The following management's discussion and analysis should be read in conjunction
with our unaudited condensed consolidated financial statements and related notes
that appear elsewhere in this report and with our audited financial statements
and related notes and management's discussion and analysis of financial
condition and results of operations included in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2021, as filed with the SEC on
February 25, 2022 ("2021 Form 10-K"). This management's discussion and analysis
contains forward-looking statements that involve risks and uncertainties. Please
see "Special Note Regarding Forward-Looking Statements" for additional factors
relating to such statements and see "Risk Factors" in our 2021 Form 10-K and
other documents we have filed or furnished with the SEC for a discussion of
certain risk factors applicable to our business, financial condition, and
results of operations. Past operating results are not necessarily indicative of
operating results in any future periods. 

Overview

 We are a pharmaceutical company focused on the discovery, development, and
commercialization of first-in-class ophthalmic therapies for the treatment of
patients with eye diseases and conditions including open-angle glaucoma, dry
eye, DME, and wet AMD. 

U.S. Commercialization of the Glaucoma Franchise

 Our strategy is to grow the market share of our FDA approved glaucoma franchise
products, Rocklatan® and Rhopressa® in the United States. Both Rocklatan® and
Rhopressa® are being sold to national and regional U.S. pharmaceutical
distributors, and patients have access to them through pharmacies across the
United States. We have obtained broad formulary coverage for Rocklatan® and
Rhopressa® for the lives covered under commercial plans and Medicare Part D
plans. Our commercial team responsible for sales of Rocklatan® and Rhopressa® is
targeting select eye-care professionals who treat glaucoma throughout the United
States. 

In March 2022, we commenced a Phase 4 program that was designed to further
demonstrate that Rocklatan® is a highly effective single bottle, once-daily
therapy. We expect topline data for this Phase 4 Multi-center Open-label
Rocklatan® Evaluation (“MORE”) study to be available in the first half of 2023.

 Rocklatan® is a 

once-daily fixed-dose combination of Rhopressa® and

 latanoprost, a commonly 

prescribed drug for the treatment of

 patients with 

open-angle glaucoma or ocular hypertension. Rocklatan®

 is taken in the 

evening, and similar to Rhopressa®, has shown in

 preclinical and 

clinical trials to be highly effective in reducing

 IOP, with a favorable safety profile.
[[Image Removed: aeri-20220930_g1.jpg]] Based on our clinical 

data in which Rocklatan® demonstrated

 statistically superior 

IOP reduction over its components,

 latanoprost and 

netarsudil, at every measured time point, we believe

 that Rocklatan® has 

the potential to provide a greater IOP-reducing

 effect than any 

glaucoma medication currently marketed in the United

 States. Rhopressa® is a 

once-daily eye drop designed to reduce elevated IOP

 in patients with 

open-angle glaucoma or ocular hypertension.

 Rhopressa® is taken in 

the evening and has shown in preclinical and

 clinical trials to be 

effective in reducing IOP, with a favorable

 safety profile. [[Image Removed: aeri-20220930_g2.jpg]] The active ingredient 

in Rhopressa®, netarsudil, is an Aerie-owned

 Rho kinase ("ROCK") 

inhibitor. Rhopressa® increases the outflow of

 aqueous humor through 

the trabecular meshwork (“TM”), which accounts

 for approximately 80% 

of fluid drainage from the healthy eye and is

 the diseased tissue 

responsible for elevated IOP in glaucoma. Using

 this mechanism of 

action (“MOA”), we believe that Rhopressa®

 represents the first of 

a new drug class for reducing IOP in

 patients with glaucoma 

in over 20 years.

Efforts Outside the United States

 In addition to growing the market share of Rocklatan® and Rhopressa® in the
United States, our strategy also includes developing business opportunities
outside of the United States and we continue to make progress in our efforts to
commercialize Rocklatan® and Rhopressa® in Europe, Japan, and other regions of
the world. 22
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We have partnered and have collaboration agreements in place with Santen to
develop and commercialize our products in Japan, East Asia, as well as Europe,
China, India, the Middle East, CIS, Africa, parts of Latin America, and the
Oceania countries. The First Santen Agreement was executed in October 2020 to
advance our clinical development and ultimately commercialize Rocklatan® and
Rhopressa® in Japan and East Asia. The Second Santen Agreement was executed in
December 2021 to develop and commercialize Rocklatan® and Rhopressa® in Europe,
China, India, the Middle East, CIS, Africa, parts of Latin America, and the
Oceania countries. In Europe, Rocklatan® and Rhopressa® will be marketed under the names Roclanda®
and Rhokiinsa®, respectively. Roclanda® and Rhokiinsa® were granted a
Centralised MA by the EC in January 2021 and November 2019, respectively. In
April 2021, Roclanda® received marketing authorisation from the MHRA in Great
Britain. In Japan, we reported positive topline results for our Phase 3 clinical trial of
netarsudil ophthalmic solution 0.02% in October 2021, the first of three
expected Phase 3 clinical trials in Japan. The results evaluated netarsudil
0.02% versus ripasudil hydrochloride hydrate ophthalmic solution 0.4%
("ripasudil 0.4%") and showed that netarsudil 0.02% once-daily was superior to
ripasudil 0.4% twice-daily in lowering IOP after four weeks (p<0.0001), the
primary endpoint of the study. The medications were safe and well tolerated. The
most common treatment emergent adverse event was conjunctival hyperemia, which
is treatable. In March 2022, Santen made a $6.0 million developmental milestone
payment in connection with the conclusion of this Phase 3 clinical trial. A
second, confirmatory Phase 3 study, required for approval in Japan, is currently
underway. Santen is taking the lead on next steps in preparation for
registration in Japan under the terms of the First Santen Agreement. Clinical
trials for Rocklatan® have not yet begun. 

