Proprietary Information for personal use or for others; and
(ii)permanently remove any Company material or reproductions (including but not limited to writings, correspondence, notes, drafts, records, invoices, technical and business policies, computer programs or disks) thereof from the Company’s offices at any time during his employment by the Company, except as required in the execution of Executive’s duties to the Company; provided, however, that Executive shall not be prevented from using or disclosing any Confidential and Proprietary Information:
(A)that Executive can demonstrate was known to him prior to the Effective Date;
(B)that is now, or becomes in the future, available to persons who are not required, by contract or otherwise, to treat such information as confidential unless such persons acquired the Confidential and Proprietary Information through acts or omissions of Executive; or
(C)that Executive is compelled to disclose pursuant to the order of a court or other governmental or legal body having jurisdiction over such matter, provided that (1) Executive shall give Company sufficient advance written notice of such required disclosure to permit it to seek a protective order or other similar order with respect to such Confidential and Proprietary Information, and (2) thereafter Executive shall disclose only the minimum Confidential and Proprietary Information required to be disclosed in order to comply, whether or not a protective order or other similar order is obtained by the Company. The Confidential and Proprietary Information that is disclosed pursuant to this paragraph shall remain Confidential and Proprietary Information for all other purposes.
Notwithstanding the foregoing, nothing herein shall preclude Executive’s right to communicate, cooperate or file a complaint with any U.S. federal, state or local governmental or law enforcement branch, agency or entity (collectively, a “Governmental Entity”) with respect to possible violations of any U.S. federal, state or local law or regulation, or otherwise make disclosures to any Governmental Entity, in each case, that are protected under the whistleblower or similar provisions of any such law or regulation; provided that in each case such communications and disclosures are consistent with applicable law. In addition, Executive acknowledges that Executive has received notice of the immunity from liability to which Executive is entitled for the disclosure of confidential information or a trade secret to the government or in a court filing as provided by Federal law, as set forth in Exhibit A to this Agreement.
(b)Executive agrees to immediately return to the Company all Company material and reproductions thereof (including but not limited, to writings, correspondence, notes, drafts, records, invoices, technical and business policies, computer programs or disks) in his possession upon request and in any event immediately upon termination of employment.
(c)Except with prior written authorization by the Company, Executive agrees not to disclose or publish any of the Confidential and Proprietary Information, or any confidential, scientific, technical or business information of any other party to whom the Company or any of its Affiliates owes a legal duty of confidence, at any time during or after his employment with the Company.
(d)Executive agrees that all inventions, discoveries, improvements and patentable or copyrightable works, relating to the Company’s business (“Inventions”) initiated, conceived or made by him, either alone or in conjunction with others, during the Term shall be the sole property of the Company to the maximum extent permitted by applicable law and, to the extent permitted by law, shall be “works made for hire” as that term is defined in the United States Copyright Act (17 U.S.C.A., Section 101). The Company shall be the sole owner of all patents, copyrights, trade secret rights, and other intellectual property or other rights in connection therewith. Executive hereby assigns to the Company all right, title and interest he may have or acquire in all such Inventions; provided, however, that the Board may in its sole discretion agree to waive the Company’s rights pursuant to this Section 5(d) with respect to any Invention that is not directly or indirectly related to the Company’s business. Executive further agrees to assist the Company in every proper way (but at the Company’s expense) to obtain and from time to time enforce patents, copyrights or other rights on such Inventions in any and all countries, and to that end Executive will execute all documents necessary:





