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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_____________________________________________
FORM 10-Q
_____________________________________________
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____________ to ________________
Commission file number: 001-36421
__________________________________________
Aurinia Pharmaceuticals Inc.
(Exact Name of Registrant as Specified in its Charter)
__________________________________________
Alberta, Canada
(State or other jurisdiction of
incorporation or organization)
#1203-4464 Markham Street
Victoria, British Columbia V8Z 7X8
98-1231763
(Address of principal executive offices)(I.R.S. Employer
Identification Number)
(250) 744-2487
Registrant’s telephone number, including area code
_____________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer☒Accelerated filer☐
Non-accelerated filer☐Smaller reporting company☐
Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x 
Indicate the number of shares outstanding of each of the registrant's classes of common shares, as of the latest predictable date. As of November 2, 2022, the registrant had 142,109,703 of common shares outstanding.
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of exchange on which registered
Common shares, no par valueAUPHThe Nasdaq Global Market LLC


AURINIA PHARMACEUTICALS INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page


PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
AURINIA PHARMACEUTICALS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, 2022December 31, 2021
(unaudited)
ASSETS
Current assets
Cash, cash equivalents and restricted cash$86,052 $231,900 
Short-term investments290,592 234,178 
Accounts receivable, net41,771 15,414 
Inventories, net25,320 19,326 
Prepaid expenses12,159 11,710 
Other current assets3,808 796 
Total current assets459,702 513,324 
Non-current assets
Other non-current assets13,049 11,838 
Property and equipment, net3,758 4,418 
Acquired intellectual property and other intangible assets, net6,839 8,404 
Right-of-use assets, net4,945 5,383 
Total assets488,293 543,367 
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities40,123 34,947 
Other current liabilities724 4,640 
Operating lease liabilities918 1,059 
Total current liabilities41,765 40,646 
Non-current liabilities
Deferred compensation and other non-current liabilities15,833 15,950 
Operating lease liabilities7,270 7,680 
Total liabilities64,868 64,276 
Commitments and contingencies (Note 17)
SHAREHOLDER’S EQUITY
Common shares - no par value, unlimited shares authorized, 142,110 and 141,600 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively
1,184,020 1,177,051 
Additional paid-in capital79,188 59,014 
Accumulated other comprehensive loss(1,527)(852)
Accumulated deficit(838,256)(756,122)
Total shareholders' equity423,425 479,091 
Total liabilities and shareholders’ equity$488,293 $543,367 
The accompanying notes are an integral part of these condensed consolidated financial statements.
1

AURINIA PHARMACEUTICALS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
Three months endedNine months ended
September 30,September 30,
2022202120222021
(unaudited)
Revenue
Product revenue, net$25,502 $14,638 $75,142 $22,113 
License and collaboration revenue30,277 29 30,453 88 
Total revenue, net55,779 14,667 105,595 22,201 
Operating expenses
Cost of sales2,447 254 4,302 610 
Selling, general and administrative52,169 44,645 148,898 128,772 
Research and development10,973 20,066 35,118 39,990 
Other (income) expense, net(311)55 647 859 
Total cost of sales and operating expenses65,278 65,020 188,965 170,231 
Loss from operations(9,499)(50,353)(83,370)(148,030)
Interest income1,464 106 2,209 420 
Net loss before income taxes(8,035)(50,247)(81,161)(147,610)
Income tax expense954 8 973 34 
Net loss(8,989)(50,255)(82,134)(147,644)
Other comprehensive loss:
Unrealized gain (loss) on available-for-sale securities, net of tax of nil
326 (2)(675)11 
Comprehensive loss$(8,663)$(50,257)$(82,809)$(147,633)
Basic and diluted loss per share$(0.06)$(0.39)$(0.58)$(1.15)
Weighted-average common shares outstanding used in computation of basic and diluted loss per share141,856 128,443 141,831 128,084 
The accompanying notes are an integral part of these condensed consolidated financial statements.
2

AURINIA PHARMACEUTICALS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
(unaudited)
Common Shares
Three Months Ended September 30, 2022SharesAmountAdditional
paid in
capital		Accumulated
Other
Comprehensive
(Loss) Income		Accumulated
Deficit		Total
Shareholders'
Equity
Balance at June 30, 2022141,892 $1,180,884 $74,004 $(1,853)$(829,267)$423,768 
Shares issued on exercise of stock options and vesting of performance awards and restricted stock units218 3,136 (3,136)— — — 
Share-based compensation— — 8,320 — — 8,320 
Unrealized gain on available-for-sale securities, net— — — 326 — 326 
Net loss— — — — (8,989)(8,989)
Balance at September 30, 2022142,110 $1,184,020 $79,188 $(1,527)$(838,256)$423,425 
Common Shares
Three Months Ended September 30, 2021SharesAmountAdditional
paid in
capital		Accumulated
Other
Comprehensive
(Loss) Income		Accumulated
Deficit		Total
Shareholders'
Equity
Balance at June 30, 2021128,396 954,572 51,022 (792)(672,545)332,257 
Shares issued on exercise of stock options1,172 12,579 (3,505)— — 9,074 
Exercise of warrants2 8 (2)— — 6 
Shared-based compensation— — 7,092 — — 7,092 
Unrealized loss on available-for-sale securities, net— — — (2)— (2)
Net loss— — — — (50,255)(50,255)
Balance at September 30, 2021129,570 $967,159 $54,607 $(794)$(722,800)$298,172 
Common Shares
Nine Months Ended September 30, 2022SharesAmountAdditional
paid in
capital		Accumulated
Other
Comprehensive
(Loss) Income		Accumulated
Deficit		Total
Shareholders'
Equity
Balance at December 31, 2021141,600 $1,177,051 $59,014 $(852)$(756,122)$479,091 
Shares issued on exercise of stock options and vesting of performance awards and restricted stock units383 5,064 (4,542)— — 522 
Issuance of common shares in conjunction with ESPP program127 1,905 (682)— — 1,223 
Share-based compensation— — 25,398 — — 25,398 
Unrealized loss on available-for-sale securities, net— — — (675)— (675)
Net loss— — — — (82,134)(82,134)
Balance at September 30, 2022142,110 $1,184,020 $79,188 $(1,527)$(838,256)$423,425 
Common Shares
Nine Months Ended September 30, 2021SharesAmountAdditional
paid in
capital		Accumulated
Other
Comprehensive
(Loss) Income		Accumulated
Deficit		Total
Shareholders'
Equity
Balance at December 31, 2020126,725 $944,328 $39,383 $(805)$(575,156)$407,750 
Shares issued on exercise of stock options2,324 22,097 (6,745)— — 15,352 
Exercise of warrants521 734 (697)— — 37 
Shared-based compensation— — 22,666 — — 22,666 
Unrealized gain on available-for-sale securities, net— — — 11 — 11 
Net loss— — — — (147,644)(147,644)
Balance at September 30, 2021129,570 $967,159 $54,607 $(794)$(722,800)$298,172 
The accompanying notes are an integral part of these condensed consolidated financial statements.
3

