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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, 2021
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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.001 per shareAERINasdaq 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. 
Large accelerated filer 
  Accelerated filer
Non-accelerated filer 
  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 October 29, 2021, there were 47,357,519 shares of the registrant’s common stock, par value $0.001 per share, 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 “products” mean products approved by the U.S. Food and Drug Administration (“FDA”) or other regulatory authorities; references to “product candidates” mean products that are in development but not yet approved by the FDA or other regulatory authorities; references to “future product candidates” mean products that have not yet been developed; and references to “implants” mean both preclinical and clinical sustained-release implants.

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 broad impact of the coronavirus (“COVID-19”) pandemic on our business;
the 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 product candidates, implants 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 product candidates, implants 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 products, product candidates, implants and any future product candidates, if approved;
the glaucoma patient market size and the rate and degree of market adoption of our products, product candidates, implants 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 products, product candidates, implants 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, implants 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 products, product candidates, implants 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 products, product candidates, implants 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 products, product candidates, implants 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;
ii

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our plans to pursue development of additional product candidates and technologies in ophthalmology, including development of our products or product candidates for additional indications, and our preclinical retinal programs and other therapeutic opportunities;
the potential advantages of our products, product candidates, implants and any future product candidates;
our ability to protect our proprietary technology and enforce our intellectual property rights; and
our expectations regarding existing and future collaborations, licensing, acquisitions and strategic operations, including our ability to in-license or acquire additional ophthalmic products, product candidates or technologies.
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, 2020, as filed with the Securities and Exchange Commission (“SEC”) on February 26, 2021, 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 our product candidates, implants or any future product candidates in the United States, and there can be no assurance that we will receive FDA approval for our product candidates, implants or any future product candidates. In addition, the European Commission (“EC”) grant of a Centralised Marketing Authorisation (“Centralised MA”) for Rhokiinsa® and Roclanda® and the receipt of marketing authorization from the Medicines and Healthcare Products Regulatory Agency (“MHRA”) for Roclanda® do not constitute European Medicines Agency (“EMA”) or MHRA approval of our product candidates, implants or any future product candidates in Europe, and there can be no assurance that we will receive EMA or MHRA approval for our product candidates, implants or any future product candidates. FDA, EMA and MHRA approval of Rhopressa® and Rocklatan® do not constitute regulatory approval of these products in jurisdictions outside of the United States or Europe and there is no assurance that we will receive regulatory approval for Rhopressa® and Rocklatan® in such jurisdictions. In addition, the clinical trials discussed in this report are preliminary and the outcome of such clinical trials 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 clinical trials 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.
iii

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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, 2021DECEMBER 31, 2020
Assets
Current assets
Cash and cash equivalents$61,847 $151,570 
Short-term investments105,760 88,794 
Accounts receivable, net64,566 56,022 
Inventory30,055 27,059 
Prepaid expenses and other current assets13,724 8,310 
Total current assets275,952 331,755 
Property, plant and equipment, net51,681 54,260 
Operating lease right-of-use assets23,171 14,084 
Other assets998 1,946 
Total assets$351,802 $402,045 
Liabilities and Stockholders’ (Deficit) Equity
Current liabilities
Accounts payable$8,076 $8,826 
Accrued expenses and other current liabilities106,117 90,723 
Operating lease liabilities3,935 4,923 
Total current liabilities118,128 104,472 
Convertible notes, net228,189 210,373 
Deferred revenue, non-current53,700 50,858 
Long-term operating lease liabilities22,496 10,206 
Other non-current liabilities2,165 2,168 
Total liabilities424,678 378,077 
Commitments and contingencies (Note 12)
Stockholders’ (deficit) equity
Preferred stock, $0.001 par value; 15,000,000 shares authorized as of September 30, 2021 and December 31, 2020; none issued and outstanding
  
Common stock, $0.001 par value; 150,000,000 shares authorized as of September 30, 2021 and December 31, 2020; 47,179,733 and 46,821,644 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively
47 47 
Additional paid-in capital1,126,580 1,103,074 
Accumulated other comprehensive loss(59)(52)
Accumulated deficit(1,199,444)(1,079,101)
Total stockholders’ (deficit) equity(72,876)23,968 
Total liabilities and stockholders’ (deficit) equity $351,802 $402,045 
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,
 2021202020212020
Product revenues, net$29,313 $20,081 $79,468 $58,455 
Total revenues, net29,313 20,081 79,468 58,455 
Costs and expenses:
Cost of goods sold7,899 5,381 20,776 18,799 
Selling, general and administrative34,656 32,029 101,796 102,168 
Pre-approval commercial manufacturing 110  2,304 
Research and development19,132 16,165 54,990 55,281 
Total costs and expenses61,687 53,685 177,562 178,552 
Loss from operations(32,374)(33,604)(98,094)(120,097)
Other (expense) income, net(7,259)(6,044)(22,142)(16,900)
Loss before income taxes(39,633)(39,648)(120,236)(136,997)
Income tax expense (benefit)58  107 (33)
Net loss$(39,691)$(39,648)$(120,343)$(136,964)
Net loss per common share—basic and diluted$(0.86)$(0.86)$(2.60)$(2.99)
Weighted average number of common shares
 outstanding—basic and diluted
46,342,905 45,945,745 46,217,404 45,871,723 
Net loss$(39,691)$(39,648)$(120,343)$(136,964)
Unrealized gain (loss) on available-for-sale investments, net2 (129)(7)80 
Comprehensive loss$(39,689)$(39,777)$(120,350)$(136,884)
The accompanying notes are an integral part of these condensed consolidated financial statements.