(i)to apply for, obtain and vest in the name of the Company alone (unless the Company otherwise directs) letters patent, copyrights or other analogous protection in any country throughout the world and when so obtained or vested to renew and restore the same; and
(ii)to defend any opposition proceedings in respect of such applications and any opposition proceedings or petitions or applications for revocation of such letters patent, copyright or other analogous protection.
(e)Executive acknowledges that while performing the services under this Agreement Executive or other employees, agents or advisors of the Company or its Affiliates in the course of their services on behalf of the Company, may locate, identify and/or evaluate molecules, compounds, products and product candidates having commercial potential in the specific segments of the pharmaceutical or biotechnology research and development industries in which the Company is then operating (the “Corporate Opportunities”). Executive understands, acknowledges and agrees that Executive shall not pursue any such Corporate Opportunity for himself or for others unless on behalf of the Company or unless such Corporate Opportunity is first offered to the Company and the Board rejects such Corporate Opportunity. Notwithstanding the foregoing, nothing in this Agreement shall be construed as a limitation of Executive’s fiduciary duties as an officer and director of the Company.
(f)The provisions of this Section 5 shall survive any termination of this Agreement.
6.Non-Solicitation; Non-Disparagement.
(a)During the Term and for a period of 12 months thereafter, Executive shall not, directly or indirectly, without the prior written consent of the Company engage in any Prohibited Solicitation. For purposes of this Agreement, a “Prohibited Solicitation” shall mean Executive’s (i) directly or indirectly hiring, contacting, inducing or soliciting (or assisting any Person to hire, contact, induce or solicit) for employment any person who is, or within six (6) months prior to the date of such hiring, contacting, inducing or soliciting was, an employee of the Company or any of its Affiliates, or (ii) directly or indirectly inducing or soliciting (or assisting any Person to induce or solicit) any customer, client or vendor of, or other person having a business relationship with, the Company or any of its Affiliates to terminate its relationship or otherwise cease doing business in whole or in part with the Company or any of its Affiliates, or directly or indirectly interfering with (or assist any Person to interfere with) any relationship between the Company or any of its Affiliates and any of their respective customers, clients, vendors or any other business contacts.
(b)During the Term and at all times thereafter, (i)  Executive agrees he shall not, directly or indirectly, make or encourage any other individual to make any public or private comments, orally or in written form (including, without limitation by e-mail or other electronic transmission), whether or not true, that would “disparage” the Company, or any of its officers, directors, managers, or significant stockholders and (ii) the Company agrees not to issue any public statement that would “disparage” Executive, and shall advise its officers and directors not to make any such statement on the Company’s behalf. “Disparaging” statements are those which impugn the character, capabilities, reputation or integrity of the aforesaid individuals or entity or which accuse the aforesaid individuals or entity of acting in violation of any law or governmental regulation or of condoning any such action, or otherwise acting in an unprofessional, dishonest, disreputable, improper, incompetent or negligent manner, but shall not include truthful statements required by due legal process. Notwithstanding the foregoing, nothing in this Agreement shall preclude the parties hereto or their successors from making truthful statements in the proper performance of their jobs or that are required by applicable law, regulation or legal process, and the parties shall not violate this provision in making truthful statements in response to disparaging statements made by the other party.
(c)In the event that Executive materially breaches any provisions of Section 5 or this Section 6, then, in addition to any other rights that the Company may have, the Company shall be entitled to seek injunctive relief to enforce the restrictions contained in such Sections, which injunctive relief shall be in addition to any other rights or remedies available to the Company under the law or in equity.
(d)The right and remedy enumerated in Section 6(c) shall be independent of and shall be in addition to and not in lieu of any other rights and remedies available to the Company at law or in equity. If any of the covenants contained in this Section 6, or any part of any of them, is hereafter construed or adjudicated to be invalid or