AURINIA PHARMACEUTICALS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
20222021
(in thousands)(unaudited)
Cash flows used in operating activities:
Net loss$(82,134)$(147,644)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization2,487 2,030 
Upfront license and milestone expense— 10,000 
Share-based compensation expense25,398 22,666 
Write-down of inventory2,464 — 
Other, net587 1,005 
Net changes in operating assets and liabilities
Accounts receivable(26,356)(9,815)
Inventories, net(8,458)(5,366)
Prepaid expenses and other current assets(3,461)(6,541)
Non-current assets(830)247 
Accounts payable, accrued and other liabilities875 1,149 
Lease liabilities(551)499 
Net cash used in operating activities (89,979)(131,770)
Cash flows used in investing activities:
Purchase of investments(403,184)(342,831)
Proceeds from investments346,109 263,752 
Upfront lease payment(381)(11,838)
Upfront license payment— (6,000)
Purchase of non-current assets(158)(268)
Additions to internal use-software implementation costs— (1,198)
Net cash used in investing activities (57,614)(98,383)
Cash flows from financing activities
Proceeds from exercise of stock options and employee share purchase plan1,745 15,353 
Proceeds from exercise of warrants— 37 
Cash provided by financing activities 1,745 15,390 
Net decrease in cash, cash equivalents and restricted cash(145,848)(214,763)
Cash, cash equivalents and restricted cash, beginning of period231,900 272,350 
Cash, cash equivalents and restricted cash, end of period$86,052 $57,587 
Supplemental cash flow information
Cash received for interest$1,705 $671 
Cash paid for taxes$(779)$(236)
Cash paid for amounts included in the measurement of lease liabilities$(897)$(195)
Supplemental disclosure of noncash transactions
Initial recognition of operating lease right-of-use asset$— $419 
Reconciliation of cash, cash equivalents and restricted cash to the condensed consolidated balance sheets
Cash, cash equivalents$85,341 $57,587 
Restricted cash711 — 
Total cash, cash equivalents and restricted cash$86,052 $57,587 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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AURINIA PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.Organization and Description of Business
Aurinia Pharmaceuticals Inc. (Aurinia or the Company) is a fully integrated biopharmaceutical company focused on delivering therapies to treat targeted patient populations that are impacted by serious diseases with a high unmet medical need. In January 2021, the Company introduced LUPKYNIS® (voclosporin), the first U.S. Food and Drug Administration (FDA) approved oral therapy for the treatment of adult patients with active lupus nephritis (LN) and continues to conduct pre-clinical, clinical, and regulatory activities to support the voclosporin development program as well as our other assets.
On August 17, 2021, the Company announced the addition of two novel assets AUR200 and AUR300. AUR200 and AUR300 are currently undergoing pre-clinical development with projected submission of Investigational New Drug Applications (INDs) to the FDA in 2023.
On September 15, 2022, the European Commission (EC) granted marketing authorization of LUPKYNIS to Otsuka Pharmaceutical Co., Ltd. (Otsuka). The centralized marketing authorization is valid in all European (EU) member states as well as in Iceland, Liechtenstein, Norway and Northern Ireland.
Aurinia's head office is located at #1203-4464 Markham Street, Victoria, British Columbia, Canada and its registered office is located at #201, 17873-106 A Avenue, Edmonton, Alberta. Aurinia also has a U.S. commercial office located at 77 Upper Rock Circle Suite 700, Rockville, Maryland, 20850 United States.
Aurinia is incorporated pursuant to the Business Corporations Act (Alberta). The Company’s common shares are traded on the Nasdaq Global Market (Nasdaq) under the symbol AUPH.
2.Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments considered necessary for fair presentation in accordance with U.S. GAAP. The condensed consolidated balance sheet as of December 31, 2021 was derived from audited annual consolidated financial statements but does not include all annual disclosures required by U.S. GAAP. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. The results of operations for the nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the full year or any other future periods.
These unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Aurinia Pharma U.S., Inc. (Delaware incorporated) and Aurinia Pharma Limited (UK incorporated). All intercompany balances and transactions have been eliminated in consolidation and operate in one segment.
These unaudited condensed consolidated financial statements are presented in U.S. dollars which is the Company's functional currency, therefore, there is no currency translation adjustment upon consolidation as the remeasurement of gains or losses are recorded in the condensed consolidated statements of operations. All assets and liabilities denominated in a foreign currency are remeasured into U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are remeasured at the average exchange rate during the period. Foreign exchange gains and losses arising on translation or settlement of a foreign currency denominated monetary item are included in the condensed consolidated statements of operations.
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The Company is devoting the majority of our operational efforts and financial resources towards the commercialization and post approval commitments of our approved drug, LUPKYNIS. The Company is also expending efforts towards our newly acquired assets AUR200 and AUR300. Taking into consideration the Company's cash, cash equivalents, restricted cash and investments of $376.6 million as of September 30, 2022, the Company believes that it has sufficient resources to fund its operations for at least the next few years beyond the date that the unaudited condensed consolidated financial statements are issued.
Significant Accounting Policies
Other than as described below, the Company's significant accounting policies have not changed from those previously described in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
Restricted cash: Restricted cash consists of the 2021 Employee Share Purchase Plan (2021 ESPP) deposits of $0.7 million and $0.3 million as of September 30, 2022 and December 31, 2021, respectively.
Major Customers: The Company currently has two main customers for U.S. commercial sales of LUPKYNIS and a collaboration partner for sales of LUPKYNIS in the EU, Japan, as well as the United Kingdom, Russia, Switzerland, Norway, Belarus, Iceland, Liechtenstein and Ukraine (collectively, the "Otsuka Territories"). Revenues from the two main customers in the U.S. accounted in total of approximately 48% for the three months ended September 30, 2022 and 74% for the nine months ended September 30, 2022 of the Company's total revenues. Our collaboration partner for sales outside the U.S. accounted for approximately 52% and 26% for the three and nine months ended September 30, 2022 of the Company's total revenues.
In late March 2022, we provided a nominal additional discount to both of our two main U.S. customers, applicable for the remainder of the 2022 calendar year, in connection with holding additional amounts of LUPKYNIS on hand due to supply chain concerns. Such discounts, or any future discounts, may result in reduced sales to these customers in subsequent periods and substantial fluctuations in our revenues from period to period. The Company monitors economic conditions, the creditworthiness of customers and government regulations and funding, both domestically and abroad. The Company regularly communicates with its customers regarding the status of receivable balances. Global economic conditions and customer specific factors may require the Company to periodically re-evaluate the collectability of its receivables and based on this evaluation the Company could potentially incur credit losses.
Product Revenues
In the United States (and territories), the Company sells LUPKYNIS primarily to specialty pharmacies and specialty distributors. These customers subsequently resell the Company's products to health care providers and patients. Revenues from product sales are recognized when the customer obtains control of our product, which typically occurs upon delivery to the customer.
Reserves for discounts and allowances: Product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to our customer) or a liability (if the amount is payable to a party other than our customer).
The Company's estimates of reserves established for variable consideration are calculated based upon utilizing the expected value method. The transaction price, which includes variable consideration reflecting the impact of discounts and allowances, may be subject to constraint and is included in the net sales price only to the extent that it is probable that a significant reversal of the amount of the cumulative revenues recognized will not occur in a future period. Amounts related to such items are estimated at contract inception and updated at the end of each reporting period as additional information becomes available.
