Convertible Notes

In September 2014, Aerie issued $125.0 million aggregate principal amount of the 2014 Convertible Notes to Deerfield Partners, L.P., Deerfield International Master Fund, L.P., Deerfield Private Design Fund III, L.P., Deerfield Special Situations Fund, L.P. and Deerfield Special Situations International Master Fund, L.P., collectively with their transferees, “Deerfield.” The 2014 Convertible Notes were issued pursuant to a note purchase agreement (as amended and supplemented from time to time, the “Note Purchase Agreement”), dated as of September 8, 2014, among Aerie and the Deerfield entities party thereto.

The 2014 Convertible Notes were scheduled to mature on the seventh anniversary from the date of issuance, unless earlier converted. In July 2018, Deerfield converted the entire outstanding principal amount of the 2014 Convertible Notes into shares of Aerie common stock. See Note 13, “Subsequent Events,” for additional information.

The 2014 Convertible Notes were guaranteed on a senior secured basis by Aerie Distribution. The 2014 Convertible Notes constituted the senior secured obligations of Aerie and Aerie Distribution, collateralized by a first-priority security interest in substantially all of the assets of Aerie and Aerie Distribution.

The 2014 Convertible Notes were convertible at any time at the option of Deerfield, in whole or in part, into shares of common stock. The initial conversion price was $24.80 per share of common stock (equivalent to an initial conversion rate of 40.32 shares of common stock per $1,000 principal amount of 2014 Convertible Notes), representing a 30% premium over the closing price of the common stock on September 8, 2014.

The Note Purchase Agreement contained various representations and warranties, and affirmative and negative covenants customary for financings of this type, including restrictions on the incurrence of additional debt and liens on Aerie’s and its subsidiaries’ assets. As of June 30, 2018, Aerie was in compliance with the covenants.

The 2014 Convertible Notes bore interest at a rate of 1.75% per annum payable quarterly in arrears on the first business day of each January, April, July and October. The Company recorded the 2014 Convertible Notes as long-term debt at face value less $2.1 million in debt discount and issuance costs incurred at the time of the transaction, which were being amortized to interest expense using the effective interest method through the maturity of the 2014 Convertible Notes.

The table below summarizes the carrying value of the 2014 Convertible Notes as of June 30, 2018 and December 31, 2017:



(in thousands)	JUNE 30, 2018			DECEMBER 31, 2017
Gross proceeds	$	125,000		$	125,000
Unamortized debt discount and issuance costs	(1,001		)	(1,155		)
Carrying value	$	123,999		$	123,845

Interest expense related to the 2014 Convertible Notes, including amortization of debt discount and issuance costs, was $0.5 million and $1.0 million for the three and six months ended June 30, 2018, respectively. Interest expense related to the 2014 Convertible Notes, including amortization of debt discount and issuance costs, was $0.6 million and $1.2 million for the three and six months ended June 30, 2017, respectively.