unenforceable, the same shall not affect the remainder of the covenant or covenants or rights or remedies which shall be given full effect without regard to the invalid portions. If any of the covenants contained in this Section 6 are held to be invalid or unenforceable because of the duration of such provision or the area covered thereby, the parties agree that the court making such determination shall have the power to reduce the duration and/or area of such provision and in its reduced form such provision shall then be enforceable. No such holding of invalidity or unenforceability in one jurisdiction shall bar or in any way affect the Company’s right to the relief provided in this Section 6 or otherwise in the courts of any other state or jurisdiction within the geographical scope of such covenants as to breaches of such covenants in such other respective states or jurisdictions, such covenants being, for this purpose, severable into diverse and independent covenants.
(e)In the event that an actual proceeding is brought in equity to enforce the provisions of Section 5 or this Section 6, Executive shall not urge as a defense that there is an adequate remedy at law nor shall the Company be prevented from seeking any other remedies which may be available. Executive agrees that he shall not raise in any proceeding brought to enforce the provisions of Section 5 or this Section 6 that the covenants contained in such Sections limit his ability to earn a living.
(f)The provisions of this Section 6 shall survive any termination of this Agreement.
7.Representations and Warranties by Executive. Executive hereby represents and warrants to the Company as follows:
(a)Neither the execution or delivery of this Agreement nor the performance by Executive of his duties and other obligations hereunder violate or will violate any statute or law or conflict with or constitute a default or breach of any covenant or obligation, including without limitation any non-competition restrictions, under any prior employment agreement, contract, or other instrument to which Executive is a party or by which he is bound (whether immediately, upon the giving of notice or lapse of time or both).
(b)Executive has the full right, power and legal capacity to enter and deliver this Agreement and to perform his duties and other obligations hereunder. This Agreement constitutes the legal, valid and binding obligation of Executive enforceable against him in accordance with its terms. No approvals or consents of any persons or entities are required for Executive to execute and deliver this Agreement or perform his duties and other obligations hereunder.
(c)Executive represents and warrants to the Company that he has not brought and shall not bring with him to the Company, or use in the performance of his responsibilities for the Company, any materials or documents of a former employer which are not generally available to the public or which did not belong to Executive prior to his employment with the Company, unless Executive has obtained written authorization from the former employer or other owner for their possession and use and provided the Company with a copy thereof.
8.Termination. Executive’s employment with the Company shall be at-will, and either party may terminate the employment at any time for any reason or no reason at all (subject to applicable notice requirements); provided, however, that under certain circumstances, Executive may be entitled to receive payments and other benefits from the Company following termination as described in Section 9.
Notwithstanding the foregoing, should Executive voluntarily terminate his employment, Executive shall provide the Company with no less than 30 days’ prior written notice, which notice period may be waived or shortened by the Company.
9.
Severance.
(a)In the event that Executive’s employment is terminated by the Company without Cause, or by Executive for Good Reason (each as hereinafter defined), then, Subject to Section 9(d) and Section 10:





(i)the Company shall pay Executive’s accrued but unpaid Base Salary through the date of termination, at the rate in effect at the time of termination, accrued but unused vacation, and reimburse Executive for any unreimbursed business expenses incurred prior to the date of termination;
(ii)the Company shall continue to pay Executive’s Base Salary at the rate in effect at the time of termination (without regard to any reduction in Base Salary that served as the basis for a resignation for Good Reason) for a period of 12 months following the date of termination in accordance with the Company’s ordinary payroll practice;
(iii)to the extent permitted by applicable healthcare laws and provided that Executive makes a timely election to continue coverage, the Company shall pay directly to the insurance provider the premium for COBRA continuation coverage for Executive and Executive’s dependents, less the amount payable by an active employee for such coverage, for a period of 12 months or until he obtains new employment, whichever comes first (the benefits described in this Section 9(a)(iii) shall be referred to as the “Continued Benefits”). Notwithstanding the foregoing, in the event that applicable healthcare laws do not permit continuation of coverage, then the Company shall reimburse Executive for the costs of obtaining coverage in an amount not to exceed the coverage amounts paid or payable by Executive immediately prior to the date of termination; and
(iv)the vesting applicable to all Equity Awards granted during the Term shall cease immediately and Executive shall have a period of 90 days to exercise any and all vested Equity Awards, after which time all Equity Awards shall expire; provided, however, that no such Equity Award that is an option shall be exercisable after the expiration of its maximum term pursuant to the terms thereof.
(b)In the event that Executive’s employment is terminated by the Company for Cause, or by Executive other than for Good Reason, then:
(i)the Company shall pay Executive’s accrued but unpaid Base Salary through the date of termination, at the rate in effect at the time of termination, accrued but unused vacation, and reimburse Executive for any unreimbursed business expenses incurred prior to the date of termination;
(ii)Executive shall not be entitled to receive any payments or Continued Benefits described in this Section 9; and
(iii)the vesting applicable to all Equity Awards shall cease immediately and Executive shall have a period of 90 days to exercise any and all vested Equity Awards, after which time all Equity Awards shall expire; provided, however, that no such Equity Award that is an option shall be exercisable after the expiration of its maximum term pursuant to the terms thereof.
(c)If a Change in Control occurs during the Term and the successor corporation (or a parent or subsidiary of the successor corporation) (1) does not offer Executive employment on terms comparable to Executive’s then existing terms of employment with the Company and in connection therewith, Executive terminates employment; or (2) Executive’s employment is terminated by such successor corporation without Cause or by Executive for Good Reason, within one-year after the Change in Control, then:
(i)the Company shall pay Executive’s accrued but unpaid Base Salary through the date of termination, at the rate in effect at the time of termination, accrued but unused vacation, and reimburse Executive for any unreimbursed business expenses incurred prior to the date of termination;
(ii)the Company shall continue to pay Executive’s Base Salary at the rate in effect at the time of termination (without regard to any reduction in Base Salary that served as the basis for a resignation for Good Reason) for a period of 18 months following the date of termination in accordance with the Company’s ordinary payroll practice;
(iii)the Company shall pay Executive a Performance Bonus in an amount equal to 1.5 times the greater of (1) the target bonus for the applicable calendar year; and (2) the average of the Performance Bonus received by Executive for the two years immediately preceding termination;