Significant judgment is required in estimating variable consideration. In making these estimates, we consider historical data, including patient mix and inventory sold to our customers that has not yet been dispensed. We use a data aggregator and historical claims to estimate variable consideration for inventory sold to our customers, including specialty pharmacies and specialty distributors, that has not yet been dispensed. Actual amounts may ultimately differ from the Company's estimates. If actual results vary, the Company adjust these estimates, which could have an effect on earnings in the period of adjustment. As of September 30, 2022, we did not have any material adjustments to estimates based on actual results. These specific adjustments are detailed further in our Annual Report on Form 10-K for the year ended December 31, 2021.
Milestone Payments: At the inception of each arrangement that includes development or commercial sales milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be
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included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration and other revenues and earnings in the period of adjustment. Any consideration related to sales-based royalties (and sales-based milestones) will be recognized when the related sales occur. As of September 30, 2022, we recognized $30.0 million for the regulatory milestone related to the EC marketing authorization of LUPKYNIS.
Accounts receivable, net: Accounts receivable are stated at their net realizable value. The Company's accounts receivable represents amounts due to the Company from product sales and from its Otsuka collaboration agreement (Note 12). Milestone payments that have not been invoiced as of the balance sheet date are recorded as unbilled accounts receivable. As of September 30, 2022 and December 31, 2021, accounts receivable, net are $41.8 million and $15.4 million. The accounts receivable, net as of September 30, 2022 includes $28.8 million due from Otsuka related to the achievement of a regulatory milestone in September 2022, for which payment was received on October 31, 2022. The timing between the recognition of revenue for product sales and the receipt of payment is not significant. Our standard credit terms range from 30 to 45 days. We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between the transfer of the promised good to the customer and receipt of payment will be one year or less. We estimate the allowance for doubtful accounts using the current expected credit loss, or CECL, model. Under the CECL model, the allowance for doubtful accounts reflects the net amount expected to be collected from the account receivables. We evaluate the collectability of these cash flows based on the asset’s amortized cost, the risk of loss even when that risk is remote, losses over an asset’s contractual life, and other relevant information available to us. Accounts receivable balances are written off against the allowance when it is probable that the receivable will not be collected. The allowance for doubtful accounts was $nil as of September 30, 2022 and as of December 31, 2021.
Share-Based Compensation: The Company follows ASC Topic 718, Compensation - Stock Compensation (ASC 718), which requires the measurement and recognition of compensation expense, based on estimated fair values, for all share-based awards made to employees and directors. The Company records compensation expense based on the fair value on the grant date using the graded accelerated vesting method for all share-based payments related to stock options, performance awards (PAs), restricted stock units (RSUs) and purchases under the Company's 2021 ESPP. For stock options, forfeitures are estimated based on historical experience at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates. For RSUs and PAs, forfeitures are accounted for as they occur.
Recently adopted accounting pronouncements
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which clarifies and simplifies certain aspects of the accounting for income taxes such as eliminating the exception to the general intraperiod tax allocation principle. The standard is effective for years beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2020. The Company adopted the ASU effective January 1, 2021, with no material impact on the condensed consolidated financial statements.
In November 2021, the FASB issued ASU No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, which requires business entities to make annual disclosures about transactions with a government (including government assistance) by analogizing to a grant or contribution accounting model. The required disclosures include the nature of the transaction, the entity's related accounting policy, the financial statement line items affected and the amounts reflected in the current period financial statements, as well as any significant terms and conditions. The guidance is effective for financial statements issued for annual periods beginning after December 15, 2021. The Company adopted the ASU effective January 1, 2022, with no material impact on the condensed consolidated financial statements.
3.    Fair Value Measurements
The Company's financial instruments consist primarily of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities. The carrying value of accounts receivable, accounts payable and accrued liabilities approximate their fair value because of their short-term nature. Estimated fair value of available-for-sale securities are generally based on prices obtained from commercial pricing services.
In connection with measuring the fair value of its assets and liabilities, the Company seeks to maximize the use of observable inputs (market data obtained from sources independent from the Company) and to minimize the use of unobservable inputs (the
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Company’s assumptions about how market participants would price assets and liabilities). As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:
•Level 1 - Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
•Level 2 - Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
•Level 3 - Unobservable inputs that reflect the reporting entity’s own assumptions.
The following table summarizes the financial assets (cash, cash equivalents, restricted cash and short-term investments) measured at fair value on a recurring basis:
September 30, 2022
(in thousands)Level 1Level 2Level 3Total
Financial assets:
Cash, cash equivalents and restricted cash$86,052 $— $— $86,052 
U.S. agency security— 4,904 — 4,904 
Corporate bond— 98,068 — 98,068 
Commercial paper112,633 — — 112,633 
Treasury bill— 26,704 — 26,704 
Treasury bond— 44,553 — 44,553 
Yankee bond— 3,730 — 3,730 
Total financial assets$198,685 $177,959 $— $376,644 
December 31, 2021
(in thousands)Level 1Level 2Level 3Total
Financial assets:
Cash, cash equivalents and restricted cash$231,900 $— $— $231,900 
Certificates of deposit— 3,140 — 3,140 
Corporate bond— 21,820 — 21,820 
Commercial paper206,724 — — 206,724 
Treasury bill— 2,494 — 2,494 
Total financial assets$438,624 $27,454 $— $466,078 
The Company's Level 1 instruments include cash, cash equivalents, restricted cash and commercial paper that are valued using quoted market prices. We estimate the fair values of our investments in corporate debt securities, government and government related securities and certificates of deposits by taking into consideration valuations obtained from third-party pricing services. The fair value of our short-term investments classified within Level 2 is based upon observable inputs that may include benchmark yield curves, reported trades, issuer spreads, benchmark securities and reference data including market research publications. At September 30, 2022, and December 31, 2021, the weighted average remaining contractual maturities of our Level 1 and 2 investments were approximately for 7 months and 8 months, respectively. These investments have an overall rating of A-1, or higher, by Moody’s, Standard & Poor’s and Fitch.
No credit loss allowance was recorded as of September 30, 2022, as we do not believe the unrealized loss is a result of a credit loss due to the nature of our investments. We also considered the current and expected future economic and market conditions and determined that the estimate of credit losses was not significantly impacted.
Refer to Note 4, “Cash, Cash Equivalents, Restricted Cash and Short-Term Investments,” for the carrying amount and related unrealized gains (losses) by type of investment.
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4.    Cash, Cash Equivalents, Restricted Cash and Short-Term Investments
As of September 30, 2022 and December 31, 2021, the Company had $376.6 million and $466.1 million, respectively of cash, cash equivalents, restricted cash and short-term investments summarized below. As of September 30, 2022, $376.6 million were available-for-sale debt securities which are carried at fair market value. As of December 31, 2021, $446.9 million were classified as available-for-sale and $19.2 million were held-to-maturity.
September 30, 2022
(in thousands)Amortized CostUnrealized GainsUnrealized LossesEstimated Fair Value
Cash, cash equivalents and restricted cash$86,052 $— $— $86,052 
U.S. agency security4,900 4 — 4,904 
Corporate bond98,448 — (380)98,068 
Commercial paper112,833 — (200)112,633 
Treasury bill26,721 — (17)26,704 
Treasury bond44,670 — (117)44,553 
Yankee bond3,742 — (12)3,730 
Total cash, cash equivalents, restricted cash and short-term investments$377,366 $4 $(726)$376,644 
December 31, 2021
(in thousands)Amortized CostUnrealized GainsUnrealized LossesEstimated Fair Value
Cash, cash equivalents and restricted cash$231,900 $— $— $231,900 
Certificates of deposit3,144 — (4)3,140 
Corporate bond2,592 — (1)2,591 
Commercial paper206,764 — (40)206,724 
Treasury bill2,497 — (2)2,495 
Total$446,897 $— $(47)$446,850 
Total held to maturity securities at amortized cost19,228 
Total cash, cash equivalents, restricted cash and short-term investments$466,078 

