Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read together with “Selected Financial Data” and the consolidated financial statements and the notes thereto included in the “Index to Consolidated Financial Statements" in Part IV on pages F-1 through F-21 of this Annual Report. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including but not limited to those described in the “Risk Factors” section of this Annual Report. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read “Special Note Regarding Forward-Looking Statements” and “Risk Factors.”

Overview

Aurinia is a biopharmaceutical company focused on developing and commercializing therapies to treat targeted patient populations that are suffering from serious diseases with a high unmet medical need. We have commercially launched LUPKYNIS in the United States for the treatment of adult patients with active LN, and continue to conduct pre-clinical, clinical, and regulatory advancement to support the voclosporin development program.

On January 22, 2021, the FDA approved LUPKYNIS in combination with a background immunosuppressive therapy regimen to treat adult patients with active LN.

LUPKYNIS is a CNI immunosuppressant, that has the potential to improve near and long-term outcomes in LN when used in combination with MMF, the current standard of care for LN (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, 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.

Earlier generation CNIs have demonstrated efficacy for a number of conditions, including transplant and other autoimmune diseases; however, side effects exist which can limit their long-term use and tolerability. Some clinical complications of earlier generation CNIs include hypertension, hyperlipidemia, diabetes, and both acute and chronic nephrotoxicity.

Based on published data, we believe the key potential benefits of LUPKYNIS in the treatment of adult patients with active LN versus marketed CNIs include:

•increased potency compared to cyclosporine A, allowing for lower dosing requirements and potentially fewer off target effects;

•limited inter and intra patient variability, allowing for easier dosing without the need for monitoring blood levels for therapeutic drug monitoring;

•less cholesterolemia and triglyceridemia than cyclosporine A; and

•limited incidence of glucose intolerance and diabetes at therapeutic doses compared to tacrolimus.

Results of Operations

Comparison of the Years Ended December 31, 2020 and 2019

The following table sets forth our results of operations for the years ended December 31, 2020 and 2019.

Years Ended December 31,

Revenues:

Operating expenses:

Income tax benefit (expense) 94 (144) 238

Revenues

Revenues were $50.1 million and $318 thousand for the years ended December 31, 2020 and 2019, respectively. The increase of $49.8 million in 2020 was primarily due to the upfront payment from Otsuka of $50.0 million recorded as licensing revenue.

Research and Development Expenses

R&D expenses decreased to $50.3 million for the year ended December 31, 2020 compared to $52.9 million for the year ended December 31, 2019. R&D expenses consisted of the following:

Years Ended December 31,

Research and development (in thousands) 2020 2019

Salaries, incentive pay and employee benefits 11,094 5,906

Share-based compensation expense 3,729 2,693

Travel, insurance, patent annuity fees, legal fee and other 4,016 1,837

The primary drivers for the decrease of $2.5 million in R&D spend in 2020 (as detailed in the table above) were a decrease in drug manufacturing and supply costs, due to inventory capitalization of pre-launch inventory, lower CRO expenses and other third party clinical trial expenses, partially offset by an increase in regulatory related costs as we prepared for FDA approval.

General and Administrative Expenses

Corporate, administration and business development expenses increased to $96.0 million for the year ended December 31, 2020 compared to $22.3 million for the year ended December 31, 2019.

The primary driver for the increase of $73.6 million in corporate, administrative and business development spend in 2020 was an increase of $32.8 million in salaries and employee benefits, $8.9 million in share compensation expense, $7.1 million in

insurance, rent and other facilities costs and $24.1 million for professional fees for activities such as strategic review, recruiting, legal, audit, market research and other pre-commercial activities undertaken during the year as we developed our commercial capabilities across the organization including the expansion of the commercial team headed by our new Chief Commercial Officer.

Amortization of Acquired Intellectual Property and Other Intangible Assets

Amortization of acquired intellectual property and other intangible assets increased slightly to $1.3 million for the year ended December 31, 2020 compared to $1.1 million for the year ended December 31, 2019.