(iv)the Company shall provide the Continued Benefits to Executive for a period of 18 months following the date of termination or until he obtains new employment, whichever comes first; and
(v)All unvested Equity Awards shall immediately vest in full and remain exercisable, if applicable, for a period of 90 calendar days following the date of such termination; provided, however, that no such Equity Award that is an option shall be exercisable after the expiration of its maximum term pursuant to the terms thereof. In order to give effect to the foregoing provision, notwithstanding anything to the contrary set forth in any agreement governing an Equity Award regarding immediate forfeiture of unvested shares upon termination of service or the duration of post-termination of service exercise periods, following any termination of Executive’s employment, none of Executive’s equity incentive awards shall terminate with respect to any vested or unvested portion subject to such Equity Award before 90 days following such termination.
(d)This Section 9 sets forth the only obligations of the Company with respect to the termination of Executive’s employment with the Company, and Executive acknowledges that, upon the termination of his employment, he shall not be entitled to any payments or benefits which are not explicitly provided in this Section 9. Further, notwithstanding anything to the contrary contained herein, the Company shall have no obligation to pay, and Executive shall have no right to receive, any compensation, benefits or other consideration provided for in this Section 9 (other than any accrued but unpaid Base Salary through the date of termination and any reimbursement of unreimbursed expenses incurred prior to the date of termination) (the “Payments”) unless Executive executes an agreement in a form satisfactory to the Company (the “Release Agreement”) releasing the Company from any and all liability in connection with Executive’s employment or the termination thereof that becomes effective no later than 60 days following Executive’s termination (the “Release Deadline”). Except as required by Section 10, the Payments will commence on the first payroll period following the Release Agreement becoming effective; provided, that (i) if the Payments (or any portion thereof) constitute “deferred compensation” within the meaning of Section 409A (as defined in Section 10) and (ii) the period commencing on the date of termination and ending on the Release Deadline spans two calendar years, then the Payments (or such portion thereof that constitute “deferred compensation”) will commence on the later of the Release Agreement becoming effective and the first payroll date of the Company in the second calendar year. Any portion of the Payments that is delayed due to the application of the preceding sentence shall be made on the date that the Payments commence.
(e)Effective as of the date of any termination of Executive’s employment, unless otherwise agreed to by Executive and the Board, upon termination of Executive’s employment hereunder for any reason, Executive shall be deemed to have resigned from all offices held at the Company or any subsidiary or other Affiliate of the Company at the date of such termination, including without limitation the position of General Counsel.
(f)The Company shall withhold all applicable federal, state and local taxes and social security and such other amounts as may be required by law from all amounts payable to Executive under this Section 9.
(g)The provisions of this Section 9 shall survive any termination of this Agreement.
(h)For purposes of this Agreement, “Cause” shall include any of the following:
(i)Executive’s willful failure to perform the material duties or obligations hereunder, or willful misconduct by Executive in respect of such duties or obligations, including, without limitation, willful failure, disregard or refusal by Executive to abide by specific, objective and lawful directions received by him in writing constituting an action of the Board, which willful failure, disregard or refusal is not cured by Executive within 30 days following written notice from the Company.
(ii)any willful, intentional or grossly negligent act by Executive having the reasonably foreseeable effect of actually and substantially injuring, whether financial or otherwise, the business or reputation of the Company;
(iii)Executive’s indictment of, or plea of nolo contender to, any felony;