As of September 30, 2022 and December 31, 2021, accrued interest receivable from the investments were $0.7 million and $0.1 million, respectively. During the three and nine months ended September 30, 2022, the Company had $0.3 million and $0.7 million unrealized gains and losses on available-for-sale securities, net of tax, respectively, which are included as a component of comprehensive loss on the consolidated statements of operations. Currently, the Company does not intend to sell investments that are in an unrealized loss position, and it is unlikely we will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity. We have determined that the gross unrealized losses on our investments at September 30, 2022, were temporary in nature. Realized gains or losses were immaterial during the three and nine months ended September 30, 2022 and 2021.

The Company's short-term investments as of September 30, 2022 mature at various dates through June 2023.

5.    Inventories, net

Inventories are valued under a standard costing methodology on a first-in, first-out basis and are stated at the lower of cost or net realizable value. The Company capitalizes inventory costs related to products to be sold in the ordinary course of business. The Company makes a determination of capitalizing inventory costs for a product based on, among other factors, status of regulatory approval, information regarding safety, efficacy and expectations relating to commercial sales and recoverability of costs. Capitalized costs of inventories for LUPKYNIS mainly include third party manufacturing costs, transportation, storage, insurance, and allocated internal labor.

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The Company assesses recoverability of inventory each reporting period to determine any write-down to net realizable value resulting from excess or obsolete inventories. As of September 30, 2022, we have recorded reserves of finished goods inventories of approximately $2.7 million which were primarily related to process validation batches used for FDA approval.

The components of inventory, net are as follows:
(in thousands)September 30, 2022December 31, 2021
Raw materials$2,217 $2,217 
Work in process20,150 12,566 
Finished goods2,953 4,543 
Total inventories$25,320 $19,326 


6.Prepaid Expenses
Prepaid expenses are as follows:

(in thousands)September 30, 2022December 31, 2021
Prepaid assets$5,725 $5,316 
Prepaid deposits3,582 4,762 
Prepaid insurance2,852 1,632 
Total prepaid expenses$12,159 $11,710 


7.Intangible Assets
The following table summarizes the carrying amount of intangible assets, net of accumulated amortization.
September 30, 2022
(in thousands)Gross Carrying
Value		Accumulated
Amortization		Net Carrying
Amount
Patents$1,473 $(1,249)$224 
Acquired intellectual property and reacquired rights15,126 (9,580)5,546 
Internal-use software implementation costs2,873 (1,804)1,069 
$19,472 $(12,633)$6,839 
December 31, 2021
(in thousands)Gross Carrying
Value		Accumulated
Amortization		Net Carrying
Amount
Patents$1,471 $(1,176)$295 
Acquired intellectual property and reacquired rights15,126 (8,804)6,322 
Internal-use software implementation costs2,873 (1,086)1,787 
$19,470 $(11,066)$8,404 
Amortization expense for the three months ended September 30, 2022 and 2021 was $0.5 million for both periods and for the nine months ended September 30, 2022 and 2021 was $1.6 million for both periods.

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8.    Property and Equipment, net
Property and equipment, net are as follows:
(in thousands)September 30, 2022December 31, 2021
Construction in progress$217 $393 
Leasehold improvements2,978 2,978 
Office equipment645 645 
Furniture976 976 
Computer equipment251 262 
5,0675,254
Less accumulated depreciation(1,309)(836)
Property and equipment, net$3,758 $4,418 
9.    Lease Obligations
The Company has the following lease obligations:
Victoria, British Columbia
During August 2020, the Company signed a lease for commercial office space in Victoria, British Columbia for a new corporate headquarters that was expected to commence in April 2022.

During the fourth quarter of 2020, the Company entered into 18-month facility and furniture leases for its existing corporate head office located in Victoria, British Columbia. The lease terms commenced on January 1, 2021 with an end date of August 31, 2022.

On August 3, 2022, we provided notice of termination for the lease of the intended new corporate headquarters space in Victoria on the basis that the landlord's work was not completed by the time required under the lease. As a result of the termination, the company expensed $0.3 million of CIP cost that was related to the new corporate headquarters.

On September 1, 2022, the fixed lease term ended for Aurinia's existing corporate headquarters and the Company exercised its right to enter into a month to month lease, of which expenses are incurred in SG&A.
Rockville, Maryland
During March 2020, the Company entered into a lease for its U.S. commercial office in Rockville, Maryland for a total of 30,531 square feet of office space. The lease has a remaining term of approximately 9 years and has an option to extend for two five-year periods after the initial term of 11 years has elapsed and has an option to terminate after seven years. As of September 30, 2022, the Company had a right-of-use asset of $4.9 million and lease liability of $8.2 million included in the condensed consolidated balance sheets. As of December 31, 2021, the Company had a right of use asset of $5.2 million and lease liability of $8.6 million included in the condensed consolidated balance sheets. The Company recorded leasehold improvement incentives in the amount of $2.3 million as additions to the lease liability. The lease term commenced on March 12, 2020. When measuring the lease liability, the Company discounted lease payments using its incremental borrowing rate at March 12, 2020. The incremental borrowing rate applied to the lease liability on March 12, 2020 was 5.2% based on the financial position of the Company, geographical region and term of lease.
Edmonton, Alberta
As of September 30, 2022, the Company has a short term lease in Edmonton, Alberta in which expenses are recognized in SG&A. The lease is not material to the Company's financial position.
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The Company incurs variable lease costs under the existing Victoria and Rockville leases. These costs include operation and maintenance costs included in SG&A and are expensed as incurred. The variable lease costs are not material to the Company's financial position.
The operating lease costs for the three and nine months ended September 30, 2022 and September 30, 2021 are $0.2 million and $0.8 million for both periods respectively.
The following table represents the weighted-average remaining lease term and discount rate as of September 30, 2022:
As of September 30, 2022
Weighted Average Remaining Lease Term (years)Weighted Average Discount Rate
Operating leases8.95.22%
The following table provides a summary of operating lease liabilities payments for the next five years and thereafter:
(in thousands)Operating Lease Payments
Remainder of 2022$263 
20231,061 
20241,085 
20251,110 
20261,135 
Thereafter5,638 
Total future minimum lease payments 10,292 
Less: lease imputed interest(2,104)
Total future minimum lease payments$8,188 
On December 15, 2020, the Company entered into a collaborative agreement with Lonza to build a dedicated manufacturing facility within Lonza’s existing small molecule facility in Visp, Switzerland. The dedicated facility (also referred to as "monoplant") will be equipped with state-of-the-art manufacturing equipment to provide cost and production efficiency for the manufacture of voclosporin, while expanding existing capacity and providing supply security to meet future commercial demand.
Following U.S. regulatory approval of LUPKYNIS in January 2021, the Company has commenced a capital expenditure payment program for the monoplant totaling approximately CHF 21.0 million. The first capital expenditure payment was made in February 2021 of $11.8 million (CHF 10.5 million) and was treated as an upfront lease payment and recorded under other non-current assets on the condensed consolidated balance sheets. The second payment is not due until the facility fulfills the required operational qualifications which is estimated to be during the first half of 2023. Upon completion of the monoplant, the Company will have the right to maintain sole dedicated use of the monoplant by paying a quarterly fixed facility fee. The Company expects to account for the arrangement as a finance lease under ASC 842. The present value of the minimum lease payments total approximately $73.0 million, beginning April 2023 and expiring in 2030, and are not included in the above table.
The Company has entered into an equipment and facility finance lease for a backup manufacturing encapsulation site in Beinheim, France that has not yet commenced and is therefore, not included in the above table. As part of the agreement, the Company expects to make payments of approximately $0.9 million prior to lease commencement and the future value of minimum lease payments will total approximately $0.1 million.
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10.Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities are as follows:
(in thousands)September 30, 2022December 31, 2021
Employee accruals$16,511 $18,278 
Commercial accruals9,140 5,916 
Accrued R&D projects8,995 6,412 
Other accrued liabilities5,411 3,527 
Income taxes payable66 814 
Total accounts payable and accrued liabilities$40,123 $34,947 


11.Deferred Compensation and Other Non-current Liabilities

The Company recorded other non-current liabilities of $15.8 million and $16.0 million as of September 30, 2022 and December 31, 2021, respectively. The balance as of September 30, 2022 and December 31, 2021 primarily included deferred compensation arrangements whereby certain executive officers as of March 8, 2012 were provided with future potential employee benefit obligations for remaining with the Company, for a certain period of time. These obligations were also contingent on the occurrence of uncertain future events. Other non-current liabilities also include milestone payments deemed probable to be paid in the future.
12.License and Collaboration Agreements
Otsuka Contract

On December 17, 2020, the Company entered into a collaboration and license agreement with Otsuka for the development and commercialization of oral LUPKYNIS in the Otsuka Territories.