Other Expenses (Income), Net

Other expenses were $6.8 million for the year ended December 31, 2020 compared to $14.9 million for the year ended December 31, 2019.

The primary driver for the decrease of $8.1 million in other expenses during 2020 was the higher expense related to a settlement to ILJIN that was recorded in 2019.

Comparison of the Years Ended December 31, 2019 and 2018

The following table sets forth our results of operations for the years ended December 31, 2019 and 2018.

Years Ended December 31,

Revenues:

Operating expenses:

Income tax benefit (expense) (144) (73) (71)

Revenues

Revenues were $318 thousand and $463 thousand for the years ended December 31, 2019 and 2018, respectively.

Research and Development Expenses

R&D expenses increased to $52.9 million for the year ended December 31, 2019 compared to $41.4 million for the year ended December 31, 2018. R&D expenses consisted of the following:

Years Ended December 31,

Research and development (in thousands) 2019 2018

Salaries, incentive pay and employee benefits 5,906 4,260

Share-based compensation expense 2,693 2,696

Travel, insurance, patent annuity fees, legal fee and other 1,837 1,644

The primary drivers for the increase of $11.5 million in R&D spend in 2019 (as detailed in the table above) were an increase in drug supply and distribution costs which reflected the increased manufacturing of voclosporin for future commercial and investigational use combined with higher CRO expenses and other third party clinical trial expenses incurred for the AURORA 2 extension study and preparation costs associated with the planned NDA submission for voclosporin for the treatment of adult patients with active LN, offset by lower AURORA clinical trial costs.

General and Administrative Expenses

Corporate, administration and business development expenses increased to $22.3 million for the year ended December 31, 2019 compared to $13.7 million for the year ended December 31, 2018.

The primary driver for the increase of $8.6 million in corporate, administrative and business development spend in 2019 was an increase of $2.8 million in salaries and employee benefits and $4.1 million in higher fees for activities such as strategic review, recruiting, legal, audit, market research and other pre-commercial activities undertaken during the year.

Amortization of Acquired Intellectual Property and Other Intangible Assets

Amortization of acquired intellectual property and other intangible assets decreased slightly to $1.1 million for the year ended December 31, 2019 compared to $1.3 million for the year ended December 31, 2018.

Other Expenses (Income), Net

Other expenses were $14.9 million for the year ended December 31, 2019 compared to other income of $666 thousand for the year ended December 31, 2018.

The primary driver for the increase of $15.6 million in other expense during 2019 was the recognition of the royalty obligation which is the result of a resolution of our board of directors dated March 8, 2012 whereby certain executive officers at that time were provided with future potential retention benefits for remaining with the Company as further detailed in Note 14 coupled with an increased expense related to a settlement to ILJIN.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the balance sheets and the reported amounts of revenue and expenses during the reporting periods. In accordance with U.S. GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances at the time such estimates are made. Actual results may differ materially from our estimates and judgments under different assumptions or conditions. We periodically review our estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates, if any, are reflected in our financial statements prospectively from the date of the change in estimate.

We define our critical accounting policies as those accounting principles generally accepted in the United States that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations, as well as the specific manner in which we apply those principles. While our significant accounting policies are more fully described in Note 2 to our financial statements appearing elsewhere in this Annual Report, we believe the following are the critical accounting policies used in the preparation of our financial statements that require significant estimates and judgments.

Revenue Recognition: Pursuant to Accounting Standards Codification 606, Revenue from Contracts with Customers (ASC 606), we recognize revenue when a customer obtains control of promised goods or services. We record the amount of revenue that reflects the consideration that it expects to receive in exchange for those goods or services. Revenue is recognized through a five-step process: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) a performance obligation is satisfied. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, we assess the goods or services promised within each contract and determines those that are performance obligations. Revenue is recognized for the applicable performance element when each distinct performance obligation is satisfied.

