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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
or
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)
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Shares of common stock, par value $0.001 per share
 
AERI
 
Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes:      No:  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes:      No:  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 


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Large accelerated filer
 
  
Accelerated filer
 
 
 
 
Non-accelerated filer
 
(Do not check if a smaller reporting company)
  
Smaller reporting company
 
 
 
 
 
 
Emerging growth company
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

As of November 1, 2019, there were 46,321,454 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. References to “approved products” means products approved by the U.S. Food and Drug Administration (“FDA”) or other regulatory authorities; references to “product candidates” means products that are in development but not yet approved by the FDA or other regulatory authorities; references to “future product candidates” means products that have not yet been developed.

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 potential future sales of Rhopressa® (netarsudil ophthalmic solution) 0.02% (“Rhopressa®”) or of Rocklatan® (netarsudil and latanoprost ophthalmic solution) 0.02%/0.005% (“Rocklatan®”) in the United States, and the potential future sales in the United States of any current or future product candidates, if approved;
the potential future sales in jurisdictions outside of the United States of Rhopressa®, named Rhokiinsa® (netarsudil ophthalmic solution) 0.02% (“Rhokiinsa®”) in Europe, or Rocklatan®, named Roclanda® (netarsudil and latanoprost ophthalmic solution) 0.02%/0.005% (“Roclanda®”) in Europe, or their equivalents, and those of any current or future product candidates;  
our commercialization, marketing, manufacturing and supply management capabilities and strategies in and outside of the United States;
third-party payer coverage and reimbursement for our approved products, product candidates and any future product candidates, if approved;
the glaucoma patient market size and the rate and degree of market adoption of our approved products, product candidates and any future product candidates, if approved, by eye care professionals and patients;
the timing, cost or other aspects of the commercial launch of our approved products, product candidates and any future product candidates, if approved;
the success, timing and cost of our ongoing and anticipated preclinical studies and clinical trials for our product candidates 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 our approved products, product candidates and any future product candidates and our expectations regarding the results of any clinical trials and preclinical studies;
the timing of and our ability to request, obtain and maintain FDA or other regulatory authority approval of, or other action with respect to our approved products, product candidates and any future product candidates in the United States, Europe, Japan and elsewhere, including the expected timing of, and regulatory and/or other review of, filings for such 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;

ii

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our plans to pursue development of additional product candidates and technologies in ophthalmology, including development of our approved products or product candidates for additional indications, our preclinical retinal programs and other therapeutic opportunities, and our plans to explore possible uses of our existing proprietary compounds beyond ophthalmology;
the potential advantages of our approved products, product candidates 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
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 in greater detail 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, 2018, as filed with the Securities and Exchange Commission (“SEC”) on March 1, 2019, and other documents we have filed or furnished with the SEC.
In particular, FDA approval of Rhopressa® and Rocklatan® do not constitute FDA approval of AR-1105, AR-13503 or any future product candidates in the United States, and there can be no assurance that we will receive FDA approval for AR-1105, AR-13503 or any future product candidates. FDA approval of Rhopressa® and Rocklatan® does not constitute regulatory approval of Rhopressa®, or Rhokiinsa® as it will be named in Europe, and Rocklatan®, or Roclanda® as it will be named in Europe, in jurisdictions outside the United States, and there can be no assurance that we will receive regulatory approval for our current or future product candidates in jurisdictions outside the United States. Neither the European Medicines Agency ("EMA") acceptance of our Marketing Authorisation Application ("MAA") for Rhokiinsa® nor the EMA Committee for Medicinal Products in Human Use (“CHMP”) positive opinion recommending approval of the MAA constitutes EMA approval of Rhokiinsa® and does not provide assurance that the EMA will approve Rhokiinsa®. 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 the 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 data)
 
 
SEPTEMBER 30, 2019
 
DECEMBER 31, 2018
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
248,702

 
$
202,818

Short-term investments
92,075

 

Accounts receivable, net
33,278

 
2,715

Inventory
14,673

 
10,112

Prepaid expenses and other current assets
7,940

 
4,530

Total current assets
396,668

 
220,175

Long-term investments
5,020

 

Property, plant and equipment, net
58,277

 
60,525

Operating lease right-of-use assets
17,216

 

Other assets
2,027

 
4,344

Total assets
$
479,208

 
$
285,044

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
11,480

 
$
12,403

Accrued expenses and other current liabilities
55,728

 
38,381

Operating lease liabilities
5,802

 

Total current liabilities
73,010

 
50,784

Convertible notes, net
183,553

 

Long-term operating lease liabilities
12,235

 

Other non-current liabilities
1,206

 
6,454

Total liabilities
270,004

 
57,238

Commitments and contingencies (Note 13)

 

Stockholders’ equity
 
 
 
Preferred stock, $0.001 par value; 15,000,000 shares authorized as of September 30, 2019 and December 31, 2018; None issued and outstanding

 

Common stock, $0.001 par value; 150,000,000 shares authorized as of September 30, 2019 and December 31, 2018; 45,998,956 and 45,478,883 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively
46

 
45

Additional paid-in capital
1,050,252

 
924,180

Accumulated other comprehensive loss
(158
)
 

Accumulated deficit
(840,936
)
 
(696,419
)
Total stockholders’ equity
209,204

 
227,806

Total liabilities and stockholders’ equity
$
479,208

 
$
285,044

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 SEPTEMBER 30,
 
NINE MONTHS ENDED SEPTEMBER 30,
 
2019
 
2018
 
2019
 
2018
Product revenues, net
$
18,544

 
$
7,302

 
$
45,231

 
$
9,725

Total revenues, net
18,544

 
7,302

 
45,231

 
9,725

Costs and expenses:
 
 
 
 
 
 
 
Cost of goods sold
2,063

 
205

 
3,149

 
264

Selling, general and administrative
32,171

 
32,685

 
102,935

 
88,727

Pre-approval commercial manufacturing
5,841

 
7,248

 
16,117

 
18,920

Research and development
21,796

 
28,502

 
60,584

 
59,631

Total costs and expenses
61,871

 
68,640

 
182,785

 
167,542

Loss from operations
(43,327
)
 
(61,338
)
 
(137,554
)
 
(157,817
)
Other (expense) income, net
(6,075
)
 
(24,050
)
 
(7,053
)
 
(23,291
)
Loss before income taxes
(49,402
)
 