Glaucoma Product Manufacturing

 We have a sterile fill production facility in Athlone, Ireland, for the
production of our FDA and EMA approved products and clinical supplies, with the
intent of having the Athlone plant supply our ophthalmic products in all markets
for which we received regulatory approval and are commercialized. The Athlone
plant began manufacturing commercial supplies of Rocklatan® in the first quarter
of 2020 and Rhopressa® in the third quarter of 2020 for distribution to the
United States. Shipments of commercial supply of both Rocklatan® and Rhopressa®
from the Athlone plant to the United States commenced in the second half of
2020. In addition, the Athlone 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. We currently expect to commence
shipments of Roclanda® to Santen pursuant to the Second Santen Agreement in the
fourth quarter of 2022. As the Athlone plant commenced operations in early 2020, it has not reached full
capacity. We expect that the Athlone plant will have adequate capacity to
produce for the markets included in the Santen Agreements, as needed, which
include Europe, Japan, East Asia, and certain other regions of the world, if
approved for commercial distribution in those markets. The Athlone plant
manufactures most of our ongoing needs for Rocklatan® and Rhopressa® in the
United States. We may continue to use contract manufacturers to produce
commercial supplies of Rocklatan® and Rhopressa® for distribution in the United
States, but at reduced levels as a result of the Athlone plant commencing
manufacturing operations. 

Product Candidates in Development

 Our strategy includes enhancing our longer-term commercial potential by
identifying and advancing additional product candidates through our internal
discovery efforts, our entry into potential research collaborations
or in-licensing arrangements or our acquisition of additional ophthalmic
products, technologies or product candidates that complement our current product
portfolio. Dry Eye Program We are developing AR-15512 ophthalmic solution for the treatment of patients
with dry eye disease. In September 2021, we reported topline results of our
Phase 2b clinical study, named COMET-1, for AR-15512. We 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 we have advanced to Phase 3 studies. The study did not
achieve statistical significance at the pre-determined primary endpoints at Day
28. We gained alignment with the FDA in the first quarter of 2022 on the results
of the Phase 2b clinical study and confirmed the design of the Phase 3
registrational trials, which was based on the endpoints that achieved
statistical significance in the COMET-1 study. We initiated the Phase 3
registrational trials in the second quarter of 2022, with the first Phase 3
registrational trial, named COMET-2, commencing in May 2022 with the enrollment
of the first participant. The second Phase 3 registrational trial, named
COMET-3, commenced in August 2022 with the enrollment of the first participant.
Both COMET-2 and COMET-3 are multi-center, vehicle-controlled, double-masked,
randomized clinical studies designed to evaluate a single concentration of
AR-15512 (0.003%) compared to the AR-15512 vehicle, administered twice-daily for
90 days. COMET-2 and COMET-3 are each expected to enroll about 460 23
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participants at approximately 20 sites in the United States. The last of the
Phase 3 registrational trials, a 12-month safety study named COMET-4, commenced
in November 2022 with the enrollment of the first participant. Assuming the
Phase 3 registrational trials are successful, we anticipate filing a New Drug
Application in 2024. Retina Program Furthermore, we are currently developing two sustained-release implants focused
on retinal diseases, AR-1105 and AR-14034 SR. For AR-1105, we completed a Phase
2 clinical trial for patients with macular edema due to RVO in July 2020 and
reported topline results indicating sustained efficacy of up to six months. We
have received advice from regulatory agencies in both Europe and the United
States regarding clinical and regulatory pathways for Phase 3 clinical trials.
We are currently evaluating Phase 3 development options. In addition, we are
also working to advance our preclinical sustained-release retinal implant,
AR-14034 SR, for which we anticipate filing an Investigational New Drug
Application ("IND") with the FDA in the fourth quarter of 2022. 

Pipeline

 We own over 4,000 ROCK inhibitor molecules that provide a basis for further
research and development opportunities. We discovered and developed the active
ingredient in Rocklatan® and Rhopressa®, netarsudil, through a rational drug
design approach that coupled medicinal chemistry with high content screening of
compounds in proprietary cell-based assays. We selected and formulated
netarsudil for preclinical in vivo testing following a detailed characterization
of over 3,000 synthesized ROCK inhibitors, a number that has since grown to
approximately 4,000. We evaluate this library on an ongoing basis for additional
development opportunities. Early-stage evaluations of these molecules are
underway for other ophthalmic indications. We continue to evaluate external
business development opportunities to provide access to technologies developed
outside of Aerie to complement our internal research and development efforts. 

Impact of the COVID-19 Pandemic

 On March 11, 2020, the World Health Organization declared the coronavirus
("COVID-19") outbreak a pandemic. As the COVID-19 pandemic continues to evolve,
we considered this in our critical and significant accounting estimates as
future developments continue to be uncertain, including as a result of new
information that may emerge concerning COVID-19 and its variants 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 our estimates. The health and safety of our employees, patients, prescribers, and community are
of utmost importance during this time. We are complying with all requirements
and mandates from various agencies and governments, and we continue to monitor
applicable federal and state regulations, including with respect to vaccination
mandates. We have taken precautionary measures to protect our employees and our
stakeholders, and adapted company policy to maintain the continuity of our
business. We have continued to operate effectively as most of our manufacturing
plant personnel are working at the manufacturing plant with precautionary
measures in place, and the balance of our workforce has returned to the office
on a hybrid schedule in accordance with state and local mandates. We may take
further actions as government authorities require or recommend or as we
determine to be in the best interest of our employees. 