As part of the agreement, the Company received an upfront cash payment of $50.0 million for the license agreement and has the potential to receive up to $50.0 million in regulatory related milestones. The Company will provide semi-finished product of LUPKYNIS to Otsuka on a cost-plus basis, and will receive tiered royalties on future sales ranging from 10 to 20 percent (dependent on territory and achievement of sale thresholds) on net product sales by Otsuka, along with additional milestone payments based on the attainment of certain annual sales. In addition, certain collaboration services are to be provided to Otsuka on agreed upon rates.

In furtherance of the collaboration and license agreement with Otsuka mentioned above, on August 1, 2022, the Company entered into a commercial supply agreement with Otsuka, formalizing the terms to supply semi-finished goods of LUPKYNIS to Otsuka in the Otsuka Territories, including capacity sharing of the monoplant.

On September 15, 2022, the European Commission (EC) granted marketing authorization of LUPKYNIS. The centralized marketing authorization is valid in all EU member states as well as in Iceland, Liechtenstein, Norway and Northern Ireland. The approval triggered a $30.0 million milestone to the Company, which was recognized as collaboration revenue in the three and nine months period ended September 30, 2022 and was subsequently received on October 31, 2022.

For the three and nine months ended September 30, 2022, the Company recognized $0.2 million and $0.4 million, respectively, of collaboration service revenue from Otsuka.

Riptide License
On August 17, 2021, AUR300 (M2 macrophage modulation via CD206 binding) was secured through a global licensing and research agreement with Riptide Bioscience, Inc. (Riptide), a private company. As part of the agreement, in 2021 the Company paid Riptide an upfront license fee of $6.0 million which was expensed as research and development on the condensed consolidated statements of operations. During the first quarter of 2022, Aurinia paid $4.0 million for the achievement of a one-time milestone. Additional payments are due upon certain development, clinical and regulatory milestones, and royalties will be payable upon commercialization.
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13.Net Loss per Common Share
Basic and diluted net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding. Since the Company was in a loss position for all periods presented, diluted net loss per share is the same as basic net loss per share. The numerator and denominator used in the calculation of basic and diluted net loss per common share are as follows:
Three months ended
September 30,		Nine Months Ended
September 30,
(in thousands, except per share data)2022202120222021
Net loss$(8,989)$(50,255)$(82,134)$(147,644)
Weighted average common shares outstanding141,856 128,443 141,831 128,084 
Net loss per common share (expressed in $ per share)$(0.06)$(0.39)
(0.58)
(1.15)
The Company did not include the securities in the following table in the computation of the net loss per common share because the effect would have been anti-dilutive during each period:
Nine months ended
September 30,
(in thousands)20222021
Stock options14,299 12,837 
Unvested performance awards— 857 
Unvested restricted units2,098 201 
Warrants— 1,012 
16,397 14,907 

14.Share-based Compensation
The Company's Amended and Restated Equity Incentive Plan (the Plan), which was adopted and approved by the Company's shareholders in June 2021, allows for an issuance of up to an aggregate of 23.8 million shares (inclusive of then outstanding awards) and provides for grants of stock options, performance awards, and restricted stock units (RSUs) that may be settled in cash and common shares. Also in June 2021, the Company's shareholders adopted and approved the Company's 2021 ESPP, which allows for the issuance of up to 2.5 million shares. The 2021 ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code (the Code) but also permits the Company to include the employees, including non-United States employees, in offerings not intended to qualify under Section 423. The purpose of the 2021 ESPP is to provide eligible employees with opportunities to purchase the Company’s common shares at a discounted price.
During the second quarter of 2022, the Company modified the 2021 ESPP for the current and future offerings. The new ESPP terms shortened the plan from four (4) purchases over a 24 month Offering Period to two (2) purchases over a 12 month offering period. Additionally, the ESPP now contains a rollover mechanism; that is, if the stock price on the purchase date is less than the offering price (as that is determined under the 2021 ESPP), that offering is then canceled and any participants are rolled into the new 12 month offering period at the lower price.

As a result of the modification, $475 thousand of incremental expense was added to the estimated expense for the November 2022 and May 2023 purchase dates (to be amortized over the new 12 month offering period). Additionally, the originally scheduled purchase date in November 2023 is no longer planned given the new 12 month offering period; therefore, the modification also resulted in a “repurchase for no consideration” under ASC 718. The Company recognized an additional $651 thousand of unamortized expense for the cancelled November 2023 purchase, which was recorded during the second quarter of 2022.
In addition to stock options, performance awards and RSUs granted under the Plan, the Company has granted certain stock options and RSUs as inducements material to new employees entering employment in accordance with Nasdaq Listing Rule 5635(c)(4). The inducements were granted outside of the Plan during 2022.
Stock Options

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The Plan requires the exercise price of each option not to be less than the closing market price of the Company’s common shares on the day immediately prior to the date of grant. 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.
The Company used the Black-Scholes option pricing model to estimate the fair value of the options granted. 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 nine months ended September 30, 2022 and September 30, 2021:
20222021
Annualized volatility70 %66 %
Risk-free interest rate2.01 %0.38 %
Expected life of options in years5.0 years4.0 years
Estimated forfeiture rate12.1 %8.9 %
Dividend rate0.0 %0.0%
Fair value per common share option$6.60 $6.64 

The following table summarizes the option award activity for the nine months ended September 30, 2022:

September 30, 2022
Number of shares (in thousands)Weighted average exercise price $
Outstanding - December 31, 202112,074 $12.84 
Granted3,809 11.25 
Exercised(77)6.47 
Forfeited(1,507)14.63 
Outstanding - September 30, 202214,299 $12.26 
Performance Awards and Restricted Stock Units
On October 23, 2020, the Company issued 439,000 PAs to executive management of the Company whose vesting was contingent upon meeting specific performance metrics based on the results for the year ended December 31, 2021. Each PA which vested entitled the participant to receive common shares on the basis of the performance metrics set. On March 18, 2021 performance metrics were set and formally communicated. Therefore, March 18, 2021 was the grant date and the fair value on the grant date was $13.56. The PAs vested in 2022 and the participant was required to achieve at least one of the performance metrics to obtain the portion of the award associated with the metric.
On August 6, 2021, the Company granted approximately 619,000 PAs and RSUs. The grant date for the PAs and RSUs was August 6, 2021 and the fair value on the grant date was $14.42 as this was the date performance measures were set and communicated to employees. The PAs vested on the employee's first anniversary of the grant date and the employee was required to achieve at least one of the performance metrics to obtain the portion of the award associated with the metric. The RSUs had no performance metrics and vested on the one year anniversary of the grant.
During the 2022, the Company has granted RSUs and intends to grant RSUs throughout the year under the Plan, as well as inducements for certain new hires as discussed above. The RSUs are fair valued based on the market price of our common shares on the date of the grant.
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The following table summarizes the PA and RSU activity for the nine months ended September 30, 2022:
September 30, 2022
Number of shares (in thousands)Weighted average exercise price $
Outstanding - December 31, 2021347 $13.33 
Granted2,311 11.26 
Vested(305)14.17 
Forfeited(255)12.39 
Outstanding - September 30, 20222,098 $11.04 
Compensation Expense
The Company recognized share-based compensation expense for the three and nine month periods ended September 30, 2022 and September 30, 2021 as follows:
Three months ended
September 30,		Nine Months Ended
September 30,
(in thousands)2022202120222021
Research and development$1,489 $1,038 $3,531 $3,201 
Selling, general and administrative6,625 6,000 21,480 19,189 
Capitalized under inventories206 54 387 276 
Share-based compensation expense$8,320 $7,092 $25,398 $22,666 
As of September 30, 2022, there was $33.6 million of unrecognized share-based compensation expense related to unvested awards granted which is expected to be recognized over a weighted-average period of approximately 1.4 years.