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AERIE PHARMACEUTICALS, INC.
Condensed Consolidated Statements of Stockholders’ (Deficit) Equity
(Unaudited)
(in thousands, except share data)

 
 COMMON STOCKADDITIONAL
PAID-IN
CAPITAL
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOMEACCUMULATED
DEFICIT
TOTAL
 SHARESAMOUNT
Balances at December 31, 2019
46,464,669 $46 $1,062,996 $(92)$(896,000)$166,950 
Issuance of common stock upon exercise of stock options and warrants5,811 — 44 — — 44 
Issuance of common stock for restricted stock awards, net5,705 — (1,466)— — (1,466)
Stock-based compensation— — 10,838 — — 10,838 
Other comprehensive loss— — — (28)— (28)
Net loss— — — — (49,129)(49,129)
Balances at March 31, 202046,476,185 $46 $1,072,412 $(120)$(945,129)$127,209 
Issuance of common stock upon exercise of stock purchase rights23,494 — 295 — — 295 
Issuance of common stock upon exercise of stock options31,615 1 118 — — 119 
Issuance of common stock for restricted stock awards, net(17,945)— (150)— — (150)
Stock-based compensation— — 10,289 — — 10,289 
Other comprehensive income — — — 237 — 237 
Net loss— — — — (48,187)(48,187)
Balances at June 30, 202046,513,349 $47 $1,082,964 $117 $(993,316)$89,812 
Issuance of common stock upon exercise of stock options 13,907 — 9 — — 9 
Issuance of common stock for restricted stock awards, net301,077 — (104)— — (104)
Stock-based compensation— — 10,157 — — 10,157 
Other comprehensive loss— — — (129)— (129)
Net loss— — — — (39,648)(39,648)
Balances at September 30, 202046,828,333 $47 $1,093,026 $(12)$(1,032,964)$60,097 
The accompanying notes are an integral part of these condensed consolidated financial statements.















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


 COMMON STOCKADDITIONAL
PAID-IN
CAPITAL
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOMEACCUMULATED
DEFICIT
TOTAL
 SHARESAMOUNT
Balances at December 31, 2020
46,821,644 $47 $1,103,074 $(52)$(1,079,101)$23,968 
Issuance of common stock upon exercise of stock options62,016 — 26 — — 26 
Issuance of common stock for restricted stock awards, net10,162 — (1,127)— — (1,127)
Stock-based compensation— — 8,741 — — 8,741 
Other comprehensive loss— — — (12)— (12)
Net loss— — — — (41,964)(41,964)
Balances at March 31, 202146,893,822 $47 $1,110,714 $(64)$(1,121,065)$(10,368)
Issuance of common stock upon exercise of stock purchase rights89,555 — 998 — — 998 
Issuance of common stock upon exercise of stock options18,426 — 91 — — 91 
Issuance of common stock for restricted stock awards, net(7,400)— (13)— — (13)
Stock-based compensation— — 8,363 — — 8,363 
Other comprehensive income — — — 3 — 3 
Net loss— — — — (38,688)(38,688)
Balances at June 30, 202146,994,403 $47 $1,120,153 $(61)$(1,159,753)$(39,614)
Issuance of common stock upon exercise of stock options8,897 — 112 — — 112 
Issuance of common stock for restricted stock awards, net176,433 — (502)— — (502)
Stock-based compensation— — 6,817 — — 6,817 
Other comprehensive income— — — 2 — 2 
Net loss— — — — (39,691)(39,691)
Balances at September 30, 202147,179,733 $47 $1,126,580 $(59)$(1,199,444)$(72,876)
The accompanying notes are an integral part of these condensed consolidated financial statements.