Proposed Merger

 On August 22, 2022, we entered into the Merger Agreement with Alcon and Merger
Sub. The Merger Agreement provides, among other things, and subject to the terms
and conditions set forth therein, that Merger Sub will be merged with and into
Aerie, with Aerie surviving as a wholly owned subsidiary of Alcon. At the Effective Time, each share of Aerie's common stock, par value $0.001 per
share, then outstanding (other than shares held (i) by Aerie or held in Aerie's
treasury or (ii) by Alcon, Merger Sub or any direct or indirect wholly owned
Subsidiary (as defined in the Merger Agreement) of Alcon or Aerie, which, in
each case, will be cancelled and retired and will cease to exist) will be
converted into the right to receive $15.25 per share in cash, without interest
and subject to any withholding of taxes. As a result of the Merger, Aerie's
common stock will no longer be publicly traded, and will be delisted from
Nasdaq. Our Board of Directors unanimously approved the Merger Agreement and
transactions contemplated thereby, including the Merger, and directed that a
proposal to adopt the Merger Agreement be submitted to a vote at a meeting of
the Aerie stockholders. The consummation of the Merger is subject to certain conditions, including, but
not limited to, (i) the approval and adoption of the Merger Agreement and the
Merger by the affirmative vote of the holders of a majority of the issued and
outstanding shares of common stock of Aerie as of the close of business on
October 4, 2022 at the stockholder meeting on November 17, 2022, (ii) 24
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the absence of any temporary restraining order, preliminary or permanent
injunction or final judgment, or law, regulation, or order promulgated, enacted,
issued or deemed applicable to the Merger, by any governmental entity in any
jurisdiction in which Alcon or Aerie has material business operations that
prohibits or otherwise makes illegal the consummation of the Merger, and (iii)
the expiration or termination of any waiting period (or any extension thereof)
applicable to the Merger under the HSR Act, and the rules and regulations
promulgated thereunder. We expect the transaction to close during the fourth
quarter of 2022 following the receipt of all required regulatory and antitrust
approvals and the satisfaction or waiver of the other closing conditions. The
waiting period applicable to the Merger under the HSR Act expired in October
2022. Financial Overview Our cash, cash equivalents, and investments totaled $172.5 million as of
September 30, 2022. We believe that our cash, cash equivalents, and investments
and projected cash flows from revenues will provide sufficient resources for our
current ongoing needs through at least the next twelve months from the date of
this filing, without giving effect to the proposed Merger and assuming we remain
a standalone entity. There may be need for additional financing activity as we
continue to grow, including repurchasing, repaying, or otherwise refinancing our
aggregate principal amount of $316.25 million of Convertible Notes, which are
scheduled to mature on October 1, 2024, unless earlier repurchased, redeemed or
converted. We continue to evaluate our product candidates in development for
collaboration and licensing opportunities. See "-Liquidity and Capital
Resources" below and Note 10 to our condensed consolidated financial statements
included in this report for further discussion. We have incurred net losses since our inception in June 2005. Until 2018, when
we commenced commercial operations, our business activities were primarily
limited to developing product candidates, raising capital, and performing
research and development activities. As of September 30, 2022, we had an
accumulated deficit of $1,188.0 million and recognized a net loss of $26.8
million and $82.1 million for the three and nine months ended September 30,
2022, respectively. For the three and nine months ended September 30, 2021, we
recognized a net loss of $39.7 million and $120.3 million, respectively. Our
capital resources and business efforts are largely focused on activities
relating to the commercialization of Rocklatan® and Rhopressa®, advancing our
product candidates in development, international expansion, and operating our
Athlone plant. We expect to incur operating losses until such a time when Rocklatan® or
Rhopressa® or any current or future product candidates, if approved, or proceeds
in connection with collaboration and licensing arrangements, generate sufficient
cash flows for us to achieve profitability. Accordingly, we may be required to
obtain further funding through debt or equity offerings or other sources.
Adequate additional funding may not be available to us on acceptable terms, or
at all. If we are unable to raise capital when needed or on acceptable terms, we
may be forced to delay, reduce or eliminate our research and development
programs or commercialization or manufacturing efforts, particularly if the
proposed Merger is not completed within the expected timeframe or at all. In
addition, even if we do not have an immediate need for additional capital, we
may seek to access the public or private capital markets whenever conditions are
favorable. Product Revenues, Net Rocklatan® and Rhopressa®, our glaucoma franchise products, were launched in the
United States in May 2019 and April 2018, respectively. We commenced generating
product revenues from sales of Rocklatan® and Rhopressa® during the second
quarter of 2019 and 2018, 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. Our
product revenues are recorded net of provisions relating to estimates 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.
These estimates reflect current contractual and statutory requirements, known
market events and trends, industry data, forecasted customer mix, and lagged
claims. 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 may have an impact on earnings in the period of adjustment. We will not generate any revenues from any product candidates or future product
candidates unless and until we obtain regulatory approval and commercialize such
products. Cost of Goods Sold Cost of goods sold consists of direct and indirect costs to procure and
manufacture product sold, including third-party manufacturing costs. Production
costs related to underutilized capacity at the Athlone plant, are not included
in the cost of inventory but are charged directly to cost of goods sold in the
condensed consolidated statements of operations and 25
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comprehensive loss in the period incurred. We expect cost of goods sold for the
remainder of 2022 to continue to be unfavorably impacted by production costs due
to the underutilization at the Athlone plant as a result of the Athlone plant
having become operational in early 2020 and having not yet reached full
capacity. We expect the underutilization to continue to have an unfavorable
impact on cost of goods sold that will decrease over time as the manufacturing
plant reaches full capacity. 

Selling, General, and Administrative Expenses

 Selling, general, and administrative expenses consist primarily of
employee-related expenses, including salaries, benefits, and stock-based
compensation for all officers and employees in general management, sales and
marketing, finance, and administration. Other significant expenses include
selling and marketing expenses, facilities expenses, shipping and handling
costs, and professional fees for audit, tax, legal, Merger-related costs, and
other services. 

Research and Development Expenses

 We expense research and development costs to operations as incurred. Research
and development expenses consist primarily of costs incurred for the research
and development of our preclinical and clinical candidates, which include: 

•employee-related expenses, including salaries, benefits, travel, and
stock-based compensation expense for research and development personnel;

•expenses incurred under agreements with CROs, contract manufacturing
organizations, and service providers that assist in conducting clinical trials
and preclinical studies;

•costs associated with any collaboration arrangements, licenses or acquisitions
of preclinical molecules, product candidates or technologies;

•costs associated with preclinical activities and development activities;

•costs associated with regulatory operations; and

•depreciation expense for assets used in research and development activities.

 Our expenses related to clinical trials are based on estimates of patient
enrollment and related expenses at clinical investigator sites as well as
estimates for the services received and efforts expended pursuant to contracts
with research institutions, consultants and CROs that assist in conducting and
managing clinical trials. We accrue expenses related to clinical trials based on
contracted amounts applied to the level of patient enrollment and activity
according to the protocol. If future timelines or contracts are modified based
upon changes in the clinical trial protocol or scope of work to be performed, we
modify our estimates of accrued expenses accordingly on a prospective basis.
Historically, such modifications have not been material. 

Other Expense, Net

 Other expense, net primarily includes interest expense, interest income, foreign
exchange gains and losses, and other income and expense. Interest expense
consists of interest expense under the Convertible Notes, including the
amortization of debt discounts and issuance costs incurred. Interest income
primarily consists of interest earned on our cash, cash equivalents, and
investments. See "-Liquidity and Capital Resources" below and Note 10 to our
condensed consolidated financial statements included in this report for further
discussion. Foreign exchange gains and losses are primarily due to the
remeasurement of our lease liabilities, which are denominated in a foreign
currency and held by a subsidiary with a U.S. dollar functional currency. Also
included in other income and expense are changes in the fair value of equity
securities (sold during the nine months ended September 30, 2021), and research
and development tax credit refunds. 

Income Tax Expense

 Income tax expense primarily includes branch taxes of our non-U.S. subsidiaries
and withholding taxes related to the $6.0 million developmental milestone made
by Santen pursuant to the First Santen Agreement during the nine months ended
September 30, 2022. 

Critical Accounting Policies and Use of Estimates

 Our management's discussion and analysis of financial condition and results of
operations is based on our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States ("U.S. GAAP"). The preparation of consolidated financial
statements also requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, costs and expenses, and related
disclosures. We evaluate our estimates and judgments on an ongoing basis.
Significant estimates include assumptions used in the determination of revenue 26
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recognition, leases, acquisitions, stock-based compensation, and fair value
measurements. We base our estimates on historical experience and on various
other factors that we believe are reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. Our critical accounting policies and significant estimates have not materially
changed since the date we filed our 2021 Form 10-K. For more information on our
critical accounting policies and estimates, refer to our 2021 Form 10-K. 

Results of Operations

Comparison of the Three Months Ended September 30, 2022 and 2021

The following table summarizes the results of our operations for the three
months ended September 30, 2022 and 2021:

 THREE MONTHS ENDED SEPTEMBER 30, $ % 2022 2021 CHANGE CHANGE (in thousands, except percentages)
Product revenues, net $ 36,129 $ 29,313 $ 6,816 23 %
Total revenues, net 36,129 29,313 6,816 23 %
Costs and expenses:
Cost of goods sold 6,929 7,899 (970) (12) %
Selling, general, and administrative expenses 33,878 34,656 

(778) (2) %

 Research and development expenses 21,994 19,132 2,862 15 %
Total costs and expenses 62,801 61,687 1,114 2 %
Loss from operations (26,672) (32,374) 5,702 (18) %
Other expense, net (59) (7,259) 7,200 (99) %
Loss before income taxes $ (26,731) $ (39,633) $ 12,902 (33) % Product revenues, net Product revenues, net were $36.1 million and $29.3 million for the three months
ended September 30, 2022 and 2021, respectively, and related to sales of our
U.S. glaucoma franchise products, Rocklatan® or Rhopressa®. The year-over-year
revenue increase is primarily due to an increase in the number of units shipped
to wholesalers and improved margins per bottle. 