License, Collaboration and Other Revenues

We enter into out-licensing agreements that are within the scope of ASC 606, under which we licenses certain rights to our product candidates to third parties. The terms of these arrangements typically include payment to us of one or more of the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments, payments for manufacturing supply services we provide through our contract manufacturers, and royalties on net sales of licensed products. Each of these payments results in license, collaboration and other revenues, except for revenues from royalties on net sales of licensed products, which are classified as royalty revenues.

In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under each of our agreements, we perform the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation. As part of the accounting for these arrangements, we must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. We use key assumptions to determine the stand-alone selling price, which may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success.

Licenses of Intellectual Property: If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. We evaluate the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

Manufacturing Supply Services: Arrangements that include a promise for future supply of drug substance or drug product for either clinical development or commercial supply at the licensee’s discretion are generally considered as options. We assess if these options provide a material right to the licensee and if so, they are accounted for as separate performance obligations. If we are entitled to additional payments when the licensee exercises these options, any additional payments are recorded in license, collaboration and other revenues when the licensee obtains control of the goods, which is typically upon delivery.

Milestone Payments: At the inception of each arrangement that includes development or commercial sales milestone payments, we evaluate 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 we recognize revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, we re-evaluate 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.

Research and development costs: Research and development costs, are accounted for in accordance with ASC Topic 730, Research and Development, (ASC 730) and are expensed as incurred. Research and development costs consist primarily of the cost of salaries, share-based compensation expenses, payroll taxes and other employee benefits, subcontractors and materials used for research and development activities, including nonclinical studies, clinical trials, manufacturing costs and professional services. The costs of services performed by others in connection with our R&D activities, including R&D conducted by others on our behalf, shall be included in research and development costs and expensed as the contracted work is performed. We accrue for costs incurred as the services are being provided by monitoring the status of the trial or project and the invoices received from its external service providers. Where contingent milestone payments are due to third parties under research and development arrangements or license agreements, the milestone payment obligations are expensed when the milestone results are probable to be achieved.

Inventory: We capitalize inventory costs related to products to be sold in the ordinary course of business. We make 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. Pre-launch inventory is held as an asset when there is a high probability of regulatory approval for the product.

Inventories are valued under a standard costing method and are stated at the lower of cost or net realizable value. We measure inventory, which include the direct purchase cost of materials and supplies and manufacturing overhead costs, by approximating actual cost under a first-in, first-out basis. We assess recoverability of inventory each reporting period to determine any write down to net realizable value resulting from excess or obsolete inventories.

Share-based compensation: We follow 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. We record compensation expense associated with service and performance-based stock options in accordance with provisions of authoritative guidance. The estimated fair value of service-based awards is determined using option pricing models that use unobservable inputs and is generally amortized on a straight-line basis over the requisite service period and is recognized based on the proportionate amount of the requisite service period that has been rendered during each reporting period. The estimated fair value of performance-based awards is measured on the grant date and is recognized when it is determined that it is probable that the performance condition will be achieved.

Royalty obligation: We have recorded a royalty obligation in liabilities for estimated future employee benefits relating to applicable historical employment arrangements. Pursuant to ASC Topic 710, we recognize future royalty benefits provided by employee retention arrangements, as a royalty obligation, which is recognized when we determine that it is probable we will have to make future payments.

Initially, these obligations are measured at the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting periods. Subsequent re-measurements as a result of performance obligations met by us or changes in assumptions are recognized in the consolidated statement of operations.

We are required to use judgment to determine the most appropriate model to use to measure the obligation and is required to use significant judgment and estimates in determining the inputs into the model. The royalty obligation is based on an income approach using an internal risk-adjusted net present value of the future royalty payments to be made to the former executive officers which are based on the future net revenues for voclosporin.The royalty rates applied to the net revenue are dependent on the type of net revenue earned. There are multiple unobservable inputs. The determination of this royalty obligation is subject to significant judgments and estimates in determining the significant assumptions including:

•Net pricing - this includes the established WAC pricing of the product and estimates of payor and channel mix (which include government rebates, customer discounts and co-payment programs) and annual price escalations of the product.