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AERIE PHARMACEUTICALS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands) 
 NINE MONTHS ENDED 
SEPTEMBER 30,
 20212020
Cash flows from operating activities
Net loss$(120,343)$(136,964)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation4,774 4,741 
Amortization and accretion22,943 20,446 
Stock-based compensation23,358 30,505 
Other non-cash1,221 (369)
Changes in operating assets and liabilities
Accounts receivable, net(8,544)(8,494)
Inventory(2,486)915 
Prepaid, current and other assets(5,381)(371)
Accounts payable, accrued expenses and other current liabilities14,738 6,884 
Operating lease liabilities(2,165)(4,345)
Deferred revenue2,841  
Net cash used in operating activities
(69,044)(87,052)
Cash flows from investing activities
Purchase of available-for-sale investments(112,432)(84,111)
Proceeds from sales and maturities of investments94,708 160,769 
Purchase of property, plant and equipment(2,540)(2,504)
Net cash (used in) provided by investing activities
(20,264)74,154 
Cash flows from financing activities
Proceeds from loan 8,274 
Repayment of loan (8,274)
Payments related to issuance of stock for stock-based compensation arrangements, net(415)(1,255)
Net cash used in financing activities
(415)(1,255)
Net change in cash and cash equivalents(89,723)(14,153)
Cash and cash equivalents, at beginning of period151,570 143,940 
Cash and cash equivalents, at end of period$61,847 $129,787 
Non-cash investing and financing activities
Purchase of property, plant and equipment$200 $321 
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, Aerie Pharmaceuticals Ireland Limited and Avizorex Pharma S.L. (“Aerie Distribution,” “Aerie Limited,” “Aerie Ireland Limited” and “Avizorex,” 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, ocular surface diseases and retinal diseases. The Company has its principal executive offices in Durham, North Carolina, and operates as one business segment.
U.S. Commercial Products
The Company has developed and commercialized two U.S. Food and Drug Administration (“FDA”) approved products, Rhopressa® (netarsudil ophthalmic solution) 0.02% (“Rhopressa®”) and Rocklatan® (netarsudil/latanoprost ophthalmic solution) 0.02%/0.005% (“Rocklatan®”), which are sold in the United States and comprise its glaucoma franchise. 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 fixed-dose combination of Rhopressa® and latanoprost, the most widely-prescribed drug for the treatment of patients with open-angle glaucoma. The Company is commercializing Rhopressa®, which was launched in the United States in April 2018, and Rocklatan®, which was launched in the United States in May 2019.
Outside the United States
In addition to actively promoting Rhopressa® and Rocklatan® in the United States, the Company’s strategy also includes developing business opportunities outside of the United States, including the successful commercialization of Rhopressa® and Rocklatan® in Europe, Japan and other regions. At present, the Company has a development and commercialization partner for Japan and certain other Asian countries, and is engaging in advanced partnership discussions regarding commercialization in Europe and other regions of the world. Rhopressa® and Rocklatan® will be marketed under the names Rhokiinsa® and Roclanda®, respectively, if ultimately commercialized in Europe.
In Europe, Rhokiinsa® and Roclanda® were granted a Centralised Marketing Authorisation (“Centralised MA”) by the European Commission (“EC”) in November 2019 and January 2021, respectively. In April 2021, Roclanda® received marketing authorisation from the Medicines and Healthcare Products Regulatory Agency (“MHRA”) in Great Britain. As the EC decision was received after the end of the Brexit transition period, the Company was required to complete a further administrative step in order to obtain authorisation in Great Britain.
The Company reported positive interim topline 90-day efficacy data in September 2020 for Mercury 3, the Phase 3b clinical trial for Roclanda®, a six-month efficacy and safety trial designed to compare Roclanda® to Ganfort®, a fixed-dose combination product marketed in Europe of bimatoprost (a prostaglandin analog), and timolol (a beta blocker). As a result of the positive Mercury 3 results, the Company is engaging in advanced partnership discussions regarding commercialization in Europe and other regions of the world. The Company expects to enter into a collaboration agreement by the end of 2021.