Cost of goods sold

 Cost of goods sold was $6.9 million and $7.9 million for the three months ended
September 30, 2022 and 2021, respectively. Our gross margin percentage was 80.8%
and 73.1% for the three months ended September 30, 2022 and 2021, respectively.
The increase in the gross margin percentage was driven by the increase in
product revenues, net as discussed above as well as $1.3 million of lower
production costs associated with underutilized capacity at the Athlone plant due
to increased commercial production during the three months ended September 30,
2022. The increased commercial production resulted in a higher level of costs
capitalized into inventory. Our cost of goods sold and gross margin percentage
for the three months ended September 30, 2022 and 2021 were unfavorably impacted
by costs due to underutilized capacity at the Athlone plant, which increased the
cost of goods sold by $4.1 million and $5.4 million and lowered the gross margin
percentage by 11.3% and 18.6%, respectively. We expect the underutilization to
continue to have an unfavorable impact on cost of goods sold that will decrease
over time as the Athlone plant reaches full capacity. 

Selling, general, and administrative expenses

 Selling, general, and administrative expenses were $33.9 million and $34.7
million for the three months ended September 30, 2022 and 2021, respectively.
Selling, general, and administrative expenses decreased by $0.8 million
primarily due to lower sales and marketing, employee-related and stock-based
compensation expenses. Partially offsetting the decrease in selling, general,
and administrative expenses were costs related to the Merger, which totaled
$10.1 million for the three months ended September 30, 2022. 27

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Research and development expenses

 Our direct research and development expenses are tracked on a program-by-program
basis and consist primarily of costs incurred for the research and development
of our preclinical and clinical product candidates, which include but are not
limited to: (1) expenses incurred under agreements with contract research
organizations, contract manufacturing organizations and service providers that
assist in conducting clinical and preclinical studies; (2) costs associated with
any collaboration arrangements, licenses or acquisitions of preclinical
molecules, product candidates or technologies; and (3) costs associated with our
preclinical activities, development activities, and regulatory operations. We do
not allocate employee-related expenses, stock-based compensation or facility
expenses, including depreciation or other indirect costs, to specific programs
because these costs are deployed across multiple programs. THREE MONTHS ENDED SEPTEMBER 30, $ % 2022 2021 CHANGE CHANGE (in thousands, except percentages)
Direct research and development expenses by
program:
Rhopressa® $ 497 $ 1,828 $ (1,331) (73) %
Rocklatan® 2 114 (112) (98) %
AR-15512 10,348 2,090 8,258 *
Retina programs (1) 263 936 (673) (72) %
Other direct research and development program
costs (2) 61 594 (533) (90) %
Total direct research and development program
costs 11,171 5,562 5,609 *
Employee-related costs 5,376 6,664 (1,288) (19) %
Stock-based compensation 1,012 1,941 (929) (48) %
Other indirect costs (3) 4,435 4,965 (530) (11) %
Research and development expenses $ 21,994 $ 19,132 $ 2,862 15 %

*Percentage not meaningful

(1) Consists of AR-1105, AR-13503 SR, and AR-14034 SR in 2021 and 2022.

(2) Other direct research development program costs primarily include AR-6121.

 (3) Consists primarily of other indirect costs incurred for the research and
development of preclinical and clinical product candidates, including expenses
associated with our research facilities such as lab supplies, depreciation, and
other research facility related costs. Research and development expenses were $22.0 million and $19.1 million for the
three months ended September 30, 2022 and 2021, respectively. Research and
development expenses increased by $2.9 million primarily due to an increase of
$8.3 million in expenses associated with AR-15512. In September 2021, we
reported topline results on safety and efficacy for COMET-1, a Phase 2b clinical
trial in which we completed a dose ranging study evaluating two concentrations
of AR-15512 (0.0014% and 0.003%). In May and August 2022, we initiated COMET-2
and COMET-3, respectively, the first two of three Phase 3 clinical trials for
AR-15512, and the last of the Phase 3 clinical trials, a safety study named
COMET-4, commenced in November 2022 with the enrollment of the first
participant, and therefore we expect an increase in these costs through the end
of the year. The increase described above was partially offset by a $1.3 million decrease in
expenses for Rhopressa®, a $1.3 million decrease in employee-related costs, and
a $0.9 decrease in stock-based compensation for the three months ended
September 30, 2022 compared to the three months ended September 30, 2021.
Furthermore, expenses for Rhopressa® during the three months ended September 30,
2021 consisted of costs for the Rhopressa® Phase 3 clinical trial in Japan.
Santen's portion of shared costs related to conducting the first Rhopressa®
Phase 3 clinical trial in Japan were recorded as deferred revenue, non-current
on the condensed consolidated balance sheets. We reported positive topline
results for our Phase 3 clinical trial of netarsudil 0.02% in October 2021.
Santen is taking the lead on next steps in preparation for registration in Japan
under the terms of the First Santen Agreement. 

Costs related to the development of our retina programs decreased by $0.7
million for the three months ended September 30, 2022 compared to the three
months ended September 30, 2021. The decrease is primarily related to a
reduction in spend for our

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AR-1105 and AR-13503 projects as we focus our ongoing retina program activities
to advance our preclinical sustained-release retinal implant, AR-14034 SR, for
which we anticipate filing an IND with the FDA in the fourth quarter of 2022. 

Other expense, net

Other expense, net consists of the following:

 THREE MONTHS ENDED SEPTEMBER 30, $ 2022 2021 CHANGE (in thousands)
Interest income $ 542 $ 25 $ 517
Interest expense (1,650) (7,358) 5,708
Other income (expense) 1,049 74 975
Other expense, net $ (59) $ (7,259) $ 7,200 Other expense, net decreased by $7.2 million for the three months ended
September 30, 2022 compared to the three months ended September 30, 2021. This
decrease was primarily due to a decrease of $5.7 million in interest expense due
to the impact of adopting ASU 2020-06 on January 1, 2022 which accounts for
convertible debt instruments, such as the Convertible Notes, as a single
liability measured at its amortized cost, as well as by a change of $1.0 million
in other income (expense) primarily due to an increase in research and
development tax credit refunds, and $0.5 million in interest income during the
three months ended September 30, 2022 as compared to the three months ended
September 30, 2021. See Notes 2 and 10 to our condensed consolidated financial
statements for additional information on the Convertible Notes. 

Comparison of the Nine Months Ended September 30, 2022 and 2021

The following table summarizes the results of our operations for the nine months
ended September 30, 2022 and 2021:

 NINE MONTHS ENDED SEPTEMBER 30, $ % 2022 2021 CHANGE CHANGE (in thousands, except percentages)
Product revenues, net $ 99,275 $ 79,468 $ 19,807 25 %
Total revenues, net 99,275 79,468 19,807 25 %
Costs and expenses:
Cost of goods sold 17,450 20,776 (3,326) (16) %
Selling, general, and administrative expenses 93,551 101,796 

(8,245) (8) %

 Research and development expenses 66,726 54,990 11,736 21 %
Total costs and expenses 177,727 177,562 165 - %
Loss from operations (78,452) (98,094) 19,642 (20) %
Other expense, net (2,800) (22,142) 19,342 (87) %
Loss before income taxes $ (81,252) $ (120,236) $ 38,984 (32) % Product revenues, net Product revenues, net were $99.3 million and $79.5 million for the nine months
ended September 30, 2022 and 2021, respectively, and related to sales of our
U.S. glaucoma franchise products, Rocklatan® or Rhopressa®. The year-over-year
revenue increase is primarily due to an increase in the number of units shipped
to wholesalers and improved margins per bottle. 

Cost of goods sold

 Cost of goods sold was $17.5 million and $20.8 million for the nine months ended
September 30, 2022 and 2021, respectively. Our gross margin percentage was 82.4%
and 73.9% for the nine months ended September 30, 2022 and 2021, respectively.
The increase in the gross margin percentage was driven by the increase in
product revenues, net as discussed above as well as $4.7 million of lower
production costs associated with underutilized capacity at the Athlone plant due
to increased commercial production during the nine months ended September 30,
2022. The increased commercial production resulted in a higher level of costs
capitalized into inventory. Our cost of goods sold and gross margin percentage
for the nine months ended 29
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September 30, 2022 and 2021 were unfavorably impacted by costs due to
underutilized capacity at the Athlone plant, which increased the cost of goods
sold by $9.0 million and $13.7 million and lowered the gross margin percentage
by 9.1% and 17.2%, respectively. We expect the underutilization to continue to
have an unfavorable impact on cost of goods sold that will decrease over time as
the Athlone plant reaches full capacity. 

Selling, general, and administrative expenses

 Selling, general, and administrative expenses were $93.6 million and $101.8
million for the nine months ended September 30, 2022 and 2021, respectively.
Selling, general, and administrative expenses decreased by $8.2 million
primarily due to lower stock-based compensation, employee-related and sales and
marketing expenses. Partially offsetting the decrease in selling, general, and
administrative expenses were costs related to the Merger, which totaled $10.4
million for the nine months ended September 30, 2022. 

Research and development expenses

 NINE MONTHS ENDED SEPTEMBER 30, $ % 2022 2021 CHANGE CHANGE (in thousands, except percentages)
Direct research and development expenses by
program:
Rhopressa® $ 790 $ 5,446 $ (4,656) (85) %
Rocklatan® 135 275 (140) *
AR-15512 27,490 8,605 18,885 *
Retina programs (1) 2,083 1,421 662 47 %
Other direct research and development program
costs (2) 732 863 (131) (15) %
Total direct research and development program
costs 31,230 16,610 14,620 88 %
Employee-related costs 18,518 19,136 (618) (3) %
Stock-based compensation 3,600 5,896 (2,296) (39) %
Other indirect costs (3) 13,378 13,348 30 - %
Research and development expenses $ 66,726 $ 54,990 $ 11,736 21 %

*Percentage not meaningful

(1) Consists of AR-1105, AR-13503 SR, and AR-14034 SR in 2021 and 2022.

(2) Other direct research development program costs primarily include AR-6121.