•Number of patients being treated - this includes various inputs including the number of patients receiving treatment, market penetration, time to peak market penetration, speed of response to treatment, duration of treatment, patient adherence,dosing adjustments according to the approved product labeling and the timing of generics and competitors entering the market.

•Discount rate - the rate used to derive the present value of future cash flows based on the company's estimated cost of equity rate.

Management developed the model and inputs in conjunction with their internal scientific team and utilized third party scientific studies, information provided by third party consultants engaged by us and research papers as sources to develop their inputs. Management believes the liability is based on reasonable assumptions; however, these assumptions may be incomplete or inaccurate and unanticipated events and circumstances may occur. There are numerous significant inputs into the model all of which individually or in combination result in a material change to the obligation.

Contingencies:In the normal course of business, we may be subject to loss contingencies, such as legal proceedings, amounts arising from contractual arrangements and claims arising out of our business that cover a wide range of matters, including, among others, government investigations, shareholder lawsuits, product and environmental liability, and tax matters. In accordance with ASC Topic 450, Accounting for Contingencies, (ASC 450), we record accruals for such loss contingencies when it is probable that a liability will be incurred, and the amount of loss can be reasonably estimated. In accordance with this guidance, we do not recognize gain contingencies until realized.

Income taxes:We account for income taxes under the asset and liability method in accordance with ASC 740, Income Taxes (ASC 740). Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that such tax rate changes are enacted. The portion of any deferred tax asset for which it is more likely than not that a tax benefit will not be realized must then be offset by recording a valuation allowance. Financial statement recognition of a tax position taken or expected to be taken in a tax return is determined based on a more-likely-than-not threshold of that position being sustained. If the tax position meets this threshold, the benefit to be recognized is measured as the largest amount that is more likely than not to be realized upon ultimate settlement. Our policy is to record interest and penalties on uncertain tax positions as a component of income tax expense.

Impact of Recently Issued Accounting Pronouncements

For information of recent accounting pronouncements and their impact on our consolidated financial statements or disclosures, see Note 2 "Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements included in Item 15.

Liquidity and Capital Resources

At December 31, 2020, we had cash and cash equivalents of $272.4 million and short term investments of $126.0 million compared to cash and cash equivalents of $306.0 million at December 31, 2019. Cash and cash equivalents and our investments are primarily held in U.S. dollars. As of December 31, 2020 and 2019, we had working capital of $387.4 million and $303.8 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. For the years ended December 31, 2020 and December 31, 2019, we reported a loss of $102.7 million and $88.4 million respectively. Cash used in operating activities was $69.9 million and $63.6 million for years ended December 31, 2020 and December 31, 2019, respectively. As of December 31, 2020 and 2019, we had an accumulated deficit of $575.2 million and $472.5 million, respectively.

Taking into consideration the cash and cash equivalents and short term investments balance as of December 31, 2020, we believe that our cash position is sufficient to fund our current plans which include conducting our planned R&D programs, funding pre-commercial and launch activities, manufacturing and packaging of commercial drug supply required for launch, and funding our supporting corporate and working capital for at least the next 12 months.

Sources and Uses of Cash

The following table summarizes our cash flows forDecember 31, 2020, 2019 and 2018:

Years Ended December 31,

Net cash (used in) provided by:

Cash used in operating activities in December 31, 2020 was $69.9 million, an increase of $6.3 million, from cash used in operating activities of $63.6 million from 2019. While we had a net loss of $102.7 million in 2020, non-cash components included $17.5 million of share-based compensation and $6.8 million of royalty expense. Operating cash flows included a net increase in working capital of $4.5 million. Net change in working capital during 2020 was largely impacted by changes in inventory, prepaid expenses and deposits, accounts payable and accrued liabilities and changes in our non-current assets and liabilities. Cash used in operating activities during the year ended December 31, 2019 was $63.6 million compared to $51.6 million from 2018. The increase was primarily related to the increase in royalty expense of $8.2 million.