(iv)Executive being convicted of a misdemeanor involving moral turpitude that causes, or could reasonably be expected to cause, substantial harm to business or reputation of the Company;
(v)the determination by the Company, after a reasonable and good-faith investigation by the Company following a written allegation by another employee of the Company, that Executive engaged in some form of harassment prohibited by law (including, without limitation, age, sex or race discrimination); provided, however, that Cause shall not exist under this clause (v) unless the Company gives written notice to Executive where such notice describes with particularity the alleged act(s) at issue and has given Executive an opportunity to be heard at a meeting of the Board with or without counsel, and the Board provides Executive with a summary of its findings;
(vi)any conduct on the part of Executive that constitutes a breach of his fiduciary duties to the Company;
(vii)any misappropriation or embezzlement of the property of the Company or its affiliates (whether or not a misdemeanor or felony) by Executive; or
(viii)a material breach by Executive of this Agreement.
(i)For purposes of this Agreement, “Good Reason” shall mean:
(i)any material diminution by the Company of Executive’s title, duties, reporting or Base Salary, other than as a proportional reduction, consistent with the reductions in the salaries of all other executive officers of the Company at the level of Vice President and above as part of an overall reduction in salaries of executive officers of the Company, which proportional reduction shall remain in effect only for such time as all such other executive officer salaries remain so reduced; or
(ii)a material breach by the Company of Section 4 of this Agreement.
Notwithstanding the foregoing, should Executive wish to terminate this Agreement for Good Reason, he must provide the Company with written notice of such Good Reason within 30 days of the occurrence of such event and reasonably cooperate with the Company in remedying the condition causing Good Reason for a period of not more than 60 days (the “Cure Period”). If, following the Cure Period, the condition causing Good Reason remains uncured, a termination of employment by Executive for Good Reason shall be effective on the day following the expiration of such cure period.
(j)For purposes of this Agreement, “Change in Control” shall have the meaning set forth in the Plan.
10.Section 409A. Notwithstanding anything to the contrary set forth herein, any payments and benefits provided under this Agreement that constitute “deferred compensation” within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) and the regulations and other guidance thereunder and any state law of similar effect (collectively, “Section 409A”) and that are payable in connection with Executive’s termination of employment shall not commence unless and until Executive has also incurred a “separation from service” within the meaning of Section 409A, unless the Company reasonably determines that such amounts may be provided to Executive without causing Executive to incur the additional 20% tax under Section 409A. If Executive is, upon a separation from service, a “specified employee” within the meaning of Section 409A, then, solely to the extent necessary to avoid the incurrence of the adverse personal tax consequences under Section 409A, the payment of any deferred compensation shall not commence until the earlier to occur of: (i) the date that is six months and one day after Executive’s separation from service, or (ii) the date of Executive’s death. Any payments that are delayed due to the application of the preceding sentence shall be made on the date that payments commence. For purposes of Section 409A, the right to a series of installment payments under this Agreement shall be treated as a right to a series of separate payments.
11.Section 280G. Notwithstanding anything to the contrary contained in this Agreement, to the extent that any of the payments and benefits provided for under this Agreement or any other agreement or arrangement between Executive and the Company (collectively, the “Payments”) constitute a “parachute payment” within the meaning