 (3) Consists primarily of other indirect costs incurred for the research and
development of preclinical and clinical product candidates, including expenses
associated with our research facilities such as lab supplies, depreciation, and
other research facility related costs. Research and development expenses were $66.7 million and $55.0 million for the
nine months ended September 30, 2022 and 2021, respectively. Research and
development expenses increased by $11.7 million primarily due to an increase of
$18.9 million in expenses associated with AR-15512. In September 2021, we
reported topline results on safety and efficacy for COMET-1, a Phase 2b clinical
trial in which we completed a dose ranging study evaluating two concentrations
of AR-15512 (0.0014% and 0.003%). In January 2022, the Company gained alignment
with the FDA on the results of its Phase 2b clinical trial and confirmed the
design of the Phase 3 trials. This resulted in the achievement of a regulatory
milestone in which the Company paid the former shareholders of Avizorex
$8.0 million during the three months ended March 31, 2022. In May and August
2022, we initiated COMET-2 and COMET-3, respectively, the first two of three
Phase 3 clinical trials for AR-15512, and the last of the Phase 3 clinical
trials, a safety study named COMET-4, commenced in November 2022 with the
enrollment of the first participant, and therefore we expect an increase in
these costs through the end of the year. The increase described above was partially offset by a $4.7 million decrease in
expenses for Rhopressa®, a $2.3 million decrease in stock-based compensation,
and a $0.6 million decrease in employee-related expenses for the nine months
ended September 30, 2022 compared to the nine months ended September 30, 2021.
Furthermore, expenses for Rhopressa® in the nine months ended September 30, 2021
consisted of costs for the Rhopressa® Phase 3 clinical trial in Japan. Santen's
portion of 30
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shared costs related to conducting the first Rhopressa® Phase 3 clinical trial
in Japan were recorded as deferred revenue, non-current on the condensed
consolidated balance sheets. We reported positive topline results for our Phase
3 clinical trial of netarsudil 0.02% in October 2021. Santen is taking the lead
on next steps in preparation for registration in Japan under the terms of the
First Santen Agreement. Costs related to the development of our retina programs increased by $0.7
million during the nine months ended September 30, 2022 compared to the nine
months ended September 30, 2021. The increase is primarily related to our
ongoing activities to advance our preclinical sustained-release retinal implant,
AR-14034 SR, for which we anticipate filing an IND with the FDA in the fourth
quarter of 2022. Other expense, net

Other expense, net consists of the following:

 NINE MONTHS ENDED SEPTEMBER 30, $ 2022 2021 CHANGE (in thousands)
Interest income $ 854 109 $ 745
Interest expense (4,921) (21,381) 16,460
Other income (expense) 1,267 (870) 2,137
Other expense, net $ (2,800) $ (22,142) $ 19,342 Other expense, net decreased by $19.3 million for the nine months ended
September 30, 2022 compared to the nine months ended September 30, 2021. This
decrease was primarily due to a decrease of $16.5 million in interest expense
due to the impact of adopting ASU 2020-06 on January 1, 2022 which accounts for
convertible debt instruments, such as the Convertible Notes, as a single
liability measured at its amortized cost, partially offset by a change of $2.1
million in other income (expense) and $0.7 million in interest income during the
nine months ended September 30, 2022 as compared to the nine months ended
September 30, 2021. The change in other income (expense) primarily consists of
$1.0 million in realized loss on equity securities in the prior period as well
as an increase in research and development tax credit refunds. See Notes 2 and
10 to our condensed consolidated financial statements for additional information
on the Convertible Notes. 

Liquidity and Capital Resources

 Since our inception, we have funded operations primarily through the sale of
equity securities and the issuance of convertible notes. In addition, we
generate cash flows from product revenues related to sales of Rocklatan® and
Rhopressa® in the United States. Further, we entered into the Second Santen
Agreement in December 2021 which included the Second Santen Agreement Upfront
Payment, consisting of (a) $88.0 million which we received in January 2022 and
(b) a supplemental upfront payment of $2.0 million. This expanded the scope of
the First Santen Agreement pursuant to which Santen made an upfront payment of
$50.0 million in the fourth quarter of 2020. We have incurred losses and experienced negative operating cash flows since our
inception and anticipate that we will continue to incur losses until such a time
when our current products and any future products, if commercialized, generate
adequate revenues to render us profitable. We will not generate any revenue from
any product candidates or future product candidates unless and until we obtain
regulatory approval and commercialize such products. Pursuant to the Merger Agreement, we are subject to a variety of operational
restrictions. Unless we obtain Alcon's prior written consent, we may not, among
other things and subject to certain exceptions and aggregate limitations, incur
additional indebtedness, issue additional shares of common stock, repurchase
common stock, pay dividends, acquire assets, or enter into material contracts.
We do not believe these restrictions will prevent us from meeting our ongoing
costs of operations, working capital needs, or capital expenditure requirements. 

Sources of Liquidity

 Our product revenues, net amounted to $99.3 million for the nine months ended
September 30, 2022, which relate to sales of our glaucoma franchise products,
Rocklatan® and Rhopressa®. Accounts receivable, net amounted to $73.9 million as
of September 30, 2022. 31
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As of September 30, 2022, our principal sources of liquidity were our cash, cash
equivalents and investments, which totaled approximately $172.5 million. In
January 2022, we received an aggregate $90.0 million associated with the Second
Santen Agreement Upfront Payment. See Note 3 to our condensed consolidated
financial statements included in this report for additional information. We
believe that our cash, cash equivalents, and investments and projected cash
flows from revenues will provide sufficient resources for our current ongoing
needs through at least the next twelve months. See "-Operating Capital
Requirements." 

Cash Flows

The following table summarizes our sources and uses of cash:

 NINE MONTHS ENDED SEPTEMBER 30, 2022 2021 (in thousands)
Net cash provided by (used in):
Operating activities $ 37,277 $ (69,044)
Investing activities (20,368) (20,264)
Financing activities (3) (415)

Net change in cash and cash equivalents $ 16,906 $ (89,723)

Operating Activities

 During the nine months ended September 30, 2022, net cash provided by operating
activities of $37.3 million related to a net cash inflow of $97.3 million,
primarily driven by the increase in licensing receivables and adjustments for
non-cash items of $22.1 million related to stock-based compensation expense,
amortization and accretion, and depreciation. These were offset by a net loss of
$82.1 million. During the nine months ended September 30, 2021, net cash used in
operating activities of $69.0 million related to a net loss of $120.3 million,
adjusted for non-cash items of $52.3 million primarily related to stock-based
compensation expense, amortization and accretion, and depreciation, offset by a
net cash outflow of $1.0 million related to changes in operating assets and
liabilities. The increase in net cash provided by operating activities during the nine months
ended September 30, 2022 as compared to the nine months ended September 30, 2021
was primarily due to the January 2022 receipt of the $90.0 million Second Santen
Agreement Upfront Payment from Santen in connection with the Second Santen
Agreement, the March 2022 receipt of a $6.0 million developmental milestone
payment from Santen in connection with the First Santen Agreement, and higher
net cash collections generated from product revenues. 