In Japan, the Company entered into a Collaboration and License Agreement (the “Santen Agreement”) with Santen Pharmaceuticals Co., Ltd. (“Santen”) in October 2020 to advance its clinical development and ultimately commercialize Rhopressa® and Rocklatan® in Japan and eight other countries in Asia. See Note 3 for additional information. The Company reported positive topline results for its Phase 3 clinical trial of netarsudil ophthalmic solution 0.02% (“netarsudil 0.02%”) in October 2021, the first of three expected Phase 3 clinical trials in Japan. Clinical trials for Rocklatan® in Japan have not yet begun.
Glaucoma Product Manufacturing
The Company has a sterile fill production facility in Athlone, Ireland, for the production of its FDA approved products and clinical supplies. The Company received FDA approval to produce Rocklatan® and Rhopressa® at the Athlone manufacturing plant for commercial distribution in the United States in January 2020 and September 2020, respectively. The manufacturing plant began manufacturing commercial supplies of Rocklatan® during the first quarter of 2020 and Rhopressa® in the third quarter of 2020 for distribution to the United States. Shipments of commercial supply of Rocklatan® and Rhopressa® from the Athlone manufacturing plant to the United States commenced in the third quarter of 2020 and in the fourth quarter of 2020,
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respectively. In addition, the Athlone manufacturing plant has manufactured clinical supplies of Rhopressa® for the Phase 3 clinical trials in Japan as well as registration batches to support product approval in Japan.
Product Candidates and Pipeline
The Company is furthering the development of its product candidates and preclinical candidates, described below, focused on dry eye, AR-15512, retinal diseases, AR-1105, AR-13503 SR and AR-14034 SR, and a ROCK inhibitor-linked-steroid, AR-6121.
The Company is developing AR-15512 ophthalmic solution for the treatment of patients with dry eye disease. The active ingredient in AR-15512 is a potent and selective agonist of the TRPM8 ion channel, a cold sensor that regulates tear production and blink rate. In addition, activating the TRPM8 receptor may reduce ocular discomfort by promoting a cooling sensation.
In September 2021, the Company reported positive topline results of its Phase 2b clinical study, named COMET-1, for AR-15512. The Company completed a dose ranging study evaluating two concentrations of AR-15512 (0.0014% and 0.003%) in a 90-day trial with 369 subjects. The COMET-1 clinical study achieved statistical significance for multiple pre-specified and validated signs and symptoms. The greatest efficacy was demonstrated with the higher concentration 0.003% formulation, which will be advanced to Phase 3 studies. The study did not achieve statistical significance at the pre-determined primary endpoints at Day 28. The Company expects to have an end of Phase 2 meeting with the FDA in the first quarter of 2022 and initiate Phase 3 trials in the first half of 2022.
The Company is currently developing three sustained-release implants focused on retinal diseases, AR-1105, AR-13503 SR, AR-14034 SR. In July 2020, the Company completed a Phase 2 clinical trial for AR-1105, a dexamethasone steroid implant, in patients with macular edema due to retinal vein occlusion (“RVO”) and reported topline results indicating sustained efficacy of up to six months. The Company has received advice from regulatory agencies in both Europe and the United States regarding clinical and regulatory pathways for Phase 3 clinical trials. The Company expects to start Phase 3 clinical trial activities for AR-1105 in the first half of 2022.
The Company is also developing AR-13503, a Rho kinase (“ROCK”) and Protein kinase C inhibitor that is the active ingredient in the AR-13503 sustained-release implant. The IND for AR-13503 SR became effective in April 2019, allowing the Company to initiate human studies in the treatment of wet age-related macular degeneration (age-related macular degeneration, “AMD”) and diabetic macular edema (“DME”). The Company initiated a first-in-human clinical safety study for AR-13503 SR in the third quarter of 2019. The Company currently expects to complete the human dose escalation safety evaluation with the current implant design for AR-13503 SR in the first quarter of 2022.
The preclinical sustained-release implant AR-14034 SR is being designed to deliver the active ingredient axitinib, a potent small molecule pan-VEGF receptor inhibitor. AR-14034 SR has the potential to provide a duration of effect of approximately one year with a once per-year injection. It may potentially be used to treat DME, wet AMD and related diseases of the retina. IND-enabling preclinical studies are ongoing and the Company anticipates filing an IND for AR-14034 SR with the FDA in the second half of 2022.