Cash used in investing activities during 2020 was $158.2 million compared to cash provided by investing activities of $7.8 million during 2019. Investing activities in 2020 consisted primarily of $203.0 million for purchases of investments of commercial paper and corporate bonds as discussed in Note 4 of the audited consolidated financial statements for the year ended December 31, 2020. Cash provided by investing activities during 2019 increased compared to cash used in 2018 of $65 thousand mainly from our proceeds of short-term debt securities.

Cash provided by financing activities for the year ended December 31, 2020 was $194.4 million compared to cash provided by financing activities of $243.9 million for the year ended December 31, 2019. Cash provided by financing activities for the year ended December 31, 2020 decreased mainly due to the net proceeds of $187.7 million from our underwritten public offering of common shares (the "July 2020 Offering") compared to 2019, which included $223.1 million net proceeds from the December 2019 Offering and the September 2019 Offering (each described below). Cash provided by financing activities for the year ended December 31, 2019 of $243.9 million compared to $4.0 million for the year ended December 31, 2018 increased due to the December 2019 and September 2019 Offering. Additionally, during 2019 and 2018, we had an increase of $12.8 million and $3.9 million of proceeds from the exercise of stock options and warrants, respectively.

Use of Financing Proceeds

July 2020 Offering

On July 27, 2020, we completed an underwritten public offering of 13.33 million Common Shares, for net proceeds of $187.7 million. The net proceeds are being used for pre-commercialization and launch activities, R&D activities, working capital and general corporate purposes.

December 2019 Offering

On December 12, 2019, we completed an underwritten public offering of 12.78 million Common Shares, which included 1.67 million Common Shares issued pursuant to the full exercise of the underwriters’ over allotment option to purchase additional Common Shares, for net proceeds of $179.9 million (the "December 2019 Offering"), which were to be used for pre-commercialization and launch activities, working capital and general corporate purposes.

September 2019 ATM

On September 13, 2019 we entered into an open market sale agreement with Jefferies LLC pursuant to which Aurinia would be able to, from time to time, sell, through at the market (ATM) offerings, Common Shares that would have an aggregate offering price of up to $40.0 million (the "2019 ATM"). On December 9, 2019 we terminated the agreement with Jefferies LLC related to the 2019 ATM. We received net proceeds of $14.4 million from the 2019 ATM. The net proceeds were used for working capital and corporate purposes. The last of such funds were utilized in 2020.

November 2018 ATM

On November 30, 2018 we entered into an open market sale agreement with Jefferies LLC pursuant to which Aurinia would be able to, from time to time, sell, through ATM offerings, Common Shares that would have an aggregate offering price of up to $30.0 million (the 2018 ATM). As of the first quarter of 2019, the agreement terminated as the maximum dollar amount of Common Shares were sold under the 2018 ATM. We received net proceeds of $28.8 million from the 2018 ATM. The net proceeds were used for working capital and corporate purposes. The last of such funds were utilized in 2020.

March 2017 Offering

On March 20, 2017, we completed an underwritten public offering of 25.64 million Common Shares, which included 3.35 million Common Shares issued pursuant to the full exercise of the underwriters' over allotment option to purchase additional Common Shares, for net proceeds of $162.3 million, which were used for R&D activities and for working capital and corporate purposes. The last of such funds were utilized in 2020.

A summary of the anticipated and actual use of net proceeds used to date from the above financings is set out in the table below.

Working capital and corporate purposes 38,924 38,924

December 2019 Public Offering:

July 2020 Public Offering:

Pre-commercial and launch related activities $117,000 to $143,000 —

Working capital and corporate purposes $10,500 to $42,500 —

As of December 31, 2020, there have been no material variances from how we disclosed we were going to use the proceeds from the above noted offerings and thus no material impact on its ability to achieve our business objectives and milestones.