Investing Activities

 During the nine months ended September 30, 2022, net cash used in investing
activities of $20.4 million related to purchases of available-for-sale
investments of $145.7 million and purchases of property, plant, and equipment of
$3.8 million primarily related to the Athlone plant, partially offset by sales
and maturities of available-for-sale investments of $129.1 million. During the
nine months ended September 30, 2021, net cash used in investing activities of
$20.3 million related to purchases of available-for-sale investments of $112.4
million and purchases of property, plant, and equipment of $2.5 million
primarily related to the Athlone plant, partially offset by sales and maturities
of available-for-sale investments of $94.7 million. 

Financing Activities

 During the nine months ended September 30, 2022, net cash used in financing
activities was immaterial. During the nine months ended September 30, 2021, net
cash used in financing activities was $0.4 million and primarily related to tax
payments made on employees' behalf through withholding of shares on restricted
stock grants, partially offset by proceeds from issuance of common stock upon
exercise of stock purchase rights and stock options. 

Operating Capital Requirements

 We expect to incur ongoing operating losses until such a time when Rocklatan®,
Rhopressa®, Roclanda® or Rhokiinsa®, or any product candidates or future product
candidates, if approved, generate sufficient cash flows for Aerie to achieve
profitability. 32
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Our principal liquidity requirements are for: working capital; operating
expenses, including for commercialization and manufacturing activities; expenses
associated with developing our pipeline opportunities, including pursuing
strategic growth opportunities; costs associated with executing our global
expansion strategy, including clinical and potential commercialization
activities outside the United States; contractual obligations; and capital
expenditures. We believe that our cash, cash equivalents, and investments and projected cash
flows from revenues, will provide sufficient resources to support our
operations, including interest payments for our Convertible Notes, through at
least the next twelve months, without giving effect to the proposed Merger and
assuming we remain a standalone entity. 

Our future funding requirements will depend on many factors, including, but not
limited to the following:

•consummation of the Merger;

•commercial performance of Rocklatan®, Rhopressa®, Roclanda® or Rhokiinsa®, or
any current or future product candidates, if approved;

•costs of commercialization activities for Rocklatan®, Rhopressa®, Roclanda® or
Rhokiinsa®, and any current or future product candidates, if approved;

•costs of building inventory to support sales growth and other associated
working capital needs;

•costs, timing, and outcome of seeking regulatory approval;

•timing and costs of our ongoing and future clinical trials and preclinical
studies including those related to our global expansion;

 •costs of any follow-on development or products, including the exploration
and/or development of any additional indications or additional opportunities for
new ophthalmic product candidates, delivery alternatives, and new therapeutic
areas; 

•terms and timing of any acquisitions, collaborations, or other arrangements;

 •costs related to the Convertible Notes, particularly if the proposed Merger is
not completed, including repurchasing, repaying, or otherwise refinancing our
Convertible Notes, unless earlier repurchased, redeemed or converted, including
in connection with the consummation of the Merger; and •costs related to filing and prosecuting patent applications, maintaining and
protecting our intellectual property rights, and defending against intellectual
property related claims, including defending against any ANDA filings that
contain a Paragraph IV Certification. We based our projections, without giving effect to the proposed Merger, on
assumptions that may prove to be incorrect or unreliable or may change due to
circumstances beyond our control, and as a result, we may consume our available
capital resources earlier than we originally projected, particularly if the
proposed Merger is not completed and if we are required to pay a termination fee
to Alcon. Accordingly, we may be required to obtain further funding through debt
or equity offerings or other sources. If such funding is required, we cannot
guarantee that it will be available to us on favorable terms, if at all. 

Outstanding Indebtedness

In September 2019, we issued an aggregate principal amount of $316.25 million of
Convertible Notes.

 The Convertible Notes are senior, unsecured obligations with interest 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. If consummated, the Merger is expected to constitute a
fundamental change under the indenture governing the Convertible Notes. 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,
including upon consummation of the Merger, as discussed further below. 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 our common stock, cash or a combination,
thereof, at our election. We intend to pay cash upon conversion of the
Convertible Notes, without giving effect to the proposed Merger and assuming we
remain a standalone entity. See Note 2 for additional information. In connection
with the Closing of the Merger, each holder will be entitled to convert such
holder's Convertible Notes into the right to receive the Merger Consideration in
respect of each share of common stock into which the Convertible Notes would
have been convertible pursuant to the applicable conversion rate under the
indenture. 

See Notes 1 and 10 to our condensed consolidated financial statements included
in this report for additional information.

 33

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Contractual Obligations and Commitments

There have been no material changes to our contractual obligations and
commitments as included in our 2021 Form 10-K.

Off-Balance Sheet Arrangements

None.

Recent Accounting Pronouncements

For a discussion of recently issued accounting standards, see Note 2 to our
condensed consolidated financial statements included in this report.

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