The Company is also developing AR-6121, a newly introduced preclinical ROCK inhibitor-linked-steroid, which is a proprietary class of potent ocular corticosteroids linked to ROCK inhibitors. AR-6121 has the potential to leverage the anti-fibrotic and IOP-lowering activities of ROCK inhibitors to generate potent steroid effects with an improved safety profile. AR-6121 has the potential to meet an unmet need for effective and safer steroid treatment, specifically those that do not cause an increase in IOP or cataract formation. IND-enabling preclinical studies are underway and the Company anticipates filing an IND for AR-6121 with the FDA in the second half of 2022.
Liquidity
The Company commenced generating product revenues related to the sales in the United States of Rhopressa® in the second quarter of 2018 and Rocklatan® in the second quarter of 2019. The Company’s activities prior to the commercial launch of Rhopressa® had 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 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 of 1.50% convertible senior notes due 2024 (the “Convertible Notes”) (Note 10). Further, in October 2020, the Company entered into the Santen Agreement, pursuant to which Santen paid an upfront payment of $50.0 million (Note 3). The Company believes that its cash, cash equivalents and investments and projected cash flows from revenues, will provide sufficient resources to support its operations, including interest payments for its Convertible Notes, through at least the next twelve months.
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The Company expects to incur ongoing operating losses until such a time when Rhopressa® or Rocklatan® or any current or future product candidates or future product candidates, if approved, generate sufficient cash flows for the Company to achieve profitability. Accordingly, the Company may be required to obtain further funding through debt or equity offerings or other sources. 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 statement 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, 2020 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 26, 2021. The results for the three and nine months ended September 30, 2021 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 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, leases, acquisitions, stock-based compensation and fair value measurements. On March 11, 2020, the World Health Organization declared the coronavirus (“COVID-19”) outbreak a pandemic. The full extent to which COVID-19 will directly or indirectly impact the Company’s business, results of operations and financial condition, including net product revenue, cost and expenses, reserves and allowances, manufacturing and clinical trials, may still not be known and will depend on future developments that continue to be uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat it, as well as the economic impact on eye-care professionals, patients, third parties and markets. Actual results could differ from the Company’s estimates.
Adoption of New Accounting Standards
In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes by removing certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new ASU also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates. 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 was effective for the Company beginning on January 1, 2021 and prescribes different transition methods for the various provisions. The adoption of ASU 2019-12 did not have a material impact on the Company’s consolidated financial statements and disclosures.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”) to address the complexity associated with applying GAAP to certain financial instruments with characteristics of liabilities and equity. This ASU includes amendments to the guidance on convertible instruments and the derivative scope exception for contracts in an entity’s own
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equity. ASU 2020-06 also simplifies the accounting for convertible instruments, which includes eliminating the cash conversion accounting model for convertible instruments. Additionally, ASU 2020-06 will require entities to use the “if-converted” method when calculating diluted earnings per share for convertible instruments. The guidance is effective for the Company beginning on January 1, 2022 and prescribes different transition methods for the various provisions. The Company is currently evaluating the impact of ASU 2020-06 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. 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,
 2021202020212020
Outstanding stock options8,703,221 8,790,185 8,703,221 8,790,185 
Non-vested restricted stock awards 796,656 858,147 796,656 858,147 
Non-vested restricted stock units155,083 113,368 155,083 113,368 
Total9,654,960 9,761,700 9,654,960 9,761,700 
3. Revenue Recognition
Product Revenues
Net product revenues for the three and nine months ended September 30, 2021 and 2020 were generated from sales of Rhopressa® and Rocklatan®, the Company’s glaucoma franchise products, which were commercially launched in the United States in April 2018 and May 2019, respectively. Aerie’s customers include a limited number of national and select regional wholesalers (the “distributors”). For the nine months ended September 30, 2021, three distributors accounted for 36%, 32% and 31% of total revenues, respectively. For the nine months ended September 30, 2020, three distributors accounted for 36%, 34% and 29% of total revenues, respectively. 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.