of Section 280G of the Code and (ii) but for this Section 11, would be subject to the excise tax imposed by Section 4999 of the Code, then the Payments shall be payable either (i) in full or (ii) as to such lesser amount which would result in no portion of such Payments being subject to excise tax under Section 4999 of the Code; whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in Executive’s receipt on an after-tax basis, of the greatest amount of economic benefits under this Agreement, notwithstanding that all or some portion of such benefits may be taxable under Section 4999 of the Code. Unless Executive and the Company otherwise agree in writing, any determination required under this Section 11 shall be made in writing by the Company’s independent public accountants (the “Accountants”), whose reasonable determination shall be conclusive and binding upon Executive and the Company for all purposes. For purposes of making the calculations required by this Section 11, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of the Sections 280G and 4999 of the Code. Executive and the Company shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section 11. If a reduction in Payments is necessary so that no portion of the Payments is subject to the excise tax under Section 4999 of the Code, reduction shall occur in the manner that results in the greatest economic benefit to Executive. If more than one method of reduction will result in the same economic benefit, the items so reduced will be reduced pro rata. If this Section 11 is applied to reduce an amount payable to Executive, and the Internal Revenue Service successfully asserts that, despite the reduction, Executive has nonetheless received payments which are in excess of the maximum amount that could have been paid to him without being subjected to any excise tax, then, unless it would be unlawful for the Company make such a loan or similar extension of credit to Executive, Executive may repay such excess amount to the Company though such amount constitutes a loan to Executive made at the date of payment of such excess amount, bearing interest at 120% of the applicable federal rate (as determined under section 1274(d) of the Code in respect of such loan).
12.Miscellaneous.
(a)This Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of New Jersey, without giving effect to its principles of conflicts of laws.
(b)Executive will be subject to such indemnification as is provided under the Company’s Bylaws.
(c)Any dispute arising out of, or relating to, this Agreement or the breach thereof (other than Sections 5 or 6 hereof), or regarding the interpretation thereof, shall be exclusively decided by binding arbitration conducted in New Jersey in accordance with the rules of the American Arbitration Association (the “AAA”) then in effect before a single arbitrator appointed in accordance with such rules. Judgment upon any award rendered therein may be entered and enforcement obtained thereon in any court having jurisdiction. The arbitrator shall have authority to grant any form of appropriate relief, whether legal or equitable in nature, including specific performance. Each of the parties agrees that service of process in such arbitration proceedings shall be satisfactorily made upon it if sent by registered mail addressed to it at the address referred to in clause (h) below. The costs of such arbitration shall be borne proportionate to the finding of fault as determined by the arbitrator. Judgment on the arbitration award may be entered by any court of competent jurisdiction.
(d)This Agreement shall be binding upon and inure to the benefit of the parties hereto, and their respective heirs, legal representatives, successors and assigns.
(e)This Agreement and Executive’s rights and obligations hereunder, may not be assigned by Executive. The Company may assign its rights, together with its obligations, hereunder in connection with any sale, transfer or other disposition of all or substantially all of its business or assets provided the assignee entity which succeeds to the Company expressly assumes the Company’s obligations hereunder and complies with the terms of this Agreement.
(f)This Agreement cannot be amended orally, or by any course of conduct or dealing, but only by a written agreement signed by the parties hereto.