15.Income Taxes

The effective tax rates for the three and nine months ended September 30, 2022 and September 30, 2021 differed from the federal statutory rate applied to losses before income taxes primarily as a result of the mix of income, losses and valuation allowances. The Company recognized an income tax expense of approximately $1.0 million for the three and nine months ended September 30, 2022. The Company recognized an income tax expense of approximately $8 thousand and $34 thousand for the three and nine months ended September 30, 2021, respectively. The expense recognized for these periods is a result of income in certain jurisdictions and withholding taxes on foreign income. The Company currently has tax expense in certain jurisdictions that are not offset by tax benefits. The increase from prior periods was due to withholding taxes.

Uncertain Tax Positions

The Company was under examination by the Canadian Revenue Agency for years 2017 and 2018. In March 2022, the Company was notified by the Canadian Revenue Agency that the examination is now complete and there were no findings and as a result, there is no additional tax expense or benefit recognized in regards to the audit. There are no outstanding tax audits ongoing at September 30, 2022.
16.Related Party Transactions
ILJIN SNT Co., Ltd (ILJIN) was considered to be a related party due to their equity ownership of over 5% as per their public filing. The outstanding related party amount payable to ILJIN was the result of a settlement completed on September 20, 2013 between ILJIN and the Company. During 2021, Aurinia paid ILJIN $6.0 million upon achievement of specific milestones. The amount payable to ILJIN is nil as of September 30, 2022 and December 31, 2021.
17.Commitments and Contingencies
The Company may, from time to time, be subject to claims and legal proceedings brought against it in the normal course of business. Such matters are subject to many uncertainties. Management believes the ultimate resolution of such contingencies
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will not have a material adverse effect on the consolidated financial position of the Company. The Company's material commitments and contingencies have not changed in any material manner from those previously described in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 and the quarterly report for the quarter ended September 30, 2022.
Other Funding Commitments
In the normal course of business, the Company enters into agreements with contract research organizations, contract manufacturing organizations and other third parties for services to be provided to the Company. Generally, these agreements provide for termination upon notice, with specified amounts due upon termination based on the timing of termination and the terms of the agreement. The actual amounts and timing of payments under these agreements are uncertain and contingent upon the initiation and completion of services to be provided to the Company.
18.Subsequent Events
The Company’s Compensation Committee granted 4 new employees an aggregate of 20,800 inducement stock options and an aggregate of 12,500 inducement RSUs. The options have a per share exercise price of $7.52, the closing price of Aurinia's common stock on September 30, 2022. The stock options and RSUs have a grant date of October 3, 2022. The stock options and RSUs were granted as inducements material to the new employees entering employment with Aurinia in accordance with Nasdaq Listing Rule 5635(c)(4).
On October 17, 2022, Aurinia mutually agreed with Robert Huizinga, PhD RN, CNeph(C), Executive Vice President, Research and Neil Solomons, M.D., Chief Medical Officer, to cease their employment with Aurinia, each effective October 31, 2022.

Aurnia has entered into separation agreements with Dr. Huizinga and Dr. Solomons which will supersede and replace all the severance arrangements between Aurinia and Dr. Huizinga and Dr. Solomons, set forth in their respective employment agreements with Aurinia, dated October 1, 2018 and September 12, 2012, respectively (together, as amended, the Employment Agreements). The terms of the separation agreements are expected to be consistent with the terms of the Employment Agreements, respectively.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in this Quarterly Report. The information in this discussion contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Exchange Act, which are subject to the “safe harbor” created by those sections, as well as “forward-looking information” as defined in applicable Canadian securities laws. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans; objectives of management; the key potential benefits of LUPKYNIS; our belief that we have sufficient financial resources to fund our current plans for at least the next few years; and our potential to receive certain payments and royalties under our agreement with Otsuka; and that an IND is expected to be submitted for AUR200 and AUR300 in 2023. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “propose,” “intend,” “continue,” “potential,” “possible,” “foreseeable,” “likely,” “unforeseen” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We have made numerous assumptions about the forward-looking statements and information contained herein, including among other things, assumptions about: the accuracy of reported data from third party studies and reports; that our IP rights are valid and do not infringe the IP rights of third parties; our assumptions relating to the capital required to fund operations for the next few years; the assumption that our current good relationships with our suppliers, service providers and other third parties will be maintained; assumptions relating to the burn rate of our cash for operations; assumptions relating to the capital required to fund operations for the next few years; assumptions relating to the progress of our pre-clinical activities that our third party service providers will comply with their contractual obligations. Even though management believes that the assumptions made, and the expectations represented by such statements or information are reasonable, there can be no assurance that the forward-looking information will prove to be accurate. We discuss many of these risks, uncertainties and other factors in greater detail under the heading “Risk Factors” in Part I, Item 1A of our 2021 Annual Report on Form 10-K, as filed with the U.S. Securities and Exchange Commission on February 28, 2022 and with applicable Canadian securities regulatory authorities. Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this discussion completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by our cautionary statements. Except as required by law, we assume no obligation to update our forward-looking statements publicly, or to update the reasons that actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
Overview
Aurinia is a fully integrated biopharmaceutical company focused on delivering therapies to treat targeted patient populations that are impacted by serious diseases with a high unmet medical need. In January 2021, we introduced LUPKYNIS® (voclosporin), the first FDA-approved oral therapy for the treatment of adult patients with active LN. We continue to conduct pre-clinical, clinical, and regulatory activities to support the LUPKYNIS development program as well as our other assets. We engaged with Otsuka as a collaboration partner for development and commercialization of LUPKYNIS in the Otsuka Territories.
LUPKYNIS is an orally administered CNI immunosuppressant that has been demonstrated to improve near and long-term outcomes in LN when used in combination with mycophenolate mofetil (MMF) (although MMF is not currently approved as such) and steroids. By inhibiting calcineurin, LUPKYNIS reduces cytokine activation and blocks interleukin IL-2 expression and T-cell mediated immune responses. LUPKYNIS also potentially stabilizes podocytes, which can protect against proteinuria. Voclosporin, the active ingredient in LUPKYNIS, is made by a modification of a single amino acid of the cyclosporine molecule. The mechanism of action of LUPKYNIS has been validated with certain earlier generation CNIs for the prevention of rejection in patients undergoing solid organ transplants and in several autoimmune indications, including uveitis,
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keratoconjunctivitis sicca, psoriasis, rheumatoid arthritis, and for LN in Japan. We believe that LUPKYNIS possesses pharmacologic properties with the potential to demonstrate best-in-class differentiation.
Aurinia announced during the fourth quarter of 2021 the initiation of ENLIGHT-LN, a U.S. based prospective, observational registry of adult patients with LN treated with LUPKYNIS. The registry is intended to support the interests of patients, clinicians, regulatory bodies, payers and industry by obtaining longitudinal data on LUPKYNIS. During the first quarter of 2022, we began actively enrolling patients.
On August 17, 2021, the Company announced the addition of two novel assets AUR200 and AUR300. AUR200 and AUR300 are currently undergoing pre-clinical development with projected submission of Investigational New Drug Applications (INDs) to the FDA in 2023.
On September 15, 2022, the EC granted marketing authorization of LUPKYNIS. The centralized marketing authorization is valid in all EU member states as well as in Iceland, Liechtenstein, Norway and Northern Ireland. The approval triggered a $30.0 million milestone payment to the Company, which was recognized as collaboration revenue in the three and nine months period ended September 30, 2022. We continue to progress with regulatory approval with Otsuka on the other Otsuka Territories.
Critical Accounting Policies and Significant Judgments and Estimates
Except as described below, there have been no material changes to the Company’s critical accounting policies and significant judgments and estimates as described in our Annual Report on Form 10-K for the year ended December 31, 2021.
Product Revenues
In the United States (and territories), the Company sells LUPKYNIS primarily to specialty pharmacies and specialty distributors. These customers subsequently resell the Company's products to health care providers and patients. Revenues from product sales are recognized when the customer obtains control of our product, which typically occurs upon delivery to the customer.
Reserves for discounts and allowances: Product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to our customer) or a liability (if the amount is payable to a party other than our customer).
The Company's estimates of reserves established for variable consideration are calculated based upon utilizing the expected value method. The transaction price, which includes variable consideration reflecting the impact of discounts and allowances, may be subject to constraint and is included in the net sales price only to the extent that it is probable that a significant reversal of the amount of the cumulative revenues recognized will not occur in a future period. Amounts related to such items are estimated at contract inception and updated at the end of each reporting period as additional information becomes available.
Significant judgment is required in estimating variable consideration. In making these estimates, we consider historical data, including patient mix and inventory sold to our customers that has not yet been dispensed. We use a data aggregator and historical claims to estimate variable consideration for inventory sold to our customers, including specialty pharmacies and specialty distributors, that has not yet been dispensed. Actual amounts may ultimately differ from the Company's estimates. If actual results vary, the Company adjust these estimates, which could have an effect on earnings in the period of adjustment. As of September 30, 2022, we did not have any material adjustments to estimates based on actual results. These specific adjustments are detailed further in our Annual Report on Form 10-K for the year ended December 31, 2021.
Milestone Payments: At the inception of each arrangement that includes development or commercial sales milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration and other revenues and earnings in the period of adjustment. Any consideration related to sales-based
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royalties (and sales-based milestones) will be recognized when the related sales occur. As of September 30, 2022, we recognized $30.0 million for the regulatory milestone related to the EC marketing authorization of LUPKYNIS.