Contractual Obligations and Commitments

We have the following contractual obligations and commitments as of December 31, 2020:

Payments due by period

We enter into contracts in the normal course of business with clinical trial sites and clinical supply manufacturers and with vendors for preclinical studies and other services and products for operating purposes. These contracts generally provide for termination after a notice period, and, therefore, are cancellable contracts and not included in the table above.

Off-Balance Sheet Arrangements

As of December 31, 2019 and 2020, we did not 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.

Item 7A. Quantitative and Qualitative Disclosures about Market Risks

Our activities can expose us to market risks which include foreign currency risk and interest rate risk. Risk management is carried out by management under policies approved by 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. Our investment portfolio includes cash and cash equivalents and investments that earn interest at market rates. Our investments held during the year were comprised of bonds and commercial paper with a maturity of less than two years. 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, which could affect our operating and financial results.

A 10% increase of the Canadian dollar would have increased the net loss by $0.5 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.

Credit risk

Our exposure to credit risk generally consists of cash and cash equivalents, restricted cash, investments and receivables. We place our cash, cash equivalents and restricted cash with what we believe to be 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.

ITEM 8. Financial Statements and Supplementary Data

The consolidated financial statements required in this item are set forth beginning on page F-1 of this Annual Report on Form 10-K.

Page

Report of Independent Registered Public Accounting Firm F-1

Consolidated Balance Sheets F-4

Consolidated Statements of Shareholders' Equity F-6

Consolidated Statements of Cash Flows F-7

Notes to Financial Statements F-8

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive and financial officers (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Annual Report on Form 10-K. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2020, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.

Management’s Annual Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles.

Management has assessed the effectiveness of our internal control over financial reporting based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013 framework). Based on our evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2020.

The effectiveness of our internal control over financial reporting has been audited by PricewaterhouseCoopers LLP (PwC) an independent registered public accounting firm, as stated in their attestation report herein, which appears in the "Index to Consolidated Financial Statements" in Part IV.

Inherent Limitations of Internal Controls

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control over Financial Reporting

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes. During the quarter ended December 31, 2020, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers, and Corporate Governance

The information required by this Item and not set forth below will be set forth in the section headed “—Election of Directors” and “Information Regarding the Board of Directors and Corporate Governance” in our definitive Proxy Statement for our 2021 Annual Meeting of Shareholders to be filed with the SEC by April 30, 2021 (our Proxy Statement) and is incorporated in this Annual Report by reference.

We have adopted a code of ethics for directors, officers (including our principal executive officer, principal financial officer and principal accounting officer) and employees, known as the Corporate Code of Ethics and Conduct. The Corporate Code of Ethics and Conduct is available on our website at http://www.auriniapharma.com under the Corporate Governance section of our Investors page. We will promptly disclose on our website (i) the nature of any amendment to the policy that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and (ii) the nature of any waiver, including an implicit waiver, from a provision of the policy that is granted to one of these specified individuals, the name of such person who is granted the waiver and the date of the waiver. Shareholders may request a free copy of the Corporate Code of Ethics and Conduct from c/o Aurinia Pharmaceuticals Inc., #1203-4464 Markham St., Victoria, BC, V8Z 7X8, Attn: Corporate Secretary.

Item 11. Executive Compensation

The information required by this Item will be set forth in the section headed “Executive Compensation” in our Proxy Statement and is incorporated in this Annual Report by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item will be set forth in the section headed “Security Ownership of Certain Beneficial Owners and Management” in our Proxy Statement and is incorporated in this Annual Report by reference.

Information regarding our equity compensation plans will be set forth in the section headed “Executive Compensation” in our Proxy Statement and is incorporated in this Annual Report by reference.

Item 13. Certain Relationships and Related Transactions and Director Independence

The information required by this Item will be set forth in the section headed “Transactions With Related Persons” in our Proxy Statement and is incorporated in this Annual Report by reference.

Item 14. Principal Accountant Fees and Services

The information required by this Item will be set forth in the section headed “—Ratification of Selection of Independent Registered Public Accounting Firm” in our Proxy Statement and is incorporated in this Annual Report by reference.

PