Exhibit 99.1
Aurinia Pharmaceuticals Inc.
Interim Condensed Consolidated Financial Statements
(Unaudited)
(Expressed in thousands of United States (U.S.) dollars)
Third Quarter ended September 30, 2017
Aurinia Pharmaceuticals Inc.
Interim Condensed Consolidated Statements of Financial Position
(Unaudited)
(Expressed in thousands of U.S. dollars)
September 30, 2017 $ |
December 31, 2016 $ |
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Assets |
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Current assets |
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Cash and cash equivalents |
87,546 | 39,649 | ||||||
Short term investments (note 3) |
94,860 | | ||||||
Accrued interest and other receivables |
415 | 86 | ||||||
Prepaid expenses, deposits and other |
2,064 | 1,683 | ||||||
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184,885 | 41,418 | |||||||
Clinical trial contract deposits |
448 | | ||||||
Property and equipment |
27 | 29 | ||||||
Acquired intellectual property and other intangible assets |
14,472 | 15,550 | ||||||
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199,832 | 56,997 | |||||||
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Liabilities |
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Current liabilities |
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Accounts payable and accrued liabilities |
6,665 | 5,791 | ||||||
Current portion of deferred revenue |
118 | 118 | ||||||
Contingent consideration (note 4) |
72 | 2,021 | ||||||
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6,855 | 7,930 | |||||||
Deferred revenue |
472 | 560 | ||||||
Contingent consideration (note 4) |
3,654 | 3,419 | ||||||
Derivative warrant liabilities (note 5) |
21,207 | 9,138 | ||||||
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32,188 | 21,047 | |||||||
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Shareholders equity |
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Share capital |
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Common shares (note 6) |
498,698 | 299,815 | ||||||
Warrants (note 6) |
906 | 971 | ||||||
Contributed surplus |
17,442 | 17,017 | ||||||
Accumulated other comprehensive loss |
(894 | ) | (805 | ) | ||||
Deficit |
(348,508 | ) | (281,048 | ) | ||||
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167,644 | 35,950 | |||||||
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199,832 | 56,997 | |||||||
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Subsequent events (note 11) |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
Aurinia Pharmaceuticals Inc.
Interim Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
For the three and nine month periods ended September 30, 2017 and 2016
(Expressed in thousands of U.S. dollars, except per share data)
Three months ended | Nine months ended | |||||||||||||||
September 30, 2017 $ |
September 30, 2016 $ |
September 30, 2017 $ |
September 30, 2016 $ |
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Revenue |
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Licensing revenue |
29 | 29 | 388 | 88 | ||||||||||||
Research and development revenue |
| | | 50 | ||||||||||||
Contract services |
| 2 | 1 | 5 | ||||||||||||
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29 | 31 | 389 | 143 | |||||||||||||
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Expenses |
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Research and development |
10,807 | 3,342 | 25,239 | 9,072 | ||||||||||||
Corporate, administration and business development |
2,650 | 1,716 | 8,978 | 4,743 | ||||||||||||
Amortization of acquired intellectual property and other intangible assets |
357 | 357 | 1,078 | 1,099 | ||||||||||||
Amortization of property and equipment |
5 | 5 | 17 | 15 | ||||||||||||
Contract services |
| 1 | 1 | 3 | ||||||||||||
Other expense (income) (note 7) |
(315 | ) | 1,078 | (392 | ) | 1,247 | ||||||||||
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13,504 | 6,499 | 34,921 | 16,179 | |||||||||||||
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Net loss before change in estimated fair value of derivative warrant liabilities |
(13,475 | ) | (6,468 | ) | (34,532 | ) | (16,036 | ) | ||||||||
Change in estimated fair value of derivative warrant liabilities (note 5) |
355 | (951 | ) | (32,928 | ) | 1,074 | ||||||||||
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Net loss for the period |
(13,120 | ) | (7,419 | ) | (67,460 | ) | (14,962 | ) | ||||||||
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Other comprehensive income (loss) |
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Item that may be reclassified subsequently to income (loss) |
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Net change in fair value of short-term investments |
(89 | ) | | (89 | ) | | ||||||||||
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Net comprehensive loss for the period |
(13,209 | ) | (7,419 | ) | (67,549 | ) | (14,962 | ) | ||||||||
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Net loss per common share (note 8) (expressed in $ per share) |
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Basic and diluted loss per common share |
(0.16 | ) | (0.21 | ) | (0.91 | ) | (0.44 | ) | ||||||||
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The accompanying notes are an integral part of these interim condensed consolidated financial statements.
2
Aurinia Pharmaceuticals Inc.
Interim Condensed Consolidated Statements of Changes in Shareholders Equity
(Unaudited)
For the nine month periods ended September 30, 2017 and 2016
(Expressed in thousands of U.S. dollars)
Common shares $ |
Warrants $ |
Contributed surplus $ |
Deficit $ |
Accumulated other comprehensive loss $ |
Shareholders equity $ |
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Balance January 1, 2017 |
299,815 | 971 | 17,017 | (281,048 | ) | (805 | ) | 35,950 | ||||||||||||||||
Issue of common shares (note 6) |
173,104 | | | | | 173,104 | ||||||||||||||||||
Share issue costs |
(10,780 | ) | | | | | (10,780 | ) | ||||||||||||||||
Exercise of warrants |
296 | (65 | ) | | | | 231 | |||||||||||||||||
Exercise of derivative warrants |
29,543 | | | | | 29,543 | ||||||||||||||||||
Exercise of stock options |
6,720 | | (2,862 | ) | | | 3,858 | |||||||||||||||||
Stock-based compensation |
| | 3,287 | | | 3,287 | ||||||||||||||||||
Net loss and comprehensive loss for the period |
| | | (67,460 | ) | (89 | ) | (67,549 | ) | |||||||||||||||
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Balance September 30, 2017 |
498,698 | 906 | 17,442 | (348,508 | ) | (894 | ) | 167,644 | ||||||||||||||||
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Balance January 1, 2016 |
261,645 | 1,297 | 15,579 | (257,753 | ) | (805 | ) | 19,963 | ||||||||||||||||
Issue of common shares |
6,142 | | | | | 6,142 | ||||||||||||||||||
Share issue costs |
(407 | ) | | | | | (407 | ) | ||||||||||||||||
Issue of units |
6,260 | 820 | | | | 7,080 | ||||||||||||||||||
Share issue costs |
(389 | ) | (51 | ) | | | | (440 | ) | |||||||||||||||
Exercise of warrants |
2,498 | (825 | ) | | | | 1,673 | |||||||||||||||||
Expiry of warrants |
| (155 | ) | 155 | | | | |||||||||||||||||
Exercise of stock options |
56 | | (29 | ) | | | 27 | |||||||||||||||||
Stock-based compensation |
| | 1,027 | | | 1,027 | ||||||||||||||||||
Net loss and comprehensive loss for the period |
| | | (14,962 | ) | | (14,962 | ) | ||||||||||||||||
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Balance September 30, 2016 |
275,805 | 1,086 | 16,732 | (272,715 | ) | (805 | ) | 20,103 | ||||||||||||||||
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The accompanying notes are an integral part of these interim condensed consolidated financial statements.
3
Aurinia Pharmaceuticals Inc.
Interim Condensed Consolidated Statements of Cash Flow
(Unaudited)
For the three and nine month periods ended September 30, 2017 and 2016
(Expressed in thousands of U.S. dollars)
Three months ended | Nine months ended | |||||||||||||||
September 30, 2017 $ |
September 30, 2016 $ |
September 30, 2017 $ |
September 30, 2016 $ |
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Cash flow provided by (used in) |
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Operating activities |
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Net loss for the period |
(13,120 | ) | (7,419 | ) | (67,460 | ) | (14,962 | ) | ||||||||
Adjustments for: |
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Amortization of deferred revenue |
(29 | ) | (29 | ) | (88 | ) | (138 | ) | ||||||||
Amortization of property and equipment |
5 | 5 | 17 | 15 | ||||||||||||
Amortization of acquired intellectual property and other intangible assets |
357 | 357 | 1,078 | 1,099 | ||||||||||||
Stock-based compensation |
1,068 | 548 | 3,287 | 1,027 | ||||||||||||
Change in value of short term investments |
11 | | (3 | ) | | |||||||||||
Revaluation of contingent consideration |
88 | 1,146 | 436 | 1,272 | ||||||||||||
Change in provision for restructuring costs |
| (38 | ) | | (116 | ) | ||||||||||
Loss (gain) on disposal of equipment |
| (13 | ) | 1 | (13 | ) | ||||||||||
Change in estimated fair value of derivative warrant liabilities |
(355 | ) | 951 | 32,928 | (1,074 | ) | ||||||||||
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(11,975 | ) | (4,492 | ) | (29,804 | ) | (12,890 | ) | |||||||||
Net change in other operating assets and liabilities (note 10) |
3,450 | 304 | (284 | ) | (1,563 | ) | ||||||||||
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Net cash generated from (used in) operating activities |
(8,525 | ) | (4,188 | ) | (30,088 | ) | (14,453 | ) | ||||||||
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Investing activities |
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Purchase of short term investments |
(84,889 | ) | (6,046 | ) | (97,996 | ) | (18,091 | ) | ||||||||
Proceeds on maturity of short term investments |
| 5,998 | 3,050 | 25,041 | ||||||||||||
Proceeds on disposal of equipment |
| 13 | | 13 | ||||||||||||
Purchase of equipment |
| (4 | ) | (16 | ) | (5 | ) | |||||||||
Capitalized patent costs |
| | | (3 | ) | |||||||||||
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Net cash generated from (used in) investing activities |
(84,889 | ) | (39 | ) | (94,962 | ) | 6,955 | |||||||||
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Financing activities |
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Contingent consideration milestone payments |
| | (2,150 | ) | | |||||||||||
Net proceeds from issuance of common shares |
| 5,735 | 162,324 | 5,735 | ||||||||||||
Net proceeds from issuance of units |
| | | 6,640 | ||||||||||||
Proceeds from exercise of derivative warrants |
| | 8,684 | | ||||||||||||
Proceeds from exercise of warrants |
21 | 1,673 | 232 | 1,673 | ||||||||||||
Proceeds from exercise of stock options |
1,222 | 27 | 3,857 | 27 | ||||||||||||
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Net cash generated from (used in) financing activities |
1,243 | 7,435 | 172,947 | 14,075 | ||||||||||||
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Increase (decrease) in cash and cash equivalents during the period |
(92,171 | ) | 3,208 | 47,897 | 6,577 | |||||||||||
Cash and cash equivalents Beginning of period |
179,717 | 9,125 | 39,649 | 5,756 | ||||||||||||
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Cash and cash equivalents End of period |
87,546 | 12,333 | 87,546 | 12,333 | ||||||||||||
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The accompanying notes are an integral part of these interim condensed consolidated financial statements.