(g)The failure of either party to insist upon the strict performance of any of the terms, conditions and provisions of this Agreement shall not be construed as a waiver or relinquishment of future compliance therewith, and such terms, conditions and provisions shall remain in full force and effect. No waiver of any term or condition of this Agreement on the part of either party shall be effective for any purpose whatsoever unless such waiver is in writing and signed by such party.
(h)All notices, requests, consents and other communications, required or permitted to be given hereunder, shall be in writing and shall be delivered personally or by an overnight courier service or sent by registered or certified mail, postage prepaid, return receipt requested, to the parties at the addresses set forth on the first page of this Agreement, and shall be deemed given when so delivered personally or by overnight courier, or, if mailed, five (5) days after the date of deposit in the United States mail. Either party may designate another address, for receipt of notices hereunder by giving notice to the other party in accordance with this clause (h).
(i)This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof, and supersedes all prior agreements, arrangements and understandings, written or oral, relating to the subject matter hereof. No representation, promise or inducement has been made by either party that is not embodied in this Agreement, and neither party shall be bound by or liable for any alleged representation, promise or inducement not so set forth.
(j)As used in this Agreement, “Affiliate” of a specified Person shall mean and include any Person controlling, controlled by or under common control with the specified Person.
(k)The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement.
(l)This Agreement may be executed in any number of counterparts, each of which shall constitute an original, but all of which together shall constitute one and the same instrument.
(m)Notwithstanding anything in this Agreement to the contrary, any payments made to Executive herein shall be subject to any recoupment or clawback policy adopted by the Company from time to time and to any requirement of applicable law, regulation or listing standard that requires the Company to recoup or clawback any compensation so paid.
[Signature page follows.]






 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.


AERIE PHARMACEUTICALS, INC.

By:    /s/ Vicente Anido, Jr., Ph.D.
Name:    Vicente Anido, Jr., Ph.D.
Title:    Chairman and CEO


EXECUTIVE

By:    /s/ John W. LaRocca
Name:    John W. LaRocca    
Date:    January 23, 2018








EXHIBIT A

18 U.S.C. 1833(b) provides:
(1) IMMUNITY.—An individual shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that—
(A) is made—
(i) in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and
(ii) solely for the purpose of reporting or investigating a suspected violation of law; or
(B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.

(2) USE OF TRADE SECRET INFORMATION IN ANTI-RETALIATION LAWSUIT.-An individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual—
(A) files any document containing the trade secret under seal; and
(B) does not disclose the trade secret, except pursuant to court order.




Exhibit


Exhibit 31.1
CERTIFICATION
I, Vicente Anido, Jr., Ph.D., certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Aerie Pharmaceuticals, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 
 
 
 
 
Date: May 9, 2018
 
 
 
/s/ VICENTE ANIDO, JR., PH.D.
 
 
 
 
Vicente Anido, Jr., Ph.D.
 
 
 
 
Chief Executive Officer, Chairman of the Board
 
 
 
 
(Principal Executive Officer)


Exhibit


Exhibit 31.2
CERTIFICATION
I, Richard J. Rubino, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Aerie Pharmaceuticals, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 


 
 
 
 
 
Date: May 9, 2018
 
 
 
/s/ RICHARD J. RUBINO
 
 
 
 
Richard J. Rubino
 
 
 
 
Chief Financial Officer
 
 
 
 
(Principal Financial and Accounting Officer)



Exhibit


Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Quarterly Report on Form 10-Q of Aerie Pharmaceuticals, Inc., a Delaware corporation (the “Company”), for the period ended March 31, 2018 (the “Report”), the undersigned, Vicente Anido, Jr., Ph.D., Chief Executive Officer and Chairman of the Board of the Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
 
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
 
 
 
Date: May 9, 2018
 
 
 
/s/ VICENTE ANIDO, JR., PH.D.
 
 
 
 
Vicente Anido, Jr., Ph.D.
 
 
 
 
Chief Executive Officer, Chairman of the Board
 
 
 
 
(Principal Executive Officer)



Exhibit


Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Quarterly Report on Form 10-Q of Aerie Pharmaceuticals, Inc., a Delaware corporation (the “Company”), for the period ended March 31, 2018 (the “Report”), the undersigned, Richard J. Rubino, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
 
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
 
 
 
Date: May 9, 2018
 
 
 
/s/ RICHARD J. RUBINO
 
 
 
 
Richard J. Rubino
 
 
 
 
Chief Financial Officer
 
 
 
 
(Principal Financial and Accounting Officer)