Exhibit 99.2

Financial Statements
Aurinia Pharmaceuticals
YEAR END 16
For the year ended December 31, 2016
Aurinia Pharmaceuticals

Aurinia Pharmaceuticals Inc.

Consolidated Financial Statements

December 31, 2016

(expressed in thousands of US dollars)

MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING

The accompanying consolidated financial statements of Aurinia Pharmaceuticals Inc. (the Company) are the responsibility of management.

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board and reflect, where appropriate, management’s best estimates and judgments based on currently available information. Management has prepared the financial information presented elsewhere in the Management’s Discussion and Analysis and has ensured it is consistent with the consolidated financial statements.

The Company maintains systems of internal accounting and administrative controls. These systems are designed to provide reasonable assurance that the financial information is relevant, reliable and accurate and that the Company’s assets are appropriately accounted for and adequately safeguarded.

The Board of Directors (the Board) exercises its responsibility over the consolidated financial statements and over financial reporting and internal controls principally through the Company’s Audit Committee. The Board appoints the Audit Committee and its members are outside and unrelated directors. The Audit Committee meets periodically with management to discuss internal controls over the financial reporting process and financial reporting issues and to satisfy itself that each party is properly discharging its responsibilities. The Audit Committee reviews the annual consolidated financial statements with both management and the independent auditors and reports its findings to the Board before such statements are approved by the Board. The Audit Committee also considers, for review by the Board and approval by the shareholders, the engagement or reappointment of the external auditors.

The consolidated financial statements have been audited by PricewaterhouseCoopers LLP, the Company’s independent auditors, in accordance with Canadian generally accepted auditing standards on behalf of the shareholders. Their report outlines the scope of their audit and gives their opinion on the consolidated financial statements. PricewaterhouseCoopers LLP has full and free access to the Audit Committee.

March 6, 2017

Independent Auditor’s Report

To the Shareholders of

Aurinia Pharmaceuticals Inc.

We have audited the accompanying consolidated financial statements of Aurinia Pharmaceuticals Inc. and its subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2016 and 2015 and the consolidated statements of operations and comprehensive loss, changes in shareholders’ equity (deficit) and cash flows for the years then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information.

Management’s responsibility for the consolidated financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Aurinia Pharmaceuticals Inc. and its subsidiaries as at December 31, 2016 and 2015 and their financial performance and their cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

Emphasis of matter

Without qualifying our opinion, we draw attention to note 2 to the consolidated financial statements, which describes matters and conditions that indicate the existence of a material uncertainty that may cast significant doubt about Aurinia Pharmaceuticals Inc.’s ability to continue as a going concern.

(signed) “PricewaterhouseCoopers LLP”

Chartered Professional Accountants

Aurinia Pharmaceuticals Inc.

Consolidated Statements of Financial Position

As at December 31, 2016

(expressed in thousands of US dollars)

Approved by the Board of Directors

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

Aurinia Pharmaceuticals Inc.

Consolidated Statements of Operations and Comprehensive Loss

For the years ended December 31, 2016 and December 31, 2015

(expressed in thousands of US dollars, except per share data)

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

Aurinia Pharmaceuticals Inc.

Consolidated Statements of Changes in Shareholders’ Equity (Deficit)

For the years ended December 31, 2016 and December 31, 2015

(expressed in thousands of US dollars)

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

Aurinia Pharmaceuticals Inc.

Consolidated Statements of Cash Flows

For the years ended December 31, 2016 and December 31, 2015

(expressed in thousands of US dollars)

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

Aurinia Pharmaceuticals Inc.

Notes to Consolidated Financial Statements

December 31, 2016 and December 31, 2015

(expressed in US dollars, tabular amounts in thousands)

Aurinia Pharmaceuticals Inc. or the Company is a clinical stage pharmaceutical company with its head office located at #1203-4464 Markham Street, Victoria, British Columbia, V8Z 7X8 where clinical, regulatory and business development functions of the Company are conducted. The Company has its registered office located at #201, 17904-105 Avenue, Edmonton, Alberta, T5S 2H5 where the finance function is performed.

Aurinia Pharmaceuticals Inc. is incorporated pursuant to the Business Corporations Act (Alberta). The Company’s common shares are currently listed and traded on the NASDAQ Global Market (NASDAQ) under the symbol AUPH and on the Toronto Stock Exchange (TSX) under the symbol AUP. The Company’s primary business is the development of a therapeutic drug to treat autoimmune diseases, in particular lupus nephritis (LN).

These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Aurinia Pharma Corp., Aurinia Pharmaceuticals, Inc. (Delaware incorporated) and Aurinia Pharma Limited (UK incorporated).

These consolidated financial statements have been prepared using International Financial Reporting Standards (IFRS) applicable to a going concern, which assumes the Company will continue its operations for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the ordinary course of business. The Company has no source of operating cash flows and operations to date have been funded primarily from the issue of share capital.

As at December 31, 2016, the Company had net working capital of $33,488,000 compared to $12,917,000 as at December 31, 2015. For the year ended December 31, 2016, the Company reported a loss of $23,295,000 (December 31, 2015 – $18,607,000) and a cash outflow from operating activities of $18,713,000 (December 31, 2015 – $17,766,000). As at December 31, 2016, the Company had an accumulated deficit of $281,048,000 (December 31, 2015 – $257,753,000).