4
Aurinia Pharmaceuticals Inc.
Notes to Interim Condensed Consolidated Statements
(Unaudited)
For the three and nine month periods ended September 30, 2017 and 2016
(amounts in tabular columns expressed in thousands of U.S. dollars)
1. | Corporate information |
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. 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 Companys 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 Companys primary business is the development of a therapeutic drug to treat autoimmune diseases, in particular lupus nephritis (LN).
These interim condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Aurinia Pharma Corp., Aurinia Pharma U.S., Inc. (Delaware incorporated) and Aurinia Pharma Limited (UK incorporated).
2. | Corporate information |
Statement of compliance
These interim condensed consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (IFRS), as applicable to interim financial reports including IAS 34, Interim Financial Reporting, and should be read in conjunction with the annual financial statements of the Company for the year ended December 31, 2016 which have been prepared in accordance with IFRS, as issued by the International Accounting Standards Board (IASB).
These interim condensed consolidated financial statements were authorized for issue by the audit committee of the Board of Directors on November 9, 2017.
Basis of measurement
These interim condensed consolidated financial statements have been prepared on a going concern and historical cost basis, other than certain financial instruments which are recognized at fair value.
Functional and presentation currency
These interim condensed consolidated financial statements are presented in United States (US) dollars, which is the Companys functional currency.
3. | Short term investments |
During the nine months ended September 30, 2017, the Company purchased short term investments and has classified them as either held-to-maturity or as available for sale.
Held-to-maturity investments which are recorded initially at fair value and subsequently at amortized cost using the effective interest method less any provisions for impairment. Available for sale investments are recorded initially at fair value including direct and incremental transaction costs. They are subsequently recorded at fair value. Gains or losses arising from changes in fair value are included as a separate component of equity until sale, when the cumulative gain or loss is transferred to the consolidated statements of operations and comprehensive loss. Interest is determined using the effective interest method and impairment losses, if any, on monetary items are recorded in the statement of operations and comprehensive loss.
5
Aurinia Pharmaceuticals Inc.
Notes to Interim Condensed Consolidated Statements
(Unaudited)
For the three and nine month periods ended September 30, 2017 and 2016
(amounts in tabular columns expressed in thousands of U.S. dollars)
September 30, 2017 $ |
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Interest bearing securities (amortized cost) |
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Held to maturity |
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Bank discount note |
7,006 | |||
Canadian Government bond |
3,072 | |||
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10,078 | ||||
Available for sale (fair value) |
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United States treasury notes |
40,491 | |||
Canadian government notes |
24,888 | |||
Bank corporate bonds |
16,951 | |||
Bankers acceptances |
2,452 | |||
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84,782 | ||||
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94,860 | ||||
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The average duration of the interest-bearing securities is 1.2 years and the average yield to maturity is 1.26%. Short term investments held at fair value are classified as Level 2 fair values in the fair value hierarchy.
4. | Contingent consideration |
The outstanding fair value of contingent consideration payable to ILJIN SNT Co., Ltd. (ILJIN), an affiliated shareholder and related party, 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 may be paid dependent on the achievement of pre-defined clinical and marketing milestones.
In the second quarter ended June 30, 2017 the Company paid ILJIN $2,150,000 upon the achievement of two specific milestones.
At September 30, 2017, if all of the remaining milestones are met, the timing of these payments is estimated to occur as follows:
$ | ||||
2018 |
100 | |||
2020 |
2,625 | |||
2021 |
5,125 | |||
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7,850 | ||||
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The fair value estimates at September 30, 2017 were based on a discount rate of 10% and an assumed probability adjusted payment range between 50% and 95%. There were no changes in these assumptions since December 31, 2016. The fair value of this contingent consideration as at September 30, 2017 was estimated to be $3,726,000 compared to $5,440,000 at December 31, 2016. The change in the fair value was primarily due the payment of the $2,150,000 in the second quarter of 2017.