Results of Operations
Three and Nine Months ended September 30, 2022 compared to Three and Nine Months ended September 30, 2021
The following table sets forth our results of operations for the three and nine months ended September 30, 2022 and September 30, 2021.
Three months ended September 30,Nine Months Ended September 30,
20222021Change20222021Change
(in thousands)(in thousands)
Revenue
Product revenue, net$25,502 $14,638 $10,864 $75,142 $22,113 $53,029 
License and collaboration revenue30,277 29 30,248 30,453 88 30,365 
Total revenue, net55,779 14,667 41,112 105,595 22,201 83,394 
Operating expenses
Cost of sales2,447 254 2,193 4,302 610 3,692 
Selling, general and administrative52,169 44,645 7,524 148,898 128,772 20,126 
Research and development10,973 20,066 (9,093)35,118 39,990 (4,872)
Other (income) expense, net(311)55 (366)647 859 (212)
Total cost of sales and operating expenses65,278 65,020 258 188,965 170,231 18,734 
Loss from operations(9,499)(50,353)40,854 (83,370)(148,030)64,660 
Interest income1,464 106 1,358 2,209 420 1,789 
Net loss before income taxes(8,035)(50,247)42,212 (81,161)(147,610)66,449 
Income tax expense954 8 946 973 34 939 
Net loss$(8,989)$(50,255)$41,266 $(82,134)$(147,644)$65,510 
Revenues
Total net revenue was $55.8 million and $14.7 million for the three months ended September 30, 2022 and September 30, 2021, respectively. Total revenue was $105.6 million and $22.2 million for the nine months ended September 30, 2022 and September 30, 2021, respectively.
The increase in both periods is primarily due to the recognition of a $30.0 million regulatory milestone from Otsuka following the EC marketing authorization of LUPKYNIS in September 2022, coupled with an increase in product sales to our two main customers for LUPKYNIS driven predominantly by further penetration in the lupus nephritis market.
Cost of Sales
Cost of sales were $2.4 million and $0.3 million for the three months ended September 30, 2022 and September 30, 2021, respectively. Cost of sales were $4.3 million and $0.6 million for the nine months ended September 30, 2022 and September 30, 2021, respectively. The increase for both periods was primarily due to an increase in product related revenue, coupled with an increase in our safety stock inventory reserves.
Gross margin for the three months ended September 30, 2022 and September 30, 2021 was approximately 96% and 98% respectively. Gross margin for the nine months ended September 30, 2022 and September 30, 2021 was approximately 96% and 97% respectively.
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Selling, General and Administrative Expenses
SG&A expenses increased to $52.2 million for the three months ended September 30, 2022 compared to $44.6 million for the three months ended September 30, 2021. For the nine months ended September 30, 2022 and September 30, 2021, SG&A expenses were $148.9 million and $128.8 million, respectively. SG&A expenses consisted of the following:
Three Months Ended
September 30,		Nine Months Ended
September 30,
(in thousands)2022202120222021
Salaries, incentive pay and employee benefits$20,422 $19,981 $62,487 $58,723 
Professional fees and services17,920 13,110 44,487 34,536 
Share-based compensation expense6,625 6,000 21,480 19,189 
Other corporate costs4,093 3,821 12,091 11,155 
Travel, trade shows and sponsorships3,109 1,733 8,353 5,169 
$52,169 $44,645 $148,898 $128,772 
The primary drivers for the increase in SG&A expense for the three and nine months ended September 30, 2022 as compared to the same periods ended September 30, 2021 were an increase in professional fees and services related to corporate legal matters, and travel and sponsorships to support the commercialization of LUPKYNIS. For the nine months ended September 30, 2022, salaries, incentive pay and employee benefits also increased due to employee related expenses such as increased headcount, promotions and inflation.
Research and Development Expenses
R&D expenses were $11.0 million and $20.1 million for the three months ended September 30, 2022 and September 30, 2021, respectively. For the nine months ended September 30, 2022 and September 30, 2021, R&D expenses were $35.1 million and $40.0 million, respectively. R&D expenses consisted of the following:
Three Months Ended
September 30,		Nine Months Ended
September 30,
(in thousands)2022202120222021
Contract research organizations (CRO) and developmental expenses$3,075 $15,873 $15,460 $25,579 
Clinical supply and distribution3,077 872 6,173 3,242 
Salaries, incentive pay and employee benefits3,159 2,070 9,429 7,807 
Share-based compensation expense1,489 1,038 3,531 3,201 
Other costs173 213 525 161 
$10,973 $20,066 $35,118 $39,990 

The primary driver for the decrease for the three and nine months ended September 30, 2022 as compared to the same periods ended September 30, 2021 were due to the upfront license and accrued milestone expense for AUR300 from the periods ended September 30, 2021 offset year to date by additional developmental expenses related to AUR200 and AUR300 for the periods ended September 30, 2022. In accordance with U.S. GAAP, AUR300 was recorded as an asset acquisition during the period ended September 30, 2021.

Interest Income

Interest income was $1.5 million and $0.1 million for the three months ended September 30, 2022 and September 30, 2021, respectively. Interest income was $2.2 million and $0.4 million for the nine months ended September 30, 2022 and September 30, 2021, respectively. The increase in both periods is due to higher yields on our investments as a result of increasing interest rates.

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Liquidity and Capital Resources
As of September 30, 2022, we had cash, cash equivalents and restricted cash and investments of $376.6 million compared to cash, cash equivalents and restricted cash and investments of $466.1 million at December 31, 2021. The decrease in cash, cash equivalents and restricted cash and investments is primarily related to the continued investment in commercialization activities, advancement of our pipeline and a payment for the achievement of a one-time milestone, partially offset by an increase in cash receipts from sales of LUPKYNIS. Cash, cash equivalents and restricted cash and investments are primarily held in U.S. dollars. As of September 30, 2022 and December 31, 2021, we had working capital of $417.9 million and $472.7 million, respectively.
We are devoting the majority of our operational efforts and financial resources towards the commercialization and post approval commitments of our approved drug, LUPKYNIS. We are also expending efforts towards the development of our AUR200 and AUR300 assets. Taking into consideration the cash and cash equivalents and investments as of September 30, 2022, we believe that our cash position is sufficient to fund our current plans which include funding commercial activities, including our FDA related post approval commitments, manufacturing and packaging commercial drug supply, funding our supporting commercial infrastructure, advancing our R&D programs and funding our working capital obligations for at least the next few years.