On October 16, 2015, the Company filed a Short Form Base Shelf Prospectus (the Shelf Prospectus). The Shelf Prospectus and corresponding shelf registration statement allows the Company to offer up to $250,000,000 of common shares, warrants and subscription receipts or any combination thereof during the 25-month period that the Shelf Prospectus is effective. The Shelf Prospectus is intended to give the Company the capability to access new capital from time to time. The Shelf Prospectus has been utilized for a Bought Deal public offering and two ATM facilities, and as result, the remaining amount currently available under the Shelf Prospectus is $205,000,000.

The proceeds received in 2016 from the Bought Deal public offering, the at-the-market (ATM) facilities, warrant exercises and private placement have provided the Company with liquidity in the short-term and sufficient funding to complete the Phase 2b LN trial and the planned activities for the Phase 3 LN clinical trial into the fourth quarter of 2017. In order to complete the remainder of this trial and be able to undertake further commercialization of voclosporin, the Company will need to raise additional funding within the next 12 months from sources such as debt financing, out-licensing of specific territories and /or additional equity offerings.

(1)

Aurinia Pharmaceuticals Inc.

Notes to Consolidated Financial Statements

December 31, 2016 and December 31, 2015

(expressed in US dollars, tabular amounts in thousands)

The outcome of such offerings is dependent on a number of factors outside of the Company’s control. The nature of the biotechnology sector and current financial equity market conditions make the success of any future financing ventures uncertain. There is no assurance the ATM financing or any new financings will be successful. This uncertainty casts significant doubt upon the Company’s ability to continue as a going concern and, accordingly, the appropriateness of the use of accounting principles applicable to a going concern.

The success of the Company and recoverability of amounts expended on research and development to date, including capitalized intangible assets, are dependent on the ability of the Company to raise additional cash, then to complete development activities, receive regulatory approval and to be able to commercialize voclosporin in the key markets and indications, whereby the Company can achieve future profitable operations. Depending on the results of the research and development programs and availability of financial resources, the Company may accelerate, terminate, cut back on certain areas of research and development, commence new areas of research and development or curtail certain or all of the Company’s operations. There is no assurance these initiatives will be successful.

These consolidated financial statements do not reflect the adjustments to the carrying values of assets and liabilities and the reported revenues and expenses and statement of financial position classifications that would be necessary if the Company were unable to realize its assets and settle its liabilities as a going concern in the normal course of operations. Such adjustments could be material.

Statement of compliance

The consolidated financial statements of the Company have been prepared in accordance with IFRS as issued by the International Accounting Standards Board (IASB).

The consolidated financial statements were authorized for issue by the Board of Directors on March 6, 2017.

Basis of measurement

The consolidated financial statements have been prepared on a going concern and historical cost basis, other than certain financial instruments recognized at fair value.

Functional and presentation currency

These consolidated financial statements are presented in United States (US) dollars, which is the Company’s functional currency.

(2)

Aurinia Pharmaceuticals Inc.

Notes to Consolidated Financial Statements

December 31, 2016 and December 31, 2015

(expressed in US dollars, tabular amounts in thousands)

Summary of significant accounting policies and changes in accounting policies

Consolidation

These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Subsidiaries are all entities over which the Company has the power to govern the financial and operating policies. The Company has a 100% voting interest in all of its subsidiaries.

Intercompany transactions, balances and unrealized gains on transactions between companies are eliminated.

Translation of foreign currencies

The monetary assets and liabilities of operations denominated in foreign currencies are translated into US dollars at rates of exchange in effect at the end of the period. Revenues and expenses related to monetary assets and liabilities are translated at average rates of exchange during the period. Exchange gains and losses arising on translation are included in the consolidated statements of operations and comprehensive loss.

Revenue recognition

Payments received under collaboration agreements may include upfront payments, milestone payments, contract services, royalties and licence fees. Revenues for each unit of accounting are recorded as described below:

The Company has agreements in specific regions with strategic partners. Licensing agreements usually include one-time payments (upfront payments), payments for research and development services in the form of cost reimbursements, milestone payments and royalty receipts. Revenues associated with those multiple-element arrangements are allocated to the various elements based on their relative fair value.

Agreements containing multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered obligation(s). The consideration received is allocated among the separate units based on each unit’s fair value, and the applicable revenue recognition criteria are applied to each of the separate units.

Licence fees representing non-refundable payments received at the time of signature of licence agreements are recognized as revenue upon signature of the licence agreements when the Company has no significant future performance obligations and collectability of the fees is assured. Upfront payments received at the beginning of licensing agreements are deferred and recognized as revenue on a systematic basis over the period during which the related services are rendered and all obligations are performed.

(3)

Aurinia Pharmaceuticals Inc.

Notes to Consolidated Financial Statements

December 31, 2016 and December 31, 2015

(expressed in US dollars, tabular amounts in thousands)

Milestone payments, which are generally based on developmental or regulatory events, are recognized as revenue when the milestones are achieved, collectability is assured, and when the Company has no significant future performance obligations in connection with the milestones.

Revenues from contract services are recognized as services are rendered, the price is fixed or determinable and collection is reasonably assured.