The Company recorded in a revaluation of contingent consideration expense of $88,000 and $436,000 respectively for the three and nine month periods ended September 30, 2017 compared to $1,146,000 and $1,272,000 respectively for the same periods in 2016. The change in the revaluation amounts in 2017 result primarily from the change in the passage of time and the achievement of two milestones in the second quarter ended June 30, 2017 whereas the comparative figures from 2016 reflect probability adjustments made in the third quarter ended September 30, 2016. These adjustments were determined by estimating the probability and timing of achieving the milestones and applying the income approach.
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 $569,000 as at September 30, 2017. 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 $569,000 as at September 30, 2017. If the discount rate were to increase to 12%, this would decrease the NPV of the obligation by approximately $217,000. If the discount rate were to decrease to 8%, this would increase the NPV of the obligation by approximately $235,000.
6
Aurinia Pharmaceuticals Inc.
Notes to Interim Condensed Consolidated Statements
(Unaudited)
For the three and nine month periods ended September 30, 2017 and 2016
(amounts in tabular columns expressed in thousands of U.S. dollars)
5. | Derivative warrant liabilities |
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 estimated fair value with changes in estimated fair value recognized in the consolidated statements of operations and comprehensive loss at each period-end. The derivative liabilities will ultimately be converted into the Companys 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. Immediately prior to exercise, the warrants are remeasured at their estimated fair value. Upon exercise, the intrinsic value is transferred to share capital (the intrinsic value is the share price at the date the warrant is exercised less the exercise price of the warrant). Any remaining fair value is recorded through the statement of operations and comprehensive loss as part of the change in estimated fair value of derivative warrant liabilities.
December 28, 2016 Warrants |
February 14, 2014 Warrants |
Total | ||||||||||||||||||||||
# of warrants | # of warrants | # of warrants | ||||||||||||||||||||||
(in thousands) | $ | (in thousands) | $ | (in thousands) | $ | |||||||||||||||||||
Balance at January 1, 2017 |
6,388 | 7,405 | 3,748 | 1,733 | 10,136 | 9,138 | ||||||||||||||||||
Conversion to equity (common shares) upon exercise of warrants |
(2,859 | ) | (12,399 | ) | (516 | ) | (2,834 | ) | (3,375 | ) | (15,233 | ) | ||||||||||||
Income statement adjustment on exercise of warrants |
| (3,836 | ) | | (195 | ) | | (4,031 | ) | |||||||||||||||
Revaluation of derivative warrant liabilities |
| 28,784 | | 16,028 | | 44,812 | ||||||||||||||||||
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Balance at March 31, 2017 |
3,529 | 19,954 | 3,232 | 14,732 | 6,761 | 34,686 | ||||||||||||||||||
Conversion to equity (common shares) upon exercise of warrants |
(6 | ) | (23 | ) | (1,364 | ) | (5,526 | ) | (1,370 | ) | (5,549 | ) | ||||||||||||
Income statement adjustment on exercise of warrants |
| (8 | ) | | (773 | ) | | (781 | ) | |||||||||||||||
Revaluation of derivative warrant liabilities |
| (4,734 | ) | | (1,983 | ) | | (6,717 | ) | |||||||||||||||
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Balance at June 30, 2017 |
3,523 | 15,189 | 1,868 | 6,450 | 5,391 | 21,639 | ||||||||||||||||||
Conversion to equity (common shares) upon exercise of warrants |
| | (20 | ) | (77 | ) | (20 | ) | (77 | ) | ||||||||||||||
Income statement adjustment on exercise of warrants |
| | | (8 | ) | | (8 | ) | ||||||||||||||||
Revaluation of derivative warrant liabilities |
| (382 | ) | | 35 | | (347 | ) | ||||||||||||||||
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Balance at September 30, 2017 |
3,523 | 14,807 | 1,848 | 6,400 | 5,371 | 21,207 | ||||||||||||||||||
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Balance at January 1, 2016 |
| | 4,548 | 5,499 | 4,548 | 5,499 | ||||||||||||||||||
Revaluation of derivative warrant liability |
| | | (664 | ) | | (664 | ) | ||||||||||||||||
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Balance at March 31, 2016 |
| | 4,548 | 4,835 | 4,548 | 4,835 | ||||||||||||||||||
Revaluation of derivative warrant liability |
| | | (1,361 | ) | | (1,361 | ) | ||||||||||||||||
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Balance at June 30, 2016 |
| | 4,548 | 3,474 | 4,548 | 3,474 | ||||||||||||||||||
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Revaluation of derivative warrant liability |
| | | 951 | | 951 | ||||||||||||||||||
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Balance at September 30, 2016 |
| | 4,548 | 4,425 | 4,548 | 4,425 | ||||||||||||||||||
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7
Aurinia Pharmaceuticals Inc.
Notes to Interim Condensed Consolidated Statements
(Unaudited)
For the three and nine month periods ended September 30, 2017 and 2016
(amounts in tabular columns expressed in thousands of U.S. dollars)
Derivative warrant liability related to December 28, 2016 Bought Deal public offering
On December 28, 2016, the Company completed a $28,750,000 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 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.
No Warrants were exercised in the three months ended September 30, 2017. Previously, 6,000 of these Warrants were exercised for cash and we issued 6,000 common shares and received cash proceeds of $19,000 during the three-month period ended June 30, 2017, while 2.86 million of these Warrants were exercised for cash and we issued 2.86 million common shares and received cash proceeds of $8.58 million for the three-month period ended March 31, 2017.