Product revenue is recorded net of trade discounts, allowances, rebates, chargebacks, estimated returns and other incentives, discussed below. These reserves are classified as either reductions of accounts receivable or as current liabilities. Amounts billed or invoiced are included in accounts receivable, net on the condensed consolidated balance sheets. The Company did not have any contract assets (unbilled receivables) as of September 30, 2021 or December 31, 2020, as customer invoicing generally occurs before or at the time of revenue recognition. The Company did not have any contract liabilities as of September 30, 2021 or December 31, 2020, as the Company did not receive payments in advance of fulfilling its performance obligations to its customers. 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 $65.8 million and $177.8 million in aggregate for the three and nine months ended September 30, 2021, respectively, a significant portion of which related to commercial and Medicare Part D rebates. Provisions for revenue reserves reduced product revenues by $52.1 million and $141.9 million in aggregate for the three and nine months ended September 30, 2020, 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
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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 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 information regarding returns of Rhopressa® and Rocklatan® as well as historical industry information regarding rates for comparable pharmaceutical products and product portfolios, the estimated remaining shelf life of Rhopressa® and Rocklatan® 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 the product would be eligible to be returned.
Santen Collaboration and License Agreement
In October 2020, Aerie Ireland Limited entered into a Collaboration and License Agreement with Santen Pharmaceutical Co., Ltd., a Japanese pharmaceutical company dedicated to ophthalmology that carries out research, development, marketing and sales of pharmaceuticals, over-the-counter products and medical devices. Pursuant to the Santen Agreement, Aerie Ireland Limited granted to Santen the exclusive right to develop, manufacture, market and commercialize Rhopressa® and Rocklatan® (the “Licensed Products”) in Japan, South Korea, Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam and Taiwan (such jurisdictions collectively, the “Territories”). The Company is the sole manufacturer of the Licensed Products for Santen. Under the Santen Agreement, Aerie Ireland Limited granted Santen a first right of negotiation for the rights to the Licensed Products in any Asian countries other than the Territories.
Under the Santen Agreement, Santen made an upfront payment to Aerie Ireland Limited of $50.0 million (the “Upfront Payment”) and Aerie Ireland Limited will earn various development milestones of up to $39.0 million and sales milestones of up to $60.0 million upon the achievement of certain events. In addition, Santen will pay Aerie Ireland Limited a royalty in excess of 25% of the Licensed Products’ net sales, such consideration consisting of the cost of products supplied to Santen from Aerie Ireland Limited and a royalty for the Company’s intellectual property. Santen will be responsible for sales, marketing and pricing decisions relating to the Licensed Products. Santen is also responsible for all development and commercialization costs and activities related to the Licensed Products in the Territories, except that Aerie Ireland Limited shares 50% of the costs related to conducting the first Rhopressa® Phase 3 clinical trial in Japan, which commenced in the fourth quarter of 2020 and the Company reported positive topline results as described above in Note 1.
The term of the Santen Agreement varies on a country-by-country basis in the Territory until the later of (i) the expiration of the last to expire valid patent claim covering the Licensed Product and (ii) 12 years from the date of the first commercial sale of each Licensed Products under a New Drug Application approval, marketing authorization or the equivalent. The Santen Agreement may be terminated by either Aerie Ireland Limited or Santen upon the other party’s material breach or bankruptcy or insolvency. Aerie Ireland Limited may also terminate the Santen Agreement upon a patent challenge by Santen, and Santen may terminate the Santen Agreement in its discretion if, following marketing authorization for Rhopressa® in Japan, Santen reasonably determines that the Licensed Products are not commercially viable in the Territory (effective upon 180 days’ prior written notice). In addition, in the event that patents are issued that may prevent the commercialization of the Licensed Products, Santen would have the right to terminate the Santen Agreement and require Aerie Ireland Limited’s repayment of up to approximately 85% of the Upfront Payment, all development milestone payments and 50% of the development expenses incurred by Santen. In the event of termination, the Licensed Products in the applicable Territories will revert to the Company.
Deferred revenue, non-current as of September 30, 2021 and December 31, 2020 was $53.7 million and $50.9 million, respectively, and included the Upfront Payment as well as Santen’s portion of shared costs related to conducting the first Rhopressa® Phase 3 clinical trial in Japan as described above. While the Company determined that the license was a right to use the Company’s intellectual property and as of the effective date of the Santen Agreement, the Company had provided all
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necessary information to Santen to benefit from the license and the license term had begun, revenue was not recognized upon satisfaction of the performance obligation due to the uncertainty around potential termination in the event that patents are issued that may prevent the commercialization of the Licensed Products.