Royalty income is recognized on the accrual basis in accordance with the substance of the relevant agreement.

Cash and cash equivalents

Cash and cash equivalents consist of cash on hand, deposits held with banks and other short-term highly liquid investments with original maturities of three months or less.

Property and equipment

Property and equipment are stated at cost less accumulated amortization and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. The carrying amount of a replaced asset is derecognized when replaced. Repair and maintenance costs are charged to the consolidated statements of operations and comprehensive loss during the period in which they are incurred.

The major categories of property and equipment are amortized on a straight-line basis as follows:

Acquired intellectual property and other intangible assets

External patent costs specifically associated with the preparation, filing and obtaining of patents are capitalized and amortized straight-line over the shorter of the estimated useful life and the patent life, commencing in the year of the grant of the patent. Other intellectual property expenditures are recorded as research and development expenses on the consolidated statements of operations and comprehensive loss as incurred.

Separately acquired intellectual property is shown at historical cost. The initial recognition of a reacquired right is recognized as an intangible asset measured on the basis of the remaining contractual term of the related contract. If the terms of the contract giving rise to a reacquired right are favourable or unfavourable relative to the terms of current market transactions for the same or similar items, the difference is recognized as a gain or loss in the consolidated statements of operations and comprehensive loss. Purchased intellectual property and reacquired rights are capitalized and amortized on a straight-line basis in the consolidated statements of operations and comprehensive loss over periods ranging from 10 to 20 years.

(4)

Aurinia Pharmaceuticals Inc.

Notes to Consolidated Financial Statements

December 31, 2016 and December 31, 2015

(expressed in US dollars, tabular amounts in thousands)

Impairment of non-financial assets

Property and equipment and acquired intellectual property and other intangible assets with a finite useful life are tested for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The Company evaluates impairment losses for potential reversals when events or circumstances warrant such consideration.

Share capital

Common shares are classified as equity. Transaction costs directly attributable to the issue of common shares are recognized as a deduction from equity, net of any tax effects.

Proceeds from the issue of common share purchase warrants (warrants) treated as equity are recorded as a separate component of equity. Costs incurred on the issue of warrants are netted against proceeds. Warrants issued with common shares are measured at fair value at the date of issue using the Black-Scholes pricing model, which incorporates certain input assumptions including the warrant price, risk-free interest rate, expected warrant life and expected share price volatility. The fair value is included as a component of equity and is transferred from warrants to common shares on exercise.

Provisions

A provision is recognized when the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable an outflow of economic benefits will be required to settle the obligation. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation.

Research and development

Research costs are expensed in the year incurred. These costs include salaries and benefits for research and development personnel, costs associated with clinical trials managed by contract research organizations, and other costs associated with research, development and regulatory activities. The Company uses external service providers to conduct clinical trials, to manufacture supplies of product candidates and to provide various other research and development related products and services. Development costs are expensed in the year incurred unless they meet the criteria for capitalization, which include technical feasibility, the intention to use or sell, the ability to use or sell, probable future economic benefits and the ability to develop the intangible asset. No development costs have been capitalized to date.

(5)

Aurinia Pharmaceuticals Inc.

Notes to Consolidated Financial Statements

December 31, 2016 and December 31, 2015

(expressed in US dollars, tabular amounts in thousands)

Stock-based compensation

The Company records stock-based compensation related to employee stock options granted using the estimated fair value of the options at the date of grant. The estimated fair value is expensed as employee benefits over the period in which employees unconditionally become entitled to the award. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service conditions are expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that do meet the related services and non-market performance conditions at the vesting date. The corresponding charge is to contributed surplus. Any consideration paid on the exercise of stock options is credited to share capital.

Leases

Operating lease payments are recognized in net income (loss) on a straight-line basis over the term of the lease.

Income tax

Income tax comprises current and deferred tax. Income tax is recognized in the consolidated statements of operations and comprehensive loss except to the extent that it relates to items recognized directly in shareholders’ equity (deficit), in which case the income tax is also recognized directly in shareholders’ equity (deficit).

Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted at the end of the reporting period, and any adjustments to tax payable in respect of previous years.

In general, deferred tax is recognized in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined on a non-discounted basis using the tax rates and laws that have been enacted or substantively enacted at the consolidated statements of financial position dates and are expected to apply when the deferred tax asset or liability is settled. Deferred tax assets are recognized to the extent that it is probable the assets can be recovered.

Deferred income tax assets and liabilities are presented as non-current.

Earnings (loss) per share

Basic earnings (loss) per share (EPS) is calculated by dividing the net income (loss) for the period attributable to equity owners of the Company by the weighted average number of common shares outstanding during the period.

Diluted EPS is calculated by adjusting the weighted average number of common shares outstanding for dilutive instruments. The number of shares included with respect to options, warrants and similar instruments is computed using the treasury stock method. The Company’s potentially dilutive common shares comprise stock options and warrants.

(6)

Aurinia Pharmaceuticals Inc.

Notes to Consolidated Financial Statements

December 31, 2016 and December 31, 2015

(expressed in US dollars, tabular amounts in thousands)

Financial instruments

Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognized when the obligation specified in the contract is discharged, cancelled or expires.