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 the derivative warrant liability to $7,405,000.
As at September 30, 2017, the Company revalued the remaining derivative warrants at an estimated fair value of $14,807,000 (December 31, 2016 $7,405,000).
The adjustment resulting from the revaluation of the outstanding December 28, 2016 warrants at September 30, 2017 resulted in a decrease in the estimated fair value of the derivative warrant liability for the three months ended September 30, 2017 of $382,000.
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 September 30, 2017 and December 31, 2016.
September 30, 2017 $ |
December 31, $ |
|||||||
Annualized volatility |
60 | % | 76 | % | ||||
Risk-free interest rate |
1.80 | % | 1.92 | % | ||||
Life of warrants in years |
4.24 | 5.00 | ||||||
Dividend rate |
0 | % | 0 | % | ||||
Market price |
6.27 | 2.10 | ||||||
Fair value per Warrant |
4.20 | 1.16 |
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.
8
Aurinia Pharmaceuticals Inc.
Notes to Interim Condensed Consolidated Statements
(Unaudited)
For the three and nine month periods ended September 30, 2017 and 2016
(amounts in tabular columns expressed in thousands of U.S. dollars)
In the third quarter ended September 30, 2017, a holder of 20,000 Warrants elected this option and the Company issued 11,000 common shares upon the cashless exercise of these Warrants. These Warrants had an estimated fair value of $85,000 on the date of exercise, determined using the Black-Scholes warrant pricing model.
9
Aurinia Pharmaceuticals Inc.
Notes to Interim Condensed Consolidated Statements
(Unaudited)
For the three and nine month periods ended September 30, 2017 and 2016
(amounts in tabular columns expressed in thousands of U.S. dollars)
Of this amount, $77,000 was transferred from derivative warrant liabilities to equity (common shares) and $8,000 was recorded through the statement of operations and comprehensive loss as part of the change in estimated fair value of derivative warrant liabilities. Previously, we issued 749,000 common shares upon the cashless exercise of 1,364,000 2014 Warrants during the three months ended June 30, 2017 and 308,000 common shares upon the cashless exercise of 489,000 2014 Warrants and received proceeds of $88,000 by issuing 27,000 common shares upon the cash exercise of 27,000 2014 Warrants during the three-month period ended March 31, 2017.
As at September 30, 2017, the Company revalued the remaining derivative warrants at $6,400,000 (December 31, 2016 $1,733,000).
The net adjustment resulting from the revaluation of the outstanding February 14, 2014 warrants at September 30, 2017 and the impact of the revaluation of the exercised warrants immediately before they were exercised resulted in an increase in the estimated fair value of the derivative warrant liabilities for the three months ended September 30, 2017 of $27,000. (September 30, 2016 increase in derivative warrant liability of $951,000).
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 September 30, 2017 and December 31, 2016.
September 30, 2017 $ |
December 31, 2016 $ |
|||||||
Annualized volatility |
67 | % | 61 | % | ||||
Risk-free interest rate |
1.37 | % | 1.21 | % | ||||
Life of warrants in years |
1.38 | 2.12 | ||||||
Dividend rate |
0 | % | 0 | % | ||||
Market price |
6.27 | 2.10 | ||||||
Fair value per Warrant |
3.46 | 0.46 |
The derivative warrant liabilities are Level 3 recurring fair value measurements.
The key Level 3 inputs used by management to estimate 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 fair value of the obligation by approximately $3,067,000 as at September 30, 2017. If the market price were to decrease by a factor of 10%, this would decrease the estimated fair value of the obligation by approximately $3,008,000. If the volatility were to increase by 10%, this would increase the estimated fair value of the obligation by approximately $650,000. If the volatility were to decrease by 10%, this would decrease estimated fair value of the obligation by approximately $638,000 as at September 30, 2017.
10
Aurinia Pharmaceuticals Inc.
Notes to Interim Condensed Consolidated Statements
(Unaudited)
For the three and nine month periods ended September 30, 2017 and 2016
(amounts in tabular columns expressed in thousands of U.S. dollars)
6. | Share Capital |
a) | Common shares |
Authorized
Unlimited common shares without par value
Issued | Common shares | |||||||
Number | $ | |||||||
(in thousands) | ||||||||
Balance as at January 1, 2017 |
52,808 | 299,815 | ||||||
Issued pursuant to public offering |
25,645 | 162,324 | ||||||
Issued pursuant to exercise of warrants |
85 | 296 | ||||||
Issued pursuant to exercise of derivative liability warrants (note 5) |
3,960 | 29,543 | ||||||
Issued pursuant to exercise of stock options |
1,475 | 6,720 | ||||||
|
|
|
|
|||||
Balance as at September 30, 2017 |
83,973 | 498,698 | ||||||
|
|
|
|
|||||
Balance as at January 1, 2016 |
32,287 | 261,645 | ||||||
Issued pursuant to ATM facility |
2,618 | 5,735 | ||||||
Issued pursuant to June 22, 2016 private placement |
3,000 | 5,871 | ||||||
Issued pursuant to the exercise of warrants |
879 | 2,498 | ||||||
Issued pursuant to the exercise of stock options |
10 | 56 | ||||||
|
|
|
|
|||||
Balance as at September 30, 2016 |
38,794 | 275,805 | ||||||
|
|
|
|
On March 20, 2017, the Company completed a public offering of 25,645,000 common shares which included 3,345,000 common shares from the overallotment exercised by the underwriter. The shares were issued at a price of $6.75 per share. Gross proceeds from this Offering were $173,104,000 before deducting the 6% underwriting commission and other offering expenses which totaled $10,780,000.