Cash Flow Summary
The following table summarizes our cash flows for the nine months ended September 30, 2022 and September 30, 2021:
Nine Months Ended September 30,
(in thousands)20222021
Net cash (used in) provided by:
Operating activities$(89,979)$(131,770)
Investing activities(57,614)(98,383)
Financing activities1,745 15,390 
Net decrease in cash and cash equivalents$(145,848)$(214,763)

Net cash used in operating activities was $90.0 million for the nine months ended September 30, 2022 compared to $131.8 million for the nine months ended September 30, 2021. Net cash used in both periods was primarily related to the continued investment in commercialization activities, payments made for our ongoing post approval obligations, advancement of our pipeline, and inventory purchases partially offset by cash receipts from sales of LUPKYNIS. The decrease in net cash is primarily due to an increase in cash receipts from sales of LUPKYNIS.
Cash used in investing activities during the nine months ended September 30, 2022 was $57.6 million compared to cash used in investing activities of $98.4 million during the nine months ended September 30, 2021. The decrease was primarily related to the timing of purchases of investments offset by proceeds of maturities of investments and a nonrecurring upfront lease and license payment made during the nine months ended 2021.
Cash provided by financing activities during the nine months ended September 30, 2022 was $1.7 million compared to cash provided by financing activities of $15.4 million during the nine months ended September 30, 2021. The decrease was primarily due to less proceeds from the exercise of stock options.
Off‑Balance Sheet Arrangements
During the periods presented, we did not have, nor do we currently have, any off‑balance sheet arrangements as such term is defined in Item 303(a)(4)(ii) of Regulation S-K under the Securities Act.
Contractual Obligations
There have been no material changes outside the ordinary course of business to our contractual obligations and commitments as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021.
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Item 3. Quantitative and Qualitative Disclosures About Market Risks
Our activities can expose us to market risks which include interest rate risk, foreign currency risk, inflation risk and credit risk. Risk management is carried out by management under policies approved by our Board of Directors, with oversight provided by the Audit Committee of our Board of Directors. Our overall risk management program seeks to minimize adverse effects on our financial performance.
Interest Rate Risk
Financial assets and financial liabilities with variable interest rates expose us to cash flow interest rate risk. We manage our interest rate risk by maximizing the interest income earned on excess funds while maintaining the liquidity necessary to conduct
operations on a day-to-day basis. As of September 30, 2022, our investment portfolio includes cash, cash equivalents, restricted cash and investments of $376.6 million that earn interest at market rates. Our investment portfolio is maintained in accordance with our investment policy, which defines allowable investments, specifies credit quality standards and limits the credit exposure of any single issuer. Our investments held during the year were comprised of highly rated instruments such as certificates of deposits, money market instruments, obligations issued by the U.S. government and U.S. government agencies as well as corporate debt securities. As of September 30, 2022, these instruments have a maturity of less than a year.

As of September 30, 2022, a hypothetical decrease of 100 basis points on the interest rates of our investments would result in $2.9 million less interest in our portfolio.

Accounts receivable, accounts payable and accrued liabilities bear no interest. We do not believe that the results of operations or cash flows would be affected to any significant degree by a sudden change in market interest rates relative to our investment portfolio.

Foreign Currency Risk

We are exposed to financial risk related to the fluctuation of foreign currency exchange rates. Foreign currency risk for the Company is the risk variations in exchange rates between the U.S. dollar and foreign currencies, primarily with the Canadian dollar, Swiss Franc and Great British Pound, which could affect our operating and financial results. The majority of our cash is held in U.S. dollars and a Canadian denominated bank account. As of September 30, 2022, a 10% increase of the Canadian dollar would have increased the net loss by $0.1 million assuming all other variables remained constant. An assumed 10% weakening of the Canadian dollar would have had an equal but opposite effect to the amounts shown above, on the basis all other variables remain constant. There were no other foreign currency fluctuations that would have had a material impact on our financial condition or results of operations as of September 30, 2022.

Inflation Risk

Inflation has increased during the periods covered by this Quarterly Report and is expected to continue to increase for the near future. Inflation generally affects us by increasing our cost of labor, commercial support, manufacturing and clinical trial expenditures. In addition, due to the increasing interest rates and market volatility, our investment portfolio may have higher yields with short-term maturities of nine months or less which could in turn increase the risk of realized losses on our investments if we were to sell before maturity.

Credit Risk

Our exposure to credit risk generally consists of cash and cash equivalents, investments and accounts receivable. We place our cash and cash equivalents with highly rated financial institutions and invest the excess cash in highly rated investments. Our investment policy limits investments to certain types of debt and money market instruments issued by institutions primarily with investment grade credit ratings and places restriction on maturities and concentrations by asset class and issuer.

We are subject to credit risk in connection with our accounts receivable due from our two customers and our collaboration partner which accounted for 99% of our net trade accounts receivable balances as of September 30, 2022. We monitor economic conditions, the creditworthiness of our customers and government regulations and funding, both domestically and abroad. We regularly communicate with our customers regarding the status of receivable balances. During the quarter ended September 30, 2022, we did not recognize any allowance for doubtful accounts receivable related to credit risk for our customers.
Item 4. Controls and Procedures.
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Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, 2022, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the quarter ended September 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may be involved in various claims and legal proceedings relating to claims arising out of our operations. Regardless of outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
There are no material developments to report in respect of the litigation described in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 or the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2022.
Item 1A. Risk Factors.
Under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 we identified important factors that could affect our financial performance and could cause our actual results for future periods to differ materially from our anticipated results or other expectations, including those expressed in any forward-looking statements made in this Quarterly Report. There has been no material change in our risk factors subsequent to the filing of our prior reports referenced above except as mentioned below. However, the risks described in our reports are not the only risks we face. Additional risks and uncertainties that we currently deem to be immaterial or not currently known to us, as well as other risks reported from time to time in our reports to the SEC, also could cause our actual results to differ materially from our anticipated results or other expectations.
In response to the ongoing armed conflict in Ukraine, the U.S. government, numerous state governments, the EU and other countries in which we conduct business have imposed a wide range of economic sanctions that restrict commerce and business dealings with Russia, certain regions of Ukraine and certain entities. This conflict may also precipitate or amplify the other risks described herein and in our Annual Report on Form 10-K for the year ended December 31, 2021, Part I. Item A. Risk Factors including risks relating to cyber security, global economic conditions and supply chains which could adversely affect our business, operations and financial condition and results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
The following exhibits are filed as part of this report:
25

Exhibit
Number		Description
3.1
3.2
10.22+#
10.23+#
10.24+#*
10.25+#*
10.26+#*
10.46#
31.1*
31.2*
32.1**
32.2**
101.INS*Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH*Inline XBRL Taxonomy Extension Schema Document
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*Inline XBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*Filed herewith.
**Furnished herewith. Exhibits 32.1 and 32.2 are being furnished and shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liability of that section, nor shall such exhibit be deemed to be incorporated by reference in any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as otherwise specifically stated in such filing.
+Indicates a management contract of compensatory plan.
#Certain portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K because they are not material and are the type that Aurinia treats as private or confidential.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AURINIA PHARMACEUTICALS INC.
November 2, 2022By:/s/ Peter Greenleaf
Peter Greenleaf
Chief Executive Officer, Director
(Principal Executive Officer)
November 2, 2022By:/s/ Joseph Miller
Joseph Miller
Chief Financial Officer
(Principal Financial and Accounting Officer)
27