A derivative is a financial instrument whose value changes in response to a specified variable, requires little or no net investment and is settled at a future date.

At initial recognition, the Company classifies its financial instruments in the following categories:

Derivatives are also included in this category unless they are designated as hedges.

Financial instruments in this category are recognized initially and subsequently at fair value. Gains and losses arising from changes in fair value are presented in the consolidated statements of operations and comprehensive loss within other expense (income) in the period in which they arise.

(7)

Aurinia Pharmaceuticals Inc.

Notes to Consolidated Financial Statements

December 31, 2016 and December 31, 2015

(expressed in US dollars, tabular amounts in thousands)

Impairment of financial assets

At each statement of financial position date, the Company assesses whether there is objective evidence a financial asset or group of financial assets is impaired. A financial asset or group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event), and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses) discounted at the financial asset’s original effective interest rate. The asset’s carrying amount is reduced and the amount of the loss is recognized in the consolidated statements of operations and comprehensive loss. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. For practical reasons, the Company may measure impairment on the basis of an instrument’s fair value using an observable market price.

New standards, amendments and interpretations not yet adopted

A number of new standards and amendments to standards and interpretations are effective for annual periods beginning on or after January 1, 2017 and have not been applied in preparing these consolidated financial statements. None of these new standards or amendments is expected to have a significant effect on the consolidated financial statements of the Company, except the following set out below:

International Accounting Standards (IAS) 7, Statement of cash flows

Effective for years beginning on or after January 1, 2017, IAS 7, Statement of cash flows, was amended to require disclosures about changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. Management is assessing the potential impact that the adoption of IAS 7 will have on the Company’s consolidated financial statements.

IFRS 9 Financial instruments

In July 2014, IASB revised IFRS 9, Financial Instruments. IFRS 9 is a three-part standard to replace IAS 39, Financial Instruments: Recognition and Measurement, addressing new requirements for: i) classification and measurement, ii) impairment, iii) hedge accounting. The standard is effective for annual periods beginning on or after January 1, 2018. Management is assessing the potential impact that the adoption of IFRS 9 will have on the Company’s consolidated financial statements.

(8)

Aurinia Pharmaceuticals Inc.

Notes to Consolidated Financial Statements

December 31, 2016 and December 31, 2015

(expressed in US dollars, tabular amounts in thousands)

IFRS 15, Revenue from contracts with customers

IFRS 15, Revenue from Contracts with Customers, deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Revenue is recognized when a customer obtains control of goods or services and thus has the ability to direct the use and obtain the benefits from the goods or services. The standard replaces IAS 18, Revenue, and IAS 11, Construction Contracts, and related interpretations. The standard is effective for annual periods beginning on or after January 1, 2018 and earlier application is permitted. Management is assessing the potential impact that the adoption of IFRS 15 will have on the Company’s consolidated financial statements.

IFRS 16, Leases

In January 2016, IASB issued IFRS 16, Leases, which will replace IAS 17, Leases. Under IFRS 16, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Under IAS 17, lessees were required to make a distinction between a finance lease and an operating lease. IFRS 16 now requires lessees to recognize a lease liability reflecting future lease payments and a right-of-use asset for virtually all lease contracts. There is optional exemption for certain short-term leases and leases of low-value assets; however, this exemption can only be applied by lessees. The standard is effective for annual periods beginning on or after January 1, 2019, with earlier adoption if IFRS 15 is also applied. Management is assessing the potential impact that the adoption of IFRS 16 will have on the Company’s consolidated financial statements.

There are no other IFRS or International Financial Reporting Interpretations Committee interpretations that are not yet effective that would be expected to have a material impact on the Company.

The preparation of consolidated financial statements in accordance with IFRS often requires management to make estimates about, and apply assumptions or subjective judgment to, future events and other matters that affect the reported amounts of the Company’s assets, liabilities, revenues, expenses and related disclosures. Assumptions, estimates and judgments are based on historical experience, expectations, current trends and other factors that management believes to be relevant at the time at which the Company’s consolidated financial statements are prepared. Management reviews, on a regular basis, the Company’s accounting policies, assumptions, estimates and judgments in order to ensure the consolidated financial statements are presented fairly and in accordance with IFRS.

Critical accounting estimates and judgments are those that have a significant risk of causing material adjustment and are often applied to matters or outcomes that are inherently uncertain and subject to change. As such, management cautions that future events often vary from forecasts and expectations and that estimates routinely require adjustment.

Management considers the following areas to be those where critical accounting policies affect the significant judgments and estimates used in the preparation of the Company’s consolidated financial statements.

(9)

Aurinia Pharmaceuticals Inc.

Notes to Consolidated Financial Statements

December 31, 2016 and December 31, 2015

(expressed in US dollars, tabular amounts in thousands)

Critical estimates in applying the Company’s accounting policies

Contingent consideration is a financial liability recorded at fair value (note 10). The amount of contingent consideration to be paid is based on the occurrence of future events, such as the achievement of certain development, regulatory and sales milestones. Accordingly, the estimate of fair value contains uncertainties as it involves judgment about the likelihood and timing of achieving these milestones as well as the discount rate used. Changes in fair value of the contingent consideration obligation result from changes to the assumptions used to estimate the probability of success for each milestone, the anticipated timing of achieving the milestones and the discount period and rate to be applied. A change in any of these assumptions could produce a different fair value, which could have a material impact on the results from operations. The impact of changes in key assumptions is described in note 10.