b) | Warrants |
Issued | Warrants | |||||||
Number (in thousands) |
$ | |||||||
Balance as at January 1, 2017 |
1,257 | 971 | ||||||
Warrants exercised |
(85 | ) | (65 | ) | ||||
|
|
|
|
|||||
Balance as September 30, 2017 |
1,172 | 906 | ||||||
|
|
|
|
|||||
Balance at January 1, 2016 |
1,368 | 1,297 | ||||||
Issued pursuant to June 22, 2016 private placement |
1,050 | 769 | ||||||
Warrants exercised |
(879 | ) | (825 | ) | ||||
Warrants expired |
(160 | ) | (155 | ) | ||||
|
|
|
|
|||||
Balance as at September 30, 2016 |
1,379 | 1,086 | ||||||
|
|
|
|
11
Aurinia Pharmaceuticals Inc.
Notes to Interim Condensed Consolidated Statements
(Unaudited)
For the three and nine month periods ended September 30, 2017 and 2016
(amounts in tabular columns expressed in thousands of U.S. dollars)
A summary of the outstanding warrants, including derivative warrants, as at September 30, 2017 is presented below:
Expiry date | Number | Weighted average exercise price $ |
||||||
(in thousands) | ||||||||
Exercisable in CA$ |
||||||||
June 26, 2018 (CA$2.50) |
190 | 2.00 | ||||||
December 31, 2018 (CA$2.00) |
14 | 1.60 | ||||||
|
|
|
|
|||||
204 | 1.98 | |||||||
Exercisable in US$ |
||||||||
June 22, 2018 |
968 | 2.77 | ||||||
February 14, 2019 (note 5) |
1,848 | 3.22 | ||||||
December 28, 2021 (note 5) |
3,523 | 3.00 | ||||||
|
|
|
|
|||||
6,543 | 3.00 | |||||||
|
|
|
|
c) | Stock options and compensation expense |
A summary of the stock options outstanding as of September 30, 2017 and September 30, 2016 and changes during the nine months periods ended on those dates is presented below:
September 30, 2017 | September 30, 2016 | |||||||||||||||
Number | Weighted average exercise price in CDN$ |
Number | Weighted average exercise price in CDN$ |
|||||||||||||
Outstanding Beginning of period |
4,052 | 3.74 | 2,713 | 4.00 | ||||||||||||
Granted pursuant to Stock Option Plan |
2,694 | 5.42 | 1,660 | 3.46 | ||||||||||||
Exercised |
(1,475 | ) | 3.42 | (10 | ) | 3.50 | ||||||||||
Forfeited |
(422 | ) | 3.54 | (195 | ) | 3.94 | ||||||||||
Expired |
| | (70 | ) | 7.00 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Outstanding End of period |
4,849 | 4.79 | 4,098 | 3.73 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Options exercisable End of period |
2,643 | 4.19 | 2,715 | 3.90 | ||||||||||||
|
|
|
|
|
|
|
|
On June 21, 2017, the Shareholders of the Company approved the Companys Stock Option Plan for an additional three years.
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 September 30, 2017 there were 83,973,000 Common Shares of the Company issued and outstanding, resulting in a maximum of 10,495,000 options available for issuance under the Stock Option Plan. An aggregate total of 4,665,000 options are presently outstanding in the Stock Option Plan, representing 5.6% of the issued and outstanding Common Shares of the Company.
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 Companys stock on the day immediately prior to the date of grant. Any options which expire may be re-granted. The Board approves the vesting criteria and periods at its discretion. The options issued under the plan are accounted for as equity-settled share-based payments.
12
Aurinia Pharmaceuticals Inc.