(85,388
)
 
(144,607
)
 
(181,108
)
Income tax (benefit) expense

 

 
(90
)
 
3

Net loss
$
(49,402
)
 
$
(85,388
)
 
$
(144,517
)
 
$
(181,111
)
Net loss per common share—basic and diluted
$
(1.09
)
 
$
(1.96
)
 
$
(3.19
)
 
$
(4.47
)
Weighted average number of common shares
 outstanding—basic and diluted
45,448,190

 
43,657,423

 
45,372,608

 
40,505,534

 
 
 
 
 
 
 
 
Net loss
$
(49,402
)
 
$
(85,388
)
 
$
(144,517
)
 
$
(181,111
)
Unrealized (loss) gain on available-for-sale investments
(158
)
 
8

 
(158
)
 
27

Comprehensive loss
$
(49,560
)
 
$
(85,380
)
 
$
(144,675
)
 
$
(181,084
)
The accompanying notes are an integral part of these condensed consolidated financial statements.


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AERIE PHARMACEUTICALS, INC.
Consolidated Statements of Stockholders’ Equity
(Unaudited)
(in thousands, except share data)
 
 
COMMON STOCK
 
ADDITIONAL
PAID-IN
CAPITAL
 
ACCUMULATED OTHER COMPREHENSIVE (LOSS) GAIN
 
ACCUMULATED
DEFICIT
 
TOTAL
 
SHARES
 
AMOUNT
 
Balances at December 31, 2017
36,947,637

 
$
37

 
$
597,318

 
$
(28
)
 
$
(461,728
)
 
$
135,599

Cumulative effect adjustment from adoption of ASU 2016-16

 

 

 

 
(2,137
)
 
(2,137
)
Issuance of common stock, net of commissions and expenses of $1,345
2,313,824

 
2

 
136,373

 

 

 
136,375

Issuance of common stock upon exercise of stock options and warrants
28,654

 

 
95

 

 

 
95

Issuance of common stock for restricted stock awards, net
212,995

 
1

 
(1,596
)
 

 

 
(1,595
)
Stock-based compensation

 

 
8,762

 

 

 
8,762

Other comprehensive loss

 

 

 
(129
)
 

 
(129
)
Net loss

 

 

 

 
(40,699
)
 
(40,699
)
Balances at March 31, 2018
39,503,110

 
$
40

 
$
740,952

 
$
(157
)
 
$
(504,564
)
 
$
236,271

Issuance of common stock upon exercise of stock purchase rights
16,965

 

 
872

 

 

 
872

Issuance of common stock upon exercise of stock options and warrants
319,257

 

 
2,732

 

 

 
2,732

Issuance of common stock for restricted stock awards, net
41

 

 
(369
)
 

 

 
(369
)
Stock-based compensation

 

 
10,180

 

 

 
10,180

Commissions and expenses related to issuance of common stock

 

 
70

 

 

 
70

Other comprehensive gain

 

 

 
148

 

 
148

Net loss

 

 

 

 
(55,024
)
 
(55,024
)
Balances at June 30, 2018
39,839,373

 
$
40

 
$
754,437

 
$
(9
)
 
$
(559,588
)
 
$
194,880

Issuance of common stock upon exercise of stock options
234,308

 

 
1,146

 

 

 
1,146

Issuance of common stock for restricted stock awards, net
8,099

 

 
(107
)
 

 

 
(107
)
Stock-based compensation

 

 
9,945

 

 

 
9,945

Issuance of shares upon conversion of 2014 Convertible Notes
5,369,447

 
5

 
148,078

 

 
 
 
148,083

Cumulative effect adjustment from adoption of ASU 2016-16

 

 

 

 
15

 
15

Other comprehensive gain

 

 

 
8

 
 
 
8

Net loss

 

 

 

 
(85,388
)
 
(85,388
)
Balances at September 30, 2018
45,451,227

 
$
45

 
$
913,499

 
$
(1
)
 
$
(644,961
)
 
$
268,582

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

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AERIE PHARMACEUTICALS, INC.
Consolidated Statements of Stockholders’ Equity (continued)
(Unaudited)
(in thousands, except share data)

 
COMMON STOCK
 
ADDITIONAL
PAID-IN
CAPITAL
 
ACCUMULATED OTHER COMPREHENSIVE LOSS
 
ACCUMULATED
DEFICIT
 
TOTAL
 
SHARES
 
AMOUNT
 
Balances at December 31, 2018
45,478,883

 
$
45

 
$
924,180

 
$

 
$
(696,419
)
 
$
227,806

Issuance of common stock upon exercise of stock options and warrants
141,245

 

 
1,879

 

 

 
1,879

Issuance of common stock for restricted stock awards, net
301,848

 
1

 
(2,093
)
 

 

 
(2,092
)
Stock-based compensation

 

 
12,508

 

 

 
12,508

Net loss

 

 

 

 
(47,951
)
 
(47,951
)
Balances at March 31, 2019
45,921,976

 
$
46

 
$
936,474

 
$

 
$
(744,370
)
 
$
192,150

Issuance of common stock upon exercise of stock purchase rights
22,648

 

 
569

 

 

 
569

Issuance of common stock upon exercise of stock options
10,480

 

 
71

 

 

 
71

Issuance of common stock for restricted stock awards, net
(5,686
)
 

 
(891
)
 

 

 
(891
)
Stock-based compensation

 

 
11,023

 

 

 
11,023

Net loss

 

 

 

 
(47,164
)
 
(47,164
)
Balances at June 30, 2019
45,949,418

 
$
46

 
$
947,246

 
$

 
$
(791,534
)
 
$
155,758

Issuance of common stock upon exercise of stock options
15,000

 

 
159

 

 

 
159

Issuance of common stock for restricted stock awards, net
34,538

 

 
267

 

 

 
267

Stock-based compensation

 
 
 
10,804

 

 

 
10,804

Other comprehensive loss

 

 

 
(158
)
 

 
(158
)
Equity component of Convertible Notes, net of issuance costs of $3,725

 

 
124,666

 

 

 
124,666

Payment for capped call share options

 

 
(32,890
)
 

 

 
(32,890
)
Net loss

 

 
 
 

 
(49,402
)
 
(49,402
)
Balances at September 30, 2019
45,998,956

 
$
46

 
$
1,050,252

 
$
(158
)
 
$
(840,936
)
 
$
209,204

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) 

 
NINE MONTHS ENDED 
 SEPTEMBER 30,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net loss
$
(144,517
)
 
$
(181,111
)
Adjustments to reconcile net loss to net cash used in operating activities
 
 
 
Depreciation
3,610

 
1,730

Amortization and accretion
6,335

 
833

Induced conversion of 2014 Convertible Notes

 
24,059

Stock-based compensation
33,921

 
29,015

Other non-cash
(252
)
 
(207
)
Changes in operating assets and liabilities
 
 
 
Accounts receivable, net
(30,563
)
 
(1,961
)
Inventory
(4,080
)
 
(5,299
)
Prepaid, current and other assets
(2,715
)
 
955

Accounts payable, accrued expenses and other current liabilities
18,576

 
10,924

Operating lease liabilities
(3,621
)
 

Net cash used in operating activities
(123,306
)
 
(121,062
)
Cash flows from investing activities
 
 
 
Purchase of available-for-sale investments
(97,268
)
 
(56,195
)
Proceeds from sales and maturities of investments


107,297

Purchase of property, plant and equipment
(7,911
)
 
(29,404
)
Net cash (used in) provided by investing activities
(105,179
)
 
21,698

Cash flows from financing activities
 
 
 
Proceeds from convertible notes, net of issuance costs
308,349

 

Payment for capped call options
(32,890
)
 

Proceeds from sale of common stock, net

 
135,972

Payments related to issuance of stock for stock-based compensation arrangements, net
(597
)
 
2,933

Payments of debt issuance costs
(532
)
 
(1,621
)
Proceeds from exercise of warrants
375

 

Other financing
(336
)
 
(535
)
Net cash provided by financing activities
274,369

 
136,749

Net change in cash and cash equivalents
45,884

 
37,385

Cash and cash equivalents, at beginning of period
202,818

 
197,569

Cash and cash equivalents, at end of period
$
248,702

 
$
234,954

 
 
 
 
Non-cash investing and financing activities
 
 
 
Conversion of 2014 Convertible Notes to common stock
$

 
$
148,078

Purchase of property, plant and equipment
$
1,389

 
$
3,066

Debt issuance costs included in accrued expense and other current liabilities
$
1,275

 
$

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, retinal diseases 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 two U.S. Food and Drug Administration (“FDA”) approved products, Rhopressa® (netarsudil ophthalmic solution) 0.02% (“Rhopressa®”) and Rocklatan® (netarsudil and latanoprost ophthalmic solution) 0.02%/0.005% (“Rocklatan®”). Rhopressa® is a once-daily eye drop designed to reduce elevated intraocular pressure (“IOP”) in patients with open-angle glaucoma or ocular hypertension. Rocklatan® is a once-daily eye drop that is a fixed-dose combination of Rhopressa® and latanoprost, the most widely-prescribed prostaglandin analog (“PGA”). The Company is commercializing Rhopressa®, which was launched in the United States on April 30, 2018, and Rocklatan®, which was launched in the United States on May 1, 2019. In November 2019, the Company released topline data from its Phase 4 Multi-center Open-label Study (“MOST”), which observed Rhopressa® efficacy in various real-world clinical settings, including as an adjunctive product or monotherapy. The results indicated positive IOP reduction in all settings, along with a favorable tolerability profile. In addition to actively promoting these products in the United States, the Company is pursuing its strategy to obtain regulatory approval for Rhopressa® and Rocklatan® in Europe and Japan. If approved, Rhopressa® and Rocklatan® will be marketed under the names Rhokiinsa® and Roclanda®, respectively, in Europe.
In October 2018, the Company announced that the European Medicines Agency (“EMA”) accepted for review the marketing authorisation application (“MAA”) for Rhokiinsa®. In September 2019, the EMA Committee for Medicinal Products in Human Use (“CHMP”) adopted a positive opinion recommending approval of the MAA for Rhokiinsa®. The final decision by the European Commission is expected in the fourth quarter of 2019. Additionally, the Company has completed a Phase 1 clinical trial and a successful pilot Phase 2 clinical study in the United States on Japanese and Japanese-American subjects, which were designed to support meeting the requirements of Japan’s Pharmaceuticals and Medical Devices Agency (“PMDA”) for potential regulatory submission of Rhopressa® in Japan. In July 2019, the Company completed enrollment of its Phase 2 clinical trial initiated in March 2019 in Japan and topline results were released in November 2019. The study was designed in accordance with the requirements of the PMDA on Japanese patients in Japan to support subsequent Phase 3 registration trials that are also expected to be conducted in Japan. The results of the Phase 2 clinical trial indicated positive efficacy and tolerability results for the patient set, and the Company plans to move forward with plans for Phase 3 trial initiation in Japan, along with advancing discussions for a potential commercialization partner in Japan.
In Europe, the Company is currently conducting a Phase 3 registration trial, named Mercury 3, comparing Roclanda® to Ganfort®, a fixed-dose combination product marketed in Europe consisting of bimatoprost (a PGA) and timolol (a beta blocker). If successful, Mercury 3 is expected to improve the commercialization prospects of Roclanda® in Europe. The Company plans to submit an MAA with the EMA in early 2020 for Roclanda® if the EMA has approved Rhokiinsa® by such time.
The Company is also focused on furthering the development of its future product candidates focused on retinal diseases, particularly AR-1105 and AR-13503, described below. Through business development activities, the Company acquired worldwide ophthalmic rights to a bio-erodible polymer technology from DSM, a global science-based company headquartered in the Netherlands, and PRINT® implant manufacturing technology, which is a proprietary technology capable of creating precisely-engineered sustained-release products utilizing fully-scalable manufacturing processes, from Envisia Therapeutics Inc. (“Envisia”). Using these technologies, the Company has created a sustained-release ophthalmology platform and is currently developing two sustained-release implants focused on retinal diseases, AR-1105, an investigational dexamethasone intravitreal implant, and AR-13503, a Rho kinase/Protein kinase C inhibitor. In March 2019, the Company initiated a Phase 2 clinical trial of AR-1105 in patients with macular edema due to retinal vein occlusion and completed enrollment in October 2019. The Company also submitted its investigational new drug (“IND”) application for AR-13503 in March 2019, and in April 2019 the Company announced that the FDA had reviewed the IND for AR-13503 and as a result it is now in effect, allowing Aerie to initiate human studies in the treatment of neovascular age-related macular degeneration (“nAMD”) and diabetic macular edema (“DME”). The Company initiated a first-in-human clinical study for AR-13503 in the third quarter of 2019.

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The Company owns over 4,000 Rho kinase inhibitor molecules, some of which have additional features including the inhibition of other kinases such as Janus kinase and those in the IĸB family and evaluates this library on an ongoing basis for additional development opportunities. Early stage evaluations are underway for indications, including neuroenhancement, dry age-related macular degeneration (“AMD”), geographic atrophy, dry eye and psoriasis. The Company also evaluates outside business development opportunities to provide access to technologies developed outside of Aerie and has stated its particular interest in ophthalmic areas such as dry eye, which is a very large market in the United States.
The Company commenced generating product revenues related to sales of Rhopressa® in the second quarter of 2018 and Rocklatan® in the second quarter of 2019. The Company has incurred losses and experienced negative operating cash flows since inception. The Company had previously funded its operations primarily through the sale of equity securities and issuance of convertible notes prior to generating product revenues. In September 2019, the Company issued an aggregate principal amount of $316.25 million 1.50% convertible senior notes due 2024 (the “Convertible Notes”) and simultaneously terminated its $200 million senior secured delayed draw term loan facility (the “credit facility”). See Note 10 for additional information.
If the Company does not successfully commercialize Rhopressa® and Rocklatan® or any current or future product candidates, if approved, it may not generate sufficient cash flows and may be unable to achieve profitability. Accordingly, the Company may be required to obtain further funding through public or private debt or equity offerings, or other arrangements. 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 acceptable 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 presentation of the Company’s condensed 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, 2018 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 1, 2019. The results for the three and nine months ended September 30, 2019 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. Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Use of Estimates
The preparation of condensed 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 condensed consolidated financial statements and reported amounts of income and expenses during the reporting periods. Significant items subject to such estimates and assumptions include revenue recognition, inventories, lease accounting, accrued expenses, fair value measurements, acquisitions and stock-based compensation. Actual results could differ from the Company’s estimates.
Concentration of Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash, cash equivalents and investments. 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 to minimize risk relating to exceeding insured limits. The Company’s investment policy permits investments in U.S. federal government and federal agency securities, corporate bonds or commercial paper, money market instruments, and certain qualifying money market mutual funds, and places restrictions on

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credit ratings, maturities, and concentration by type and issuer. The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash, cash equivalents and investments to the extent recorded on the condensed consolidated balance sheets.
The Company relies on its third-party manufacturers to produce the active pharmaceutical ingredient (“API”) and final drug product for Rhopressa® and Rocklatan® and may rely on third-party manufacturers for its current and future product candidates. The Company obtained FDA approval for an additional Rhopressa® drug product contract manufacturer in the first quarter of 2019, which began to supply commercial product in the second quarter of 2019. Further, the Company has obtained FDA approval for an additional API contract manufacturer, which began to supply commercial API in the second quarter of 2019. The Company is in the process of adding an additional Rocklatan® drug product contract manufacturer, which is expected to begin commercial supply in early 2020. In addition, the Company has established its own manufacturing plant in Athlone, Ireland, for future commercial production of Rhopressa®, Rocklatan®, and if approved, Rhokiinsa® and Roclanda®. In September 2019, the Company submitted a prior approval supplement (“PAS”) for the plant to the FDA, which, if approved, will permit production of Rocklatan® by the plant for sale in the United States. Commercial supply is expected to be available in early 2020. The Company expects to continue to use product sourced from its contract manufacturers when its manufacturing plant in Athlone, Ireland, is operational.
Revenue Recognition
The Company accounts for its revenue transactions under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”). In accordance with ASC Topic 606, the Company recognizes revenues when its customers obtain control of its product for an amount that reflects the consideration it expects to receive from its customers in exchange for that product. To determine revenue recognition for contracts that are determined to be in scope of ASC Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. Once the contract is determined to be within the scope of ASC Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when such performance obligation is satisfied.
Aerie’s customers include a limited number of national and select regional wholesalers (the “distributors”). These distributors subsequently resell the product, primarily to retail pharmacies that dispense the product to patients. Net product revenue is typically recognized when distributors obtain control of the Company’s products, which occurs at a point in time, typically upon delivery of product to the distributors. The Company evaluates the creditworthiness of each of its distributors to determine whether it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur. The Company does not assess whether a contract has a significant financing component if the expectation is such that the period between the transfer of the promised goods to the customer and the receipt of payment will be less than one year. Standard credit terms do not exceed 75 days. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that would have been recognized is one year or less or the amount is immaterial. Shipping and handling costs related to the Company’s product sales are included in selling, general and administrative expenses.
The Company’s net product revenues through September 30, 2019 were generated through sales of Rhopressa®, which was commercially launched in the United States on April 30, 2018, and sales of Rocklatan®, which was commercially launched in the United States on May 1, 2019. Product revenue is recorded net of trade discounts, allowances, commercial and government rebates, co-pay program coupons, chargebacks, U.S. government funding requirements for the coverage gap (commonly called the “donut hole”) portion of the Medicare Part D program and estimated returns and other incentives. These reserves are classified as either reductions of accounts receivable or as current liabilities. The estimates of reserves established for variable consideration reflect current contractual and statutory requirements, known market events and trends, industry data and forecasted customer mix. The transaction price, which includes variable consideration reflecting the impact of discounts and allowances, may be subject to constraint and is included in the net product revenues only to the extent that it is probable that a significant reversal of the amount of the cumulative revenues recognized will not occur in a future period. Actual amounts may ultimately differ from these estimates. If actual results vary, estimates may be adjusted in the period such change in estimate becomes known, which could have an impact on earnings in the period of adjustment. See Note 3 for additional information.

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Table of Contents

Inventories
Inventories are stated at the lower of cost or net realizable value. The Company determines the cost of inventory using the first-in, first-out (“FIFO”) method. The Company analyzes its inventory levels at least quarterly and writes down inventory that is expected to expire prior to being sold, inventory in excess of expected sales requirements and inventory that fails to meet commercial sale specifications, with a corresponding charge to cost of goods sold. The determination of whether inventory costs will be realizable requires estimates by management of future expected inventory requirements based on sales forecasts. If actual net realizable value is less than the estimated amount or if actual market conditions are less favorable than the Company’s projections, additional inventory write-downs may be required. Charges for inventory write-downs are not reversed if it is later determined that the product is saleable.
Prior to the date the Company obtains regulatory approval for its product candidates or its manufacturing facilities such as its manufacturing plant in Athlone, Ireland, manufacturing costs related to commercial production are expensed as pre-approval commercial manufacturing expense on the condensed consolidated statements of operations and comprehensive loss. Once regulatory approval is obtained, the Company capitalizes such costs as inventory on the condensed consolidated balance sheets.
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 yet been placed in service and are not depreciated or amortized. 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.
Estimated useful lives by major asset category are as follows:
Manufacturing equipment
10 years
Laboratory equipment
7 years
Furniture and fixtures
5 years
Software, computer and other equipment
3 years
Leasehold improvements
Lower of estimated useful life or term of lease

Leases
The Company determines if an arrangement is a lease at inception. For each lease, the lease term is determined at the commencement date and includes renewal options and termination options when it is reasonably certain that the Company will exercise that option. Operating leases with lease terms greater than one year are included in operating lease right-of-use (“ROU”) assets and current and long-term operating lease liabilities in the Company’s condensed consolidated balance sheets.
Operating lease ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term using an estimated rate of interest the Company would have to pay to borrow equivalent funds on a collateralized basis at the lease commencement date. The operating lease ROU assets are based on the liability adjusted for any prepaid or deferred rent and lease incentives. The incremental borrowing rate was utilized to discount lease payments over the expected term given that the Company’s operating leases do not provide an implicit rate. The Company estimates the incremental borrowing rate to reflect the profile of secured borrowing over the expected term of the leases based on the information available at the later of the date of adoption or the lease commencement date. Rent expense for the operating lease is recognized on a straight-line basis over the lease term.
The Company’s lease agreements have lease and non-lease components, which are generally accounted for as a single lease component. Non-lease components include lease operating expenses, which are variable costs under the Company’s current leases. For vehicle leases, the Company accounts for the lease and non-lease components as a single lease component and applies a portfolio approach to effectively account for the operating lease ROU assets and liabilities.
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

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accordance with the ASC Topic 320, Investments-Debt and Equity Securities. The Company classifies investments available to fund current operations as current assets on its condensed consolidated balance sheets. Investments are classified as long-term assets on the condensed 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 in debt securities 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 income earned on the Company’s cash, cash equivalents and investments, and amortization or accretion of discounts and premiums on investments are included within other (expense) income, net. Interest income was $0.5 million and $1.8 million for the three and nine months ended September 30, 2019, respectively, and $0.8 million and $2.5 million for the three and nine months ended September 30, 2018, respectively. Realized losses of $0.2 million were reclassified out of accumulated other comprehensive loss and recognized within other income (expense), net during the nine months ended September 30, 2018. There were no realized gains or losses recognized during the three and nine months ended September 30, 2019.
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.
The Company’s cash and cash equivalents were valued utilizing Level 1 inputs in the fair value hierarchy as of September 30, 2019 and December 31, 2018. The Company’s investments were valued utilizing Level 2 inputs and the Convertible Notes were valued utilizing Level 3 inputs as of September 30, 2019. There were no transfers between the different levels of the fair value hierarchy during the nine months ended September 30, 2019.
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. The fair value of restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) granted are based on the market value of Aerie’s common stock on the date of grant. Compensation expense related to time-based RSAs and RSUs 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.
Convertible Notes Transactions
The Company separately accounts for the liability and equity components of convertible notes transactions that can be settled in cash by allocating the proceeds from issuance between the liability component and the embedded conversion option in accordance with accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. The value of the equity component is calculated by first measuring the fair value of the liability component, using the interest rate of a similar liability that does not have a conversion feature, as of the issuance date. The difference between the proceeds from the convertible debt issuance and the amount measured as the liability component is recorded as the equity component with a corresponding discount recorded on the debt. The Company recognizes amortization of the resulting discount

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using the effective interest method as interest expense on the condensed consolidated statements of operations and comprehensive loss. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The Company allocates issuance costs incurred to the liability and equity components. Issuance costs attributable to the liability component are amortized to expense over the respective term of the convertible notes, and issuance costs attributable to the equity component are netted with the respective equity component in additional paid-in capital.
In September 2019, the Company bought capped call options from financial institutions to minimize the impact of potential dilution of the Company’s common stock upon conversion of its Convertible Notes. The capped call options meet the definition of a derivative in accordance with ASC 815, Derivatives and Hedging (“ASC 815”), however, qualify for derivative scope exception under ASC 815 for instruments indexed to a company’s own stock. Accordingly, the premiums for the capped call options were recorded as additional paid-in capital on the Company’s condensed consolidated balance sheets as the options are settleable in Aerie common stock at the election of the Company. See Note 10 for additional information.
Adoption of New Accounting Standards
In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which expands the scope of ASC Topic 718, Compensation—Stock Compensation to include share-based payments issued to non-employees for goods or services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. This ASU was effective for the Company beginning January 1, 2019. The adoption of ASU 2018-07 did not have a material impact on the Company’s consolidated financial statements and disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASC Topic 842”). ASC Topic 842 is intended to improve financial reporting of leasing transactions by requiring organizations that lease assets to recognize assets and liabilities for the rights and obligations created by leases that extend more than twelve months on the balance sheet. This accounting update also requires additional disclosures surrounding the amount, timing, and uncertainty of cash flows arising from leases. ASC Topic 842 is effective for financial statements issued for annual and interim periods beginning on January 1, 2019. The Company has elected the optional transition method that provided the option to use the effective date of ASC Topic 842 as the date of initial application on transition. Accordingly, the Company did not adjust comparative periods or make the new required lease disclosures for periods before the effective date of January 1, 2019. There was no cumulative effect adjustment recognized to accumulated deficit upon adoption. As of the date of adoption of the new leasing standards, the Company recognized an operating lease ROU asset of approximately $17.3 million and a corresponding operating lease liability of approximately $17.9 million, which are included in the condensed consolidated balance sheets. The adoption of the new leasing standards did not have a material impact on the condensed consolidated statements of operations and comprehensive loss.
The Company elected to utilize the package of practical expedients permitted in ASC Topic 842. Accordingly, the Company accounted for its existing operating leases as operating leases under the new guidance (i) without reassessing the classification of the operating leases in accordance with ASC Topic 842, (ii) without reassessing whether an existing contract contained a lease and (iii) without reassessing initial direct costs. In addition, the Company elected not to allocate the consideration between lease and non-lease components for its operating leases. The Company also reassessed its lease conclusions for its manufacturing plant in Athlone, Ireland, under ASC Topic 842 since construction was still in progress as of the date of adoption. Upon the reassessment, the Company concluded it was the owner of the leased space for accounting purposes under ASC Topic 842 as of the date of adoption and therefore, maintained its previous build-to-suit lease accounting under the transition guidance of ASC Topic 842.
Recent Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820-10): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which changes the fair value measurement disclosure requirements of ASC Topic 820. Under this ASU, certain disclosure requirements for fair value measurements are eliminated, amended or added. These changes aim to improve the overall usefulness of disclosures to financial statement users and reduce unnecessary costs to companies when preparing the disclosures. The guidance is effective for the Company beginning on January 1, 2020 and prescribes different transition methods for the various provisions. The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements and disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), 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 likelihood of the loss occurring is probable. 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

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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. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses (“ASU 2018-19”), which clarifies that receivables from operating leases are accounted for using the lease guidance and not as financial instruments. Further, in May 2019, the FASB issued ASU No. 2019-05, Financial Instruments—Credit Losses (Topic 326), Targeted Transition Relief (“ASU 2019-05”), which provides transition relief and allows allow entities to elect the fair value option on certain financial instrument. The guidance is effective for the Company beginning on January 1, 2020. The new guidance prescribes different transition methods for the various provisions. The Company does not expect the adoption of ASU 2016-13, ASU 2018-19 or ASU 2019-05 to have a material impact 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 may be 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 
 SEPTEMBER 30,
 
NINE MONTHS ENDED 
 SEPTEMBER 30,
 
2019
 
2018
 
2019
 
2018
Outstanding stock options
8,535,266

 
6,951,639

 
8,535,266

 
6,951,639

Stock purchase warrants
79,500

 
154,500

 
79,500

 
154,500

Non-vested restricted stock awards and performance share units
755,179

 
584,124

 
755,179

 
584,124

Non-vested restricted stock units
43,071

 

 
43,071

 

Total
9,413,016

 
7,690,263

 
9,413,016

 
7,690,263


3. Revenue Recognition
Net product revenues for the three and nine months ended September 30, 2019 were derived from sales of Rhopressa® and Rocklatan® in the United States to customers and net product revenues for the three and nine months ended September 30, 2018 were derived from sales of Rhopressa® in the United States to customers. The Company commenced generating product revenue related to sales of Rocklatan® in the second quarter of 2019 following its commercial launch of Rocklatan® in the United States in May 2019. For the nine months ended September 30, 2019three distributors accounted for 37%, 31% and 30% of total revenues, respectively. For the nine months ended September 30, 2018, three distributors accounted for 34%, 32% and 31% of total revenues, respectively. The Company commenced generating product revenues related to sales of Rhopressa® in the second quarter of 2018. Product affordability for the patient drives consumer acceptance, and this is generally managed through coverage by third-party payers, such as government or private healthcare insurers and pharmacy benefit managers (“Third-party Payers”) and such product may be subject to rebates and discounts payable directly to those Third-party Payers.
The Company calculates its net product revenue based on the wholesale acquisition cost that the Company charges its distributors for Rhopressa® and Rocklatan® less provisions for (i) trade discounts and allowances, such as discounts for prompt payment and distributor fees, (ii) estimated rebates to Third-party Payers, estimated payments for Medicare Part D prescription drug program coverage gap (commonly called the “donut hole”), patient co-pay program coupon utilization, chargebacks and other discount programs and (iii) reserves for expected product returns. Provisions for revenue reserves reduced product revenues by $31.0 million and $73.8 million for the three and nine months ended September 30, 2019, respectively. For the

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three and nine months ended September 30, 2018, provisions for revenue reserves reduced product revenues by $6.4 million and $8.1 million, respectively.
Trade Discounts and Allowances: The Company generally provides discounts on sales of Rhopressa® and Rocklatan® to its distributors for prompt payment and pays fees for distribution services and for certain data that distributors provide to the Company. The Company expects its distributors to earn these discounts and fees, and accordingly deducts the full amount of these discounts and fees from its gross product revenues at the time such revenues are recognized.
Rebates, Chargebacks and Other Discounts: The Company contracts with Third-party Payers for coverage and reimbursement of Rhopressa® and Rocklatan®. The Company estimates the rebates and chargebacks it expects to be obligated to provide to Third-party Payers and deducts these estimated amounts from its gross product revenue at the time the revenue is recognized. The Company estimates the rebates and chargebacks that it expects to be obligated to provide to Third-party Payers based upon (i) the Company's contracts and negotiations with these Third-party Payers, (ii) estimates regarding the payer mix for Rhopressa® and Rocklatan® based on third-party data and actual utilization, (iii) inventory held by distributors and (iv) estimates of inventory held at the retail channel. Other discounts include the Company’s co-pay assistance coupon programs for commercially-insured patients meeting certain eligibility requirements. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that the Company expects to pay associated with product that has been recognized as revenue.
Product Returns: The Company estimates the amount of Rhopressa® and Rocklatan® that will be returned and deducts these estimated amounts from its gross revenue at the time the revenue is recognized. The Company currently estimates product returns based on historical industry information regarding rates for comparable pharmaceutical products and product portfolios, the estimated remaining shelf life of product shipped to distributors, and contractual agreements with the Company's distributors intended to limit the amount of inventory they maintain. Reporting from the distributors includes distributor sales and inventory held by distributors, which provides the Company with visibility into the distribution channel to determine when product would be eligible to be returned.
The Company did not have any contract assets (unbilled receivables) at September 30, 2019 or December 31, 2018, as customer invoicing generally occurs before or at the time of revenue recognition. The Company did not have any contract liabilities at September 30, 2019 or December 31, 2018, as the Company did not receive payments in advance of fulfilling its performance obligations to its customers. Amounts billed or invoiced are included in accounts receivable, net on the condensed consolidated balance sheets.
4. Investments
Cash, cash equivalents and investments as of September 30, 2019 included the following:
(in thousands)
AMORTIZED
COST
 
GROSS
UNREALIZED
GAINS
 
GROSS
UNREALIZED
LOSSES
 
FAIR
VALUE
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash and money market funds
$
248,703

 
$

 
$
(1
)
 
$
248,702

Total cash and cash equivalents
$
248,703

 
$

 
$
(1
)
 
$
248,702

Investments:
 
 
 
 
 
 
 
Commercial paper (due within 1 year)
$
39,551

 
$

 
$
(24
)
 
$
39,527

Corporate bonds (due within 1 year)
52,668

 

 
(120
)
 
52,548

Corporate bonds (due within 2 years)
5,033

 

 
(13
)
 
5,020

Total investments
$
97,252

 
$

 
$
(157
)
 
$
97,095

Total cash, cash equivalents and investments
$
345,955

 
$

 
$
(158
)
 
$
345,797


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Cash and cash equivalents as of December 31, 2018 included the following:
 
 
 
 
GROSS
 
GROSS
 
 
 
 
AMORTIZED
 
UNREALIZED
 
UNREALIZED
 
FAIR
(in thousands)
 
COST
 
GAINS
 
LOSSES
 
VALUE
Cash and cash equivalents:
 
 
 
 
 
 
 
 
Cash and money market funds
 
$
202,818

 
$

 
$

 
$
202,818

Total cash and cash equivalents
 
$
202,818

 
$

 
$

 
$
202,818




5. 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
 
 
September 30, 2019
(in thousands)
 
LEVEL 1
 
LEVEL 2
 
LEVEL 3
 
TOTAL
Cash and cash equivalents:
 
 
 
 
 
 
 
 
Cash and money market funds
 
$
248,702

 
$

 
$

 
$
248,702

Total cash and cash equivalents:
 
$
248,702

 
$

 
$

 
$
248,702

Investments:
 
 
 
 
 
 
 
 
Commercial paper
 
$

 
$
39,527

 
$

 
39,527

Corporate bonds
 

 
57,568

 

 
57,568

Total investments
 
$

 
$
97,095

 
$

 
$
97,095

Total cash, cash equivalents and investments:
 
$
248,702

 
$
97,095

 
$

 
$
345,797

 
 
FAIR VALUE MEASUREMENTS AS OF
 
 
December 31, 2018
(in thousands)
 
LEVEL 1
 
LEVEL 2
 
LEVEL 3
 
TOTAL
Cash and cash equivalents:
 
 
 
 
 
 
 
 
Cash and money market funds
 
$
202,818

 
$

 
$

 
$
202,818

Total cash and cash equivalents:
 
$
202,818

 
$

 
$

 
$
202,818


The fair value of the Company’s Convertible Notes was $187.9 million as of September 30, 2019. The estimated fair value of Convertible Notes was determined based on a discounted cash flow analysis and a binomial lattice model. The valuation required the use of Level 3 unobservable inputs and subjective assumptions, including but not limited to the stock price volatility and bond yield. The use of alternative market assumptions and estimation methodologies could have had an effect on these estimates of fair value.

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6. Inventory
Inventory consists of the following:
(in thousands)
 
SEPTEMBER 30, 2019
 
DECEMBER 31, 2018
Raw materials
 
$
1,076

 
$
836

Work-in-process
 
7,327

 
6,885

Finished goods
 
6,270

 
2,391

Total inventory
 
$
14,673

 
$
10,112


7. Property, Plant and Equipment, Net
Property, plant and equipment, net consists of the following:
(in thousands)
 
SEPTEMBER 30, 2019
 
DECEMBER 31, 2018
Manufacturing equipment
 
$
17,992

 
$
2,366

Laboratory equipment
 
7,374

 
6,038

Furniture and fixtures
 
1,648

 
1,815

Software, computer and other equipment
 
6,567

 
2,702

Leasehold improvements
 
29,671

 
4,072

Construction-in-progress
 
3,980

 
49,057

 Property, plant and equipment
 
67,232

 
66,050

Less: Accumulated depreciation
 
(8,955
)
 
(5,525
)
Property, plant and equipment, net
 
$
58,277

 
$
60,525


Manufacturing Plant Build-Out
In the second quarter of 2019, the Company completed the build-out on its own manufacturing plant in Athlone, Ireland, for which it leases approximately 30,000 square feet of interior floor space and as such is not the legal owner of the space. However, in accordance with ASC Topic 842, the Company was deemed to be the owner of the leased space prior to completion of construction. Upon completion, the Company performed a sale-leaseback analysis and accounted for the transaction as a sale. The Company therefore derecognized the build-to-suit asset and the corresponding build-to-suit facility lease obligation of approximately $4.4 million as of the completion date. No gain or loss arose from the derecognition. The Company concurrently recognized an operating lease ROU asset and a corresponding operating lease liability related to the leaseback of the facility. See Note 8 for additional information.
The build-to-suit facility lease obligation was approximately $4.5 million as of December 31, 2018.
Also, upon completion of the build-out in the second quarter of 2019, amounts previously classified as construction-in-progress related to the manufacturing plant placed into service have been transferred to leasehold improvements and manufacturing equipment and are being amortized in accordance with the Company’s policy. See Note 2 for additional information.
8. Leases
The Company has operating leases for corporate offices, research and development facilities, and a fleet of vehicles. The properties primarily relate to the Company’s principal executive office and research facility located in Durham, North Carolina, regulatory, commercial support and other administrative activities located in Irvine, California, and clinical, finance and legal operations located in Bedminster, New Jersey. The Durham, North Carolina, facility consists of approximately 61,000 square feet of laboratory and office space under leases that expire between June 2020 and June 2024 and the Irvine, California, location consists of approximately 37,300 square feet of office space under a lease that expires in January 2022. The Company terminated its previous lease and entered into a lease for its new Bedminster, New Jersey, location, which consists of

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approximately 34,000 square feet of office space under a lease that expires in October 2029. There are also small offices in Malta, Ireland, the United Kingdom and Japan.
The Company is leasing approximately 30,000 square feet of interior floor space in Athlone, Ireland, for its manufacturing plant in Athlone, Ireland, which the Company has concluded is an operating lease upon completion of the build-out in the second quarter of 2019. As a result, the Company concurrently recognized an operating lease ROU asset and a corresponding operating lease liability related to the leaseback of the facility of approximately $2.4 million upon completion of the build-out. The Company is reasonably certain it will remain in the lease through the end of its lease term in 2037, however, the Company is permitted to terminate the lease as early as September 2027.
The Company’s operating leases have remaining lease terms of approximately 1 year to 18 years, some of which include options to extend the leases.
Balance sheet information related to leases was as follows:
(in thousands)
SEPTEMBER 30, 2019
Operating Leases
 
Operating lease right-of-use assets
$
17,216

 
 
Operating lease liabilities
$
5,802

Long-term operating lease liabilities
12,235

Total operating lease liabilities
$
18,037


The Company’s right-of-use assets obtained in exchange for operating lease obligations was $2.8 million during the nine months ended September 30, 2019.
 
SEPTEMBER 30, 2019
Operating Leases
 
Weighted-average remaining lease term
8 years

Weighted-average discount rate
8
%

Maturities of lease liabilities as of September 30, 2019 were as follows:
(in thousands)
OPERATING
Year Ending December 31,
LEASES
Remainder of 2019
$
1,479

2020
5,757

2021
4,031

2022
1,725

2023
1,715

Thereafter
10,997

Total undiscounted lease payments
25,704

Less: present value adjustment
(7,667
)
Total lease liabilities
$
18,037



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Under prior lease guidance, minimum lease payments under operating leases were as follows at December 31, 2018:
(in thousands)
OPERATING
Year Ending December 31,
LEASES
2019
$
4,283

2020
4,855

2021
4,278

2022
1,643

2023
1,438

Thereafter
6,698

Total minimum lease payments
$
23,195


Lease expense for the Company’s operating leases was $1.4 million and $3.9 million, including variable lease payments of $0.3 million and $1.1 million, for the three and nine months ended September 30, 2019, respectively. Rent expense for the Company’s operating leases was $1.0 million and $2.4 million for the three and nine months ended September 30, 2018, respectively.
9. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
 
(in thousands)
SEPTEMBER 30, 2019
 
DECEMBER 31, 2018
Accrued compensation and benefits
$
10,005

 
$
10,438

Accrued consulting and professional fees
4,326

 
3,927

Accrued research and development expenses (1)
5,538

 
7,503

Accrued revenue reserves
34,060

 
10,155

Accrued other (2)
1,799

 
6,358

Total accrued expenses and other current liabilities
$
55,728

 
$
38,381

 
(1) 
Comprised of accruals related to fees for investigative sites, contract research organizations, contract manufacturing organizations and other service providers that assist in conducting preclinical research studies and clinical trials.
(2) 
Comprised of accruals related to commercial manufacturing activities for the Company’s product candidates prior to receipt of regulatory approval, as well as other business-related expenses.
10. Debt
Credit Facility
In September 2019, the Company terminated its $200 million credit facility with certain entities affiliated with Deerfield Management Company L.P. (“Deerfield”) pursuant to which $100 million of delayed draw term loan commitments were provided by Deerfield in July 2018 (the “July 2018 tranche”) and $100 million of delayed draw term loan commitments were provided by Deerfield in May 2019 (the “May 2019 tranche”). Upon termination, the Company paid aggregate fees of $6.5 million to Deerfield in respect of the fee on undrawn amounts and the exit fee for each of the July 2018 tranche and May 2019 tranche. No funds were drawn under either tranche at the time of termination.
Convertible Notes
In September 2019, the Company issued an aggregate principal amount of $316.25 million of Convertible Notes to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933, as amended. The Convertible Notes, governed by an indenture between the Company and a trustee, are senior, unsecured obligations and do not include financial and operating

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covenants nor any restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by Aerie or any of its subsidiaries. Interest on the Convertible Notes is payable semi-annually in cash in arrears at a rate of 1.50% per annum on April 1 and October 1 of each year, beginning on April 1, 2020. The Convertible Notes will mature on October 1, 2024 unless they are redeemed, repurchased or converted prior to such date. Prior to April 1, 2024, the Convertible Notes will be convertible at the option of holders only during certain periods and upon satisfaction of certain conditions. On and after April 1, 2024, the Convertible Notes will be convertible at the option of the holders any time until the close of business on the second scheduled trading day immediately preceding the maturity date. Upon conversion, the Convertible Notes may be settled in shares of Aerie common stock, cash or a combination, thereof, at the Company's election. The Company intends to settle the principal and interest amounts of the Convertible Notes in cash, and therefore, the Company currently does not expect the conversion to have a dilutive effect on the Company’s earnings per share, as applicable.
The Convertible Notes have an initial conversion rate of 40.04 shares of Aerie common stock per $1,000 principal amount of the Convertible Notes, which will be subject to customary anti-dilution adjustments in certain circumstances. This represents an initial effective conversion price of approximately $24.98 per share, which represents a premium of approximately 35% to the $18.50 per share closing price of Aerie common stock on September 4, 2019, the date the Company priced the offering.
The Company may redeem all or any portion of the Convertible Notes, at its option, on or after October 3, 2022, at a cash redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if the last reported sale price of Aerie common stock exceeds 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately before the date the Company provides written notice of redemption; and the trading day immediately before the notice is sent.
Holders of Convertible Notes may require the Company to repurchase their Convertible Notes upon the occurrence of certain events that constitute a fundamental change under the indenture governing the Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
During the three months ended September 30, 2019, the conditions allowing holders of the Convertible Notes to elect to convert had not been met. As of September 30, 2019, the if-converted value of the Convertible Notes did not exceed the principal amount of the Convertible Notes.
In connection with the issuance of the Convertible Notes, the Company incurred debt issuance costs of $9.2 million for the three months ended September 30, 2019. In accordance with ASC Topic 470, Debt, these costs were allocated to debt and equity components in proportion to the allocation of proceeds. Issuance costs of $5.5 million were recorded as debt issuance costs in the net carrying value of Convertible Notes. The debt issuance costs are amortized on an effective interest basis over the term of the Convertible Notes. The remaining issuance costs of $3.7 million were recorded as additional paid-in capital, net with the equity component and such amounts are not subject to amortization.
The following table summarizes the carrying value of the Convertible Notes as of September 30, 2019:
(in thousands)
SEPTEMBER 30, 2019
Gross proceeds
$
316,250

Unamortized debt discount and issuance costs
(132,697
)
Carrying value
$
183,553