Warrants issued pursuant to equity offerings that are potentially exercisable in cash or on a cashless basis resulting in a variable number of shares being issued are considered derivative liabilities and therefore measured at fair value.

The Company uses the Black-Scholes pricing model to estimate fair value at each reporting date. The key assumptions used in the model are the expected future volatility in the price of the Company’s shares and the expected life of the warrants. The impact of changes in key assumptions is described in note 11.

Determining the fair value of stock options on the grant date, including performance based options, requires judgment related to the choice of a pricing model, the estimation of stock price volatility and the expected term of the underlying instruments. Any changes in the estimates or inputs utilized to determine fair value could result in a significant impact on the Company’s reported operating results, liabilities or other components of shareholders’ equity (deficit). The key assumption used by management is the stock price volatility. If the stock price volatility was higher by a factor of 10% on the option grant dates in 2016, this would have increased annual stock compensation expense by approximately $43,000. If the stock price volatility was lower by a factor of 10% on the grant date, this would have decreased annual stock compensation expense by approximately $28,000.

Critical judgments in applying the Company’s accounting policies

Management’s assessments related to the recognition of revenues for arrangements containing multiple elements are based on estimates and assumptions. Judgment is necessary to identify separate units of accounting and to allocate related consideration to each separate unit of accounting. Where deferral of upfront payments or licence fees is deemed appropriate, subsequent revenue recognition is often determined based on certain assumptions and estimates, the Company’s continuing involvement in the arrangement, the benefits expected to be derived by the customer and expected patent lives. To the extent that any of the key assumptions or estimates change, future operating results could be affected.

(10)

Aurinia Pharmaceuticals Inc.

Notes to Consolidated Financial Statements

December 31, 2016 and December 31, 2015

(expressed in US dollars, tabular amounts in thousands)

The Company follows the guidance of IAS 36 to determine when impairment indicators exist for its intangible assets. When impairment indicators exist, the Company is required to make a formal estimate of the recoverable amount of its intangible assets. This determination requires significant judgment. In making this judgment, management evaluates external and internal factors, such as significant adverse changes in the technological, market, economic or legal environment in which the Company operates as well as the results of its ongoing development programs. Management also considers the carrying amount of the Company’s net assets in relation to its market capitalization as a key indicator. In making a judgment as to whether impairment indicators exist as at December 31, 2016, management concluded there were none.

Management has determined that derivative warrant liabilities are classified as long term as these derivative warrant liabilities will ultimately be settled for common shares and therefore the classification is not relevant.

There were no short-term investments outstanding as at December 31, 2016. The short-term investment as at December 31, 2015 was recorded initially at fair value and subsequently at amortized cost using the effective interest method, The investment was a six-month HSBC Bank US denominated discount note due on February 10, 2016, with an amortized cost of $9,997,000 and an initial cost of $9,984,000 with an effective interest rate of 0.311%.

(11)

Aurinia Pharmaceuticals Inc.

Notes to Consolidated Financial Statements

December 31, 2016 and December 31, 2015

(expressed in US dollars, tabular amounts in thousands)

For the year ended December 31, 2016, the Company disposed of fully depreciated equipment for proceeds of $19,000, resulting in a gain of $19,000 (2015 – $nil resulting in a gain of $nil).

(12)

Aurinia Pharmaceuticals Inc.

Notes to Consolidated Financial Statements

December 31, 2016 and December 31, 2015

(expressed in US dollars, tabular amounts in thousands)

For the year ended December 31, 2016, the Company wrote off $88,000 of fully amortized patent costs related to specific non-core abandoned voclosporin patents/ patent applications (2015 – $136,000).

Licensing and research and development fee revenues represent the amortization of deferred revenue from fee payments received by the Company. The deferred revenue is recorded as revenue as the Company incurs the costs related to meeting its obligations under the terms of the applicable agreements.

Development, distribution and licence agreement with 3SBio, Inc.

On August 23, 2010, the Company and 3SBio, Inc. (3SBio) completed a Development, Distribution and Licence Agreement for voclosporin for the territories of China, Hong Kong and Taiwan. The transaction with 3SBio included a non-refundable licensing fee of $1,500,000, which was originally recorded as deferred revenue.

Under the agreement, the primary substantive obligations of the Company are to grant the licence and transfer intellectual knowledge to 3SBio. Management believes it had fulfilled these obligations by December 31, 2010. However, under the agreement, the Company is also required to maintain the patent portfolio in China, Taiwan and Hong Kong, and to provide further support and cooperation to 3SBio over the life of the agreement, which coincides with the life of the patents. Any additional assistance that may be provided to 3SBio will be performed on a full cost recovery basis. For accounting purposes, when services are to be performed by an indeterminate number of acts over a specific period of time, revenue is recognized on a straight-line basis over this future period. As a result, the balance in deferred revenue is amortized into licensing revenue on a straight-line basis to 2022.

(13)

Aurinia Pharmaceuticals Inc.

Notes to Consolidated Financial Statements

December 31, 2016 and December 31, 2015

(expressed in US dollars, tabular amounts in thousands)

Plan of arrangement with Paladin Labs Inc. (Paladin)

Research and development revenues represent the amortization of the deferred monthly research and development fee payments received by the Company from Paladin for the period from July 1, 2009 to June 30, 2010, pursuant to the terms of the Research and Development Agreement. Under the agreement, the primary substantive obligations of the Company had been achieved by the Company by December 31, 2010. However, under the agreement, the Company is also required to maintain the patent portfolio in Canada, South Africa and Israel and to provide further support and cooperation to Paladin over the life of the agreement. As a result, the balance in deferred revenue as at January 1, 2011 was being amortized into research and development revenue on a straight-line basis over the remaining life of the agreement, which ended in June 2016.

The outstanding fair value of contingent consideration payable to ILJIN is the result of an Arrangement Agreement (the Agreement) completed on September 20, 2013 between the Company, Aurinia Pharma Corp. and ILJIN. Pursuant to the Agreement, payments of up to $10,000,000 are to be paid dependent on the achievement of pre-defined clinical and marketing milestones.

If all milestones are met, the timing of these payments is estimated to occur as follows:

The fair value of this contingent consideration as at December 31, 2016 was estimated to be $5,440,000 (December 31, 2015 - $3,810,000) and was determined by estimating the probability and timing of achieving the milestones and applying the income approach with a discount rate of 10% (2015 - 10%).

The Company achieved a positive 24-week primary endpoint result in the Phase 2b clinical LN trial during the third quarter of 2016. As such while no milestone was attached to this positive primary endpoint result, it was an event that triggered an adjustment of the probability of success of the milestones such that the probability of success factors were increased for the milestones. As a result of the adjustments to the probability factors, the probability adjusted payment ranges were increased to 50% to 95% as at December 31, 2016 from 35% to 70% as at December 31, 2015. The current portion of the contingent consideration liability of $2,021,000 represents the first milestone and a portion of a second milestone that are expected to be achieved within the year. The change in probability factors for the milestones and the passage of time resulted in a revaluation of contingent consideration expense of $1,630,000 (2015 - $337,000)

This is a Level 3 recurring fair value measurement. If the probability for success were to increase by a factor of 10% for each milestone, this would increase the net present value (NPV) of the obligation by approximately

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Aurinia Pharmaceuticals Inc.

Notes to Consolidated Financial Statements

December 31, 2016 and December 31, 2015

(expressed in US dollars, tabular amounts in thousands)

$737,000 as at December 31, 2016. If the probability for success were to decrease by a factor of 10% for each milestone, this would decrease the NPV of the obligation by approximately $739,000 as at December 31, 2016. If the discount rate were to increase to 12%, this would decrease the NPV of the obligation by approximately $261,000. If the discount rate were to decrease to 8%, this would increase the NPV of the obligation by approximately $284,000.

In accordance with IFRS, a contract to issue a variable number of shares fails to meet the definition of equity and must instead be classified as a derivative liability and measured at fair value with changes in fair value recognized in the consolidated statements of operations and comprehensive loss at each period-end. The derivative liability will ultimately be converted into the Company’s equity (common shares) when the warrants are exercised, or will be extinguished on the expiry of the outstanding warrants, and will not result in the outlay of any cash by the Company.

Derivative warrant liability related to December 28, 2016 Bought Deal public offering

On December 28, 2016, the Company completed a $28,750,000 Bought Deal public offering (the Offering). Under the terms of the Offering, the Company issued 12,778,000 units at a subscription price per Unit of $2.25, each Unit consisting of one common share and one-half (0.50) of a common share purchase warrant (a Warrant), exercisable for a period of five years from the date of issuance at an exercise price of $3.00. The holders of the Warrants issued pursuant to this offering may elect, if the Company does not have an effective registration statement registering or the prospectus contained therein is not available for the issuance of the Warrant Shares to the holder, in lieu of exercising the Warrants for cash, a cashless exercise option to receive common shares equal to the fair value of the Warrants based on the number of Warrants to be exercised

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Aurinia Pharmaceuticals Inc.

Notes to Consolidated Financial Statements

December 31, 2016 and December 31, 2015

(expressed in US dollars, tabular amounts in thousands)

multiplied by the weighted average market price less the exercise price with the difference divided by the weighted average market price. If a Warrant holder exercises this option, there will be variability in the number of shares issued per Warrant.

At initial recognition on December 28, 2016, the Company recorded a derivative warrant liability of $7,223,000 based on the estimated fair value of the Warrants with allocated share issuance costs of $655,000 recognized as other expense.

As at December 31, 2016, the Company revalued a derivative warrant liability of $7,405,000 which resulted in a loss on revaluation of a derivative warrant liability of $182,000 for the period from December 28, 2016 to December 31, 2016.

The Company uses the Black-Scholes pricing model to estimate fair value. The Company considers expected volatility of its common shares in estimating its future stock price volatility. The risk-free interest rate for the life of the Warrants was based on the yield available on government benchmark bonds with an approximate equivalent remaining term at the time of issue. The life of warrant is based on the contractual term.

The following assumptions were used to estimate the fair value of the derivative warrant liability on December 31, 2016 and December 28, 2016.

Derivative warrant liability related to February 14, 2014 private placement offering

On February 14, 2014, the Company completed a $52,000,000 private placement. Under the terms of the Offering, the Company issued 18,919,404 units at a subscription price per Unit of $2.7485, each Unit consisting of one common share and one-quarter (0.25) of a common share purchase warrant (a Warrant), exercisable for a period of five years from the date of issuance at an exercise price of $3.2204. The holders of the Warrants issued pursuant to the February 14, 2014 private placement may elect, in lieu of exercising the Warrants for cash, a cashless exercise option to receive common shares equal to the fair value of the Warrants based on the number of Warrants to be exercised multiplied by a five-day weighted average market price less the exercise price with the difference divided by the weighted average market price. If a Warrant holder exercises this option, there will be variability in the number of shares issued per Warrant.

In 2016, two holders of these Warrants elected this option and the Company issued 256,860 common shares on the cashless exercise of 800,432 Warrants. These Warrants had an estimated fair value of $1,852,000 at the dates of exercise, determined using the Black-Scholes warrant pricing model. This amount was transferred from

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Aurinia Pharmaceuticals Inc.

Notes to Consolidated Financial Statements

December 31, 2016 and December 31, 2015

(expressed in US dollars, tabular amounts in thousands)

derivative warrant liability to common shares. In 2015, a holder of these Warrants elected this option and the Company issued 66,000 common shares on the cashless exercise of 182,000 Warrants with an estimated fair value of $635,000.

As at December 31, 2016, the Company revalued the remaining erivative warrant liability at $1,733,000 (December 31, 2015 – $5,499,000), which resulted in a gain on revaluation of a derivative warrant liability for the year ended December 31, 2016 of $1,914,000 related to these outstanding derivative liability warrants (December 31, 2015 – gain on revaluation of a derivative warrant liability of $5,101,000).

The Company considers expected volatility of its common shares in estimating its future stock price volatility. The risk-free interest rate for the expected life of the Warrants was based on the yield available on government benchmark bonds with an approximate equivalent remaining term at the time of the grant. The expected life is based on the contractual term.

The Company uses the Black-Scholes pricing model to estimate fair value. The following assumptions were used to estimate the fair value of the derivative warrant liability on December 31, 2016 and December 31, 2015.

These derivative warrant liabilities are Level 3 recurring fair value measurements.

The key Level 3 inputs used by management to determine the fair value are the market price and the expected volatility. If the market price were to increase by a factor of 10%, this would increase the estimated NPV of the obligation by approximately $1,435,000 as at December 31, 2016. If the market price were to decrease by a factor of 10%, this would decrease the estimated NPV of the obligation by approximately $1,375,000. If the volatility were to increase by 10%, this would increase the estimated NPV of the obligation by approximately $967,000. If the volatility were to decrease by 10%, this would decrease estimated NPV of the obligation by approximately $1,017,000 as at December 31, 2016.

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Aurinia Pharmaceuticals Inc.

Notes to Consolidated Financial Statements

December 31, 2016 and December 31, 2015

(expressed in US dollars, tabular amounts in thousands)

Authorized

Unlimited common shares without par value

Issued

Bought Deal public offering

On December 28, 2016, the Company completed a Bought Deal public offering for gross proceeds of $28,750,000 as described in note 11.

Share issue costs of $2,606,000 included a 7.0% cash commission of $2,012,000 paid to the placement agents and filing, legal and other professional fees of $594,000 directly related to the Offering of which $655,000 was allocated to the derivative warrant liability and expensed in 2016 in other expense (income).

The Company intends to use the net proceeds from this offering for research and development activities including the LN Phase 3 clinical trial and for corporate and working capital purposes.

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Aurinia Pharmaceuticals Inc.

Notes to Consolidated Financial Statements

December 31, 2016 and December 31, 2015

(expressed in US dollars, tabular amounts in thousands)

ATM Facilities

On July 22, 2016 the Company entered into a Controlled Equity Offering Sales Agreement with Cantor Fitzgerald & Co. (Cantor Fitzgerald) pursuant to which the Company may from time to time sell common shares, through ATM offerings with Cantor Fitzgerald acting as sales agent. Pursuant to Canadian securities rules, the Company was limited to raising $8,000,000 under this specific ATM offering.

Pursuant to this agreement, the Company issued 3,306,000 common shares, receiving proceeds of $7,529,000 net of share issue costs of $471,000. Share issue costs of $471,000 included a 3% commission of $240,000 paid to the agent and professional fees and filing fees of $231,000 directly related to the ATM.

The Company intends to use the net proceeds from the ATM to continue development of its lead drug candidate, voclosporin, as a therapy for LN, and for general corporate purposes.

On November 9, 2016 the Company entered into a second Controlled Equity Offering Sales Agreement with Cantor Fitzgerald pursuant to which the Company may from time to time sell common shares, through ATM offerings with Cantor Fitzgerald acting as sales agent. Pursuant to Canadian securities rules, the Company was limited to raising $8,000,000 under this specific ATM offering.

Pursuant to this agreement the Company issued 139,000 common shares as at December 31, 2016, receiving proceeds of $292,000 net of share issue costs of $104,000. Share issue costs of $104,000 included a 3% commission of $12,000 paid to the agent and professional fees and filing fees of $92,000 directly related to the ATM.