Notes to Interim Condensed Consolidated Statements
(Unaudited)
For the three and nine month periods ended September 30, 2017 and 2016
(amounts in tabular columns expressed in thousands of U.S. dollars)
A summary of the stock options granted pursuant to the Stock Option Plan for the years is presented below:
Nine months ended September 30, 2017 | ||||||||||||
Grant Date | Grant Price US$ |
Grant Price CDN$ |
Number | |||||||||
January 20, 2017-New Director (3) |
2.74 | 3.65 | 10 | |||||||||
January 27, 2017-Employee (4) |
3.02 | 3.96 | 25 | |||||||||
February 9, 2017-Chief Executive Officer (6) |
3.20 | 4.21 | 1,050 | |||||||||
February 9, 2017-Officers & Employees (4) |
3.20 | 4.21 | 836 | |||||||||
February 16, 2017-Directors (3) |
3.62 | 4.73 | 50 | |||||||||
April 26, 2017-Employees (5) |
6.95 | 9.45 | 233 | |||||||||
April 26, 2017-Directors (5) |
6.95 | 9.45 | 100 | |||||||||
June 23, 2017-New Director (3) |
6.40 | 8.48 | 50 | |||||||||
July 5, 2017-New Officer (5) |
6.24 | 8.10 | 280 | |||||||||
September 20, 2017-New employees (5) |
6.19 | 7.59 | 60 | |||||||||
|
|
|||||||||||
2,694 | ||||||||||||
|
|
|||||||||||
Nine months ended September 30, 2016 | ||||||||||||
Grant Date | Grant Price US$ |
Grant Price CDN$ |
Number | |||||||||
March 23, 2016-Directors (1) |
3.00 | 3.96 | 60 | |||||||||
March 30, 2016-Officers & employees (1) |
3.02 | 3.91 | 220 | |||||||||
March 31, 2016-Officer (1) |
2.90 | 3.76 | 40 | |||||||||
June 17, 2016-Officer (2) |
2.48 | 3.20 | 1,000 | |||||||||
July 12, 2016-Employee (2) |
3.05 | 4.00 | 100 | |||||||||
July 21, 2016-Officer (2) |
3.03 | 3.95 | 40 | |||||||||
|
|
|||||||||||
1,460 | ||||||||||||
|
|
1. | These options vest in equal amounts over 12 months and are exercisable for a term of five years. |
2. | These options vest in equal amounts over 36 months and are exercisable for a term of five years. |
3. | These options vest in equal amounts over 12 months and are exercisable for a term of ten years. |
4. | These options vest in equal amounts over 36 months and are exercisable for a term of ten years. |
5. | These options vest 12/36 on the 12-month anniversary date and thereafter 1/36 per month over the next 24 months and are exercisable for a term of ten years. |
6. | One quarter of the options vested immediately, with the remainder of the options vesting each month in equal amounts over a period of 36 months and are exercisable for a term of ten years. |
On February 9, 2017, the Company granted 1,050,000 stock options to the Chairman and Chief Executive Officer upon his appointment as Chief Executive Officer of the Company.
On May 2, 2016, the Company granted 200,000 inducement stock options to a new employee pursuant to Section 613 (g) of the TSX Company Manual at a price of $2.92 (CDN$3.66). These options vest in equal amounts over 36 months and are exercisable for a term of five years. In the second quarter ended June 30, 2017, this employee exercised 16,000 of these options to hold 184,000. These options are recorded outside of the Companys stock option plan.
The Company recognized stock-based compensation expense of $1,068,000 and $3,287,000 for the three and nine month periods ended September 30, 2017 respectively (2016$548,000 and $1,027,000) with corresponding credits to contributed surplus. For the three and nine months ended September 30, 2017, stock compensation expense has been allocated to research and development expense in the amount of $273,000 and $692,000 respectively (2016$79,000 and $288,000) and corporate administration expense in the amount of $795,000 and $2,595,000 respectively (2016 $469,000 and $739,000).
The Company used the Black-Scholes option pricing model to estimate the fair value of the options granted to employees, officers and directors.
13
Aurinia Pharmaceuticals Inc.
Notes to Interim Condensed Consolidated Statements
(Unaudited)
For the three and nine month periods ended September 30, 2017 and 2016
(amounts in tabular columns expressed in thousands of U.S. dollars)
The following weighted average assumptions were used to estimate the fair value of the options granted during the nine month periods ended September 30:
September 30, 2017 |
September 30, 2016 |
|||||||
Expected volatility |
74 | % | 74 | % | ||||
Risk-free interest rate |
1.31 | % | 0.59 | % | ||||
Expected life of options in years |
6.6 | 4.0 | ||||||
Estimated forfeiture rate |
24.6 | % | 16.9 | % | ||||
Dividend rate |
0.0 | % | 0.0 | % | ||||
Exercise price |
$ | 4.11 | $ | 2.68 | ||||
Market price on date of grant |
$ | 4.11 | $ | 2.68 | ||||
Fair value per common share option |
$ | 2.78 | $ | 1.46 |
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 behaviour.
Determining the fair value of stock options on grant date, 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 Companys reported operating results, liabilities or other components of shareholders equity. The key assumption used by management is the stock price volatility. If the market price or volatility factors were to increase or decrease by a change of 10% there would be no significant impact.
7. | Other expense (income) |
Three months ended | Nine months ended | |||||||||||||||
September 30, 2017 $ |
September 30, 2016 $ |
September 30, 2017 $ |
September 30, 2016 $ |
|||||||||||||
Other expense (income) net composed of: |
||||||||||||||||
Finance Income |
||||||||||||||||
Interest |
(399 | ) | (7 | ) | (893 | ) | (20 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Other |
||||||||||||||||
Revaluation adjustment on contingent consideration (note 4) |
88 | 1,146 | 436 | 1,272 | ||||||||||||
Foreign exchange loss (gain) and other |
(4 | ) | (48 | ) | 64 | 8 | ||||||||||
Loss (gain) on disposal of equipment |
| (13 | ) | 1 | (13 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
84 | 1,085 | 501 | 1,267 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
(315 | ) | 1,078 | (392 | ) | 1,247 | |||||||||||
|
|
|
|
|
|
|
|
8. | Net loss per common share |
Basic and diluted net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. In determining diluted net loss per common share, the weighted average number of common shares outstanding is adjusted for stock options and warrants eligible for exercise where the average market price of common shares for the three and nine months ended September 30, 2017 exceeds the exercise price. Common shares that could potentially dilute basic net loss per common share in the future that could be issued from the exercise of outstanding stock options and warrants were not included in the computation of the diluted loss per common share for the three and nine months ended September 30, 2017 and September 30, 2016 because to do so would be anti-dilutive.
14
Aurinia Pharmaceuticals Inc.
Notes to Interim Condensed Consolidated Statements
(Unaudited)
For the three and nine month periods ended September 30, 2017 and 2016
(amounts in tabular columns expressed in thousands of U.S. dollars)
The numerator and denominator used in the calculation of historical basic and diluted net loss amounts per common share are as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, 2017 $ |
September 30, 2016 $ |
September 30, 2017 $ |
September 30, 2016 $ |
|||||||||||||
Net loss for the period |
(13,120 | ) | (7,419 | ) | (67,460 | ) | (14,962 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
# | # | # | # | |||||||||||||
In thousands | In thousands | In thousands | In thousands | |||||||||||||
Weighted average common shares outstanding |
83,608 | 36,079 | 74,519 | 33,648 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | $ | $ | $ | |||||||||||||
Loss per common share (expressed in $ per share) |
(0.16 | ) | (0.21 | ) | (0.91 | ) | (0.44 | ) | ||||||||
|
|
|
|
|
|
|
|
The outstanding number, calculated using the treasury stock method, and type of securities that would potentially dilute basic loss per common share in the future and which were not included in the computation of diluted loss per share, because to do so would have reduced the loss per common share (anti-dilutive) for the years presented, are as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, 2017 # |
September 30, 2016 # |
September 30, 2017 # |
September 30, 2016 # |
|||||||||||||
Stock Options |
1,253 | 60 | 1,198 | 717 | ||||||||||||
Warrants (equity) |
687 | 135 | 646 | 519 | ||||||||||||
Warrants (derivative liability) |
2,774 | | 2,537 | 618 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
4,714 | 195 | 4,381 | 1,854 | |||||||||||||
|
|
|
|
|
|
|
|
9. | Segment disclosures |
The Companys operations comprise a single reporting segment engaged in the research, development and commercialization of therapeutic drugs. As the operations comprise a single reporting segment, amounts disclosed in the consolidated financial statements represent those of the single reporting unit. In addition, all of the Companys long-lived assets are located in Canada.
The following geographic information reflects revenue based on customer location.
Three months ended | Nine months ended | |||||||||||||||
September 30, 2017 $ |
September 30, 2016 $ |
September 30, 2017 $ |
September 30, 2016 $ |
|||||||||||||
Revenue |
||||||||||||||||
United States |
| | 300 | | ||||||||||||
China |
29 | 29 | 88 | 88 | ||||||||||||
Canada |
| 2 | | 55 | ||||||||||||
Switzerland |
| | 1 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
29 | 31 | 389 | 143 | |||||||||||||
|
|
|
|
|
|
|
|
15
Aurinia Pharmaceuticals Inc.
Notes to Interim Condensed Consolidated Statements
(Unaudited)
For the three and nine month periods ended September 30, 2017 and 2016
(amounts in tabular columns expressed in thousands of U.S. dollars)
10. | Supplementary cash flow information |
Net change in other operating assets and liabilities:
Three months ended | Nine months ended | |||||||||||||||
September 30, 2017 $ |
September 30, 2016 $ |
September 30, 2017 $ |
September 30, 2016 $ |
|||||||||||||
Accounts receivable |
(130 | ) | (49 | ) | (329 | ) | (51 | ) | ||||||||
Prepaid expenses and deposits |
354 | (117 | ) | (829 | ) | (1,111 | ) | |||||||||
Accounts payable and accrued liabilities |
3,226 | 470 | 874 | (401 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
3,450 | (304 | ) | (284 | ) | (1,563 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Interest Received |
279 | 15 | 661 | 34 | ||||||||||||
|
|
|
|
|
|
|
|
11. | Subsequent events |
a) | Exercise of warrants |
Subsequent to September 30, 2017, the Company issued 59,000 common shares upon the cashless exercise of 110,000 derivative warrants.
b) | Stock options |
Subsequent to September 30, 2017 the Company issued 20,000 common shares upon the exercise of 20,000 stock options for proceeds of $56,000 and granted 5,000 stock options to a new employee at an exercise price of $5.76 (CDN$7.30) per share.
16