The Company will recognize the Upfront Payment, and any other potential future development milestones and sales milestones, when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. The Company will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.
4. Investments
Cash, cash equivalents and investments as of September 30, 2021 included the following:
GROSSGROSS
AMORTIZEDUNREALIZEDUNREALIZEDFAIR
(in thousands)COSTGAINSLOSSESVALUE
Cash and cash equivalents:
Cash and cash equivalents$61,847 $ $ $61,847 
Total cash and cash equivalents$61,847 $ $ $61,847 
Investments:
Certificates of deposit (due within 1 year)$7,449 $1 $(1)$7,449 
Commercial paper (due within 1 year)53,962  (26)53,936 
Corporate bonds (due within 1 year)44,408  (33)44,375 
Total investments$105,819 $1 $(60)$105,760 
Total cash, cash equivalents and investments$167,666 $1 $(60)$167,607 

Cash, cash equivalents and investments as of December 31, 2020 included the following:
GROSSGROSS
AMORTIZEDUNREALIZEDUNREALIZEDFAIR
(in thousands)COSTGAINSLOSSESVALUE
Cash and cash equivalents:
Cash and cash equivalents$151,570 $ $ $151,570 
Total cash and cash equivalents$151,570 $ $ $151,570 
Investments:
Commercial paper (due within 1 year)$44,122 $5 $(23)$44,104 
Corporate bonds (due within 1 year)44,724 3 (37)44,690 
Total investments$88,846 $8 $(60)$88,794 
Total cash, cash equivalents and investments$240,416 $8 $(60)$240,364 
Interest income earned on the Company’s cash, cash equivalents and investments was immaterial for the three and nine months ended September 30, 2021, respectively, and $0.3 million and $1.9 million for the three and nine months ended September 30, 2020, respectively. Realized gains or losses were immaterial during the three and nine months ended September 30, 2021 and 2020.
As of September 30, 2021, the Company did not hold any equity securities. As of December 31, 2020, the fair value of the equity securities held at the end of the period was $1.3 million. For the nine months ended September 30, 2021, the Company had $1.0 million of losses on equity securities sold during the period.
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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, 2021
(in thousands)LEVEL 1LEVEL 2LEVEL 3TOTAL
Cash and cash equivalents:
Cash and cash equivalents$61,847 $61,847 
Total cash and cash equivalents:$61,847 $ $ $61,847 
Investments:
Certificates of deposit$ $7,449 $ $7,449 
Commercial paper 53,936  53,936 
Corporate bonds 44,375  44,375 
Total investments$ $105,760 $ $105,760 
Total cash, cash equivalents and investments:$61,847 $105,760 $ $167,607 
FAIR VALUE MEASUREMENTS AS OF
DECEMBER 31, 2020
(in thousands)LEVEL 1LEVEL 2LEVEL 3TOTAL
Cash and cash equivalents:
Cash and cash equivalents$151,570 $ $ $151,570 
Total cash and cash equivalents:$151,570 $ $ $151,570 
Investments:
Commercial paper$ $44,104 $ $44,104 
Corporate bonds 44,690  44,690 
Total investments$ $88,794 $ $88,794 
Total cash, cash equivalents and investments:$151,570 $88,794 $ $240,364 

The fair value of the Convertible Notes, which differs from their carrying value, is influenced by interest rates, stock price and stock price volatility and is determined by prices observed in market trading. The market for trading of the Convertible Notes is not considered to be an active market and therefore the estimate of fair value is based on Level 2 inputs. The estimated fair value of the Convertible Notes was $287.7 million and $296.7 million at September 30, 2021 and December 31, 2020, respectively.
There were no transfers between the different levels of the fair value hierarchy during the nine months ended September 30, 2021 and 2020.
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6. Inventory
Inventory consists of the following:
(in thousands)SEPTEMBER 30, 2021DECEMBER 31, 2020
Raw materials$4,780 $1,875 
Work-in-process20,732 21,648 
Finished goods4,543 3,536 
Total inventory$30,055 $27,059 

For the three and nine months ended September 30, 2021, $5.4 million and $13.7 million, respectively, of idle capacity cost associated with the Company’s Athlone manufacturing plant was recorded to costs of goods sold. For the three and nine months ended September 30, 2020, $3.8 million and $12.4 million, respectively, of idle capacity cost associated with the Company’s Athlone manufacturing plant was recorded to costs of goods sold. The idle capacity results from the manufacturing plant having commenced operations earlier in 2020 and not having yet reached full capacity.
7. Property, Plant and Equipment, Net
Property, plant and equipment, net consists of the following:
(in thousands)SEPTEMBER 30, 2021DECEMBER 31, 2020
Manufacturing equipment$22,076 $21,705 
Laboratory equipment9,048 7,948 
Furniture and fixtures1,582 1,681 
Software, computer and other equipment7,920 7,836 
Leasehold improvements30,713 30,178 
Construction-in-progress1,608 1,481 
 Property, plant and equipment72,947 70,829 
Less: Accumulated depreciation(21,266)(16,569)
Property, plant and equipment, net$51,681 $54,260 

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 a lease that was renewed in the third quarter of 2021 and expires in June 2029. The Irvine, California, location consists of approximately 27,000 square feet of office space under a lease that was renewed in the third quarter of 2021 and expires in October 2027. The Bedminster, New Jersey, location consists of approximately 34,000 square feet of office space under a lease that expires in October 2029. There are also small offices in Ireland, the United Kingdom and Japan.
The Company is leasing approximately 30,000 square feet of interior floor space for its manufacturing plant in Athlone, Ireland. 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 16 years, some of which include options to extend the leases.
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Balance sheet information related to leases was as follows:
(in thousands)SEPTEMBER 30, 2021DECEMBER 31, 2020
Operating Leases
Operating lease right-of-use assets$23,171 $14,084 
Operating lease liabilities$3,935 $4,923 
Long-term operating lease liabilities22,496 10,206 
Total operating lease liabilities$26,431 $15,129 
The Company’s right-of-use assets obtained in exchange for operating lease obligations was $12.6 million and $1.9 million during the nine months ended September 30, 2021 and 2020.
9. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
(in thousands)SEPTEMBER 30, 2021DECEMBER 31, 2020
Accrued expenses and other current liabilities:
Accrued compensation and benefits $14,581 $15,207 
Accrued consulting and professional fees3,387 2,645 
Accrued research and development (1)
2,506 2,222 
Accrued revenue reserves(2)
79,799 66,552 
Accrued other (3)
5,844 4,097 
Total accrued expenses and other current liabilities$106,117 $90,723 
(1)Comprised primarily of accruals related to fees for investigative sites, contract research organizations and other service providers that assist in conducting preclinical research studies and clinical trials.
(2)Comprised primarily of accruals related to commercial and government rebates as well as returns.
(3)Comprised primarily of accruals related to interest payable as well as other business-related expenses.
10. Debt
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 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, which began 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 would not expect the conversion to have a dilutive effect on the Company’s earnings per share, as applicable. However, the Company is currently evaluating the impact of ASU 2020-06 on its consolidated financial statements and disclosures, in which the Company will soon no longer be eligible to use the treasury stock method to reflect the shares underlying the Convertible Notes in the Company’s dilutive earnings per share. See Note 2 for additional information.
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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, 2021, the conditions allowing holders of the Convertible Notes to elect to convert had not been met. As of September 30, 2021, the if-converted value of the Convertible Notes did not exceed the principal amount of the Convertible Notes.
The estimated fair value of the liability component of the Convertible Notes at the time of issuance was $187.9 million, and 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 effective interest rate on the liability component was 10.5% for the period from the date of issuance through September 30, 2021. The equity component of the Convertible Notes was recognized at issuance and represents the difference between the principal amount of the Convertible Notes and the fair value of the liability component of the Convertible Notes at issuance. The equity component was approximately $128.4 million at the time of issuance and its fair value is not remeasured as long as it continues to meet the conditions for equity classification.
In connection with the issuance of the Convertible Notes, the Company incurred debt issuance costs of $9.2 million for the three months ended December 31, 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, 2021:
(in thousands)SEPTEMBER 30, 2021DECEMBER 31, 2020
Gross proceeds$316,250 $316,250 
Unamortized debt discount(84,474)(101,565)
Unamortized issuance costs(3,587)(4,312)
Carrying value$228,189 $210,373 

The following table summarizes the interest expense recognized related to the Convertible Notes:
THREE MONTHS ENDED 
SEPTEMBER 30,
NINE MONTHS ENDED 
SEPTEMBER 30,
(in thousands)2021202020212020
Stated interest$1,186 $1,186