The Company intends to use the net proceeds from the ATM to continue development of its lead drug candidate, voclosporin, as a therapy for LN, and for general corporate purposes.

Private placement

On June 22, 2016, the Company completed a private placement for net proceeds of $6,640,000.

Under the terms of the private placement, the Company issued 3,000,000 units (the Units) at a price of $2.36 per Unit. Each Unit consisted of one common share and 0.35 of a common share purchase warrant (a Warran), exercisable for a period of two years from the date of issuance at an exercise price of $2.77.

Share issue costs of $440,000 included a cash commission of $250,000 paid to the agent and legal and filing fees of $190,000 directly related to the private placement.

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Aurinia Pharmaceuticals Inc.

Notes to Consolidated Financial Statements

December 31, 2016 and December 31, 2015

(expressed in US dollars, tabular amounts in thousands)

Issued

On June 22, 2016, pursuant to the private placement noted above, the Company issued 1,050,000 warrants to purchase common shares at a price of $2.77 per common share. The warrants have a term of two years from the date of issuance. The fair value attributed to the warrants using the Black-Scholes option pricing model was $769,000, net of share issue costs of $51,000.

The following assumptions were used to estimate the fair value of the warrants issued pursuant to the June 22, 2016 private placement:

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Aurinia Pharmaceuticals Inc.

Notes to Consolidated Financial Statements

December 31, 2016 and December 31, 2015

(expressed in US dollars, tabular amounts in thousands)

A summary of the outstanding warrants as at December 31, 2016 is presented below:

A summary of the stock options outstanding as at December 31, 2016 and 2015 and changes during the years ended on those dates is presented below:

On June 8, 2016, the Shareholders of the Company approved the amendment to the Stock Option Plan to increase the maximum number of Common Shares reserved for issuance under the Stock Option Plan from 10% to 12.5% of the outstanding Common Shares of the Company at the time of granting.

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Aurinia Pharmaceuticals Inc.

Notes to Consolidated Financial Statements

December 31, 2016 and December 31, 2015

(expressed in US dollars, tabular amounts in thousands)

Therefore, the maximum number of Common Shares issuable under the Stock Option Plan is equal to 12.5% of the issued and outstanding Common Shares at the time the Common Shares are reserved for issuance. As at December 31, 2016, there were 52,808,000 Common Shares of the Company issued and outstanding, resulting in a maximum of 6,601,000 options available for issuance under the Stock Option Plan. An aggregate total of 3,852,000 options are presently outstanding in the Stock Option Plan, representing 7.3% of the issued and outstanding Common Shares of the Company.

In addition, on May 2, 2016, the Company granted 200,000 inducement stock options to a new employee pursuant to Section 613(c) of the TSX Company Manual at a price of $2.92 (CA$3.66). These options vest in equal amounts over 36 months and are exercisable for a term of five years. These options are recorded outside of the Company’s stock option plan.

The Stock Option Plan requires the exercise price of each option to be determined by the Board of Directors and not to be less than the closing market price of the Company’s stock on the day immediately prior to the date of grant. Any options which expire may be re-granted. The Board of Directors approves the vesting criteria and periods at its discretion. The options issued under the plan are accounted for as equity-settled share-based payments.

A summary of the stock options granted pursuant to the Stock Option Plan for the years ended December 31, 2016 and 2015 is presented below:

Year ended December 31, 2016

Year ended December 31, 2015

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Aurinia Pharmaceuticals Inc.

Notes to Consolidated Financial Statements

December 31, 2016 and December 31, 2015

(expressed in US dollars, tabular amounts in thousands)

Application of the fair value method resulted in charges to stock-based compensation expense of $1,383,000 for the year ended December 31, 2016 (2015 – $3,224,000) with corresponding credits to contributed surplus. For the year ended December 31, 2016, stock compensation expense has been allocated to research and development expense in the amount of $330,000 (2015 – $862,000) and corporate, administration and business development expense in the amount of $1,053,000 (2015 – $2,362,000).

The Company used the Black-Scholes option pricing model to estimate the fair value of the options granted in 2016 and 2015.

The Company considers historical volatility of its common shares in estimating its future stock price volatility. The risk-free interest rate for the expected life of the options was based on the yield available on government benchmark bonds with an approximate equivalent remaining term at the time of the grant. The expected life is based upon the contractual term, taking into account expected employee exercise and expected post-vesting employment termination behavior.

The following weighted average assumptions were used to estimate the fair value of the options granted during the year ended December 31:

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Aurinia Pharmaceuticals Inc.

Notes to Consolidated Financial Statements

December 31, 2016 and December 31, 2015

(expressed in US dollars, tabular amounts in thousands)

The following table summarizes information on stock options outstanding as at December 31, 2016:

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Aurinia Pharmaceuticals Inc.

Notes to Consolidated Financial Statements

December 31, 2016 and December 31, 2015

(expressed in US dollars, tabular amounts in thousands)

As at December 31, 2016, the Company has available Canadian non-capital losses in the amount of $73,002,000 (2015 – $51,848,000) to reduce Canadian taxable income in future years. The Company has unclaimed investment tax credits of $1,158,000 (2015 – $952,000) available to reduce future Canadian income taxes otherwise payable.

The losses and credits will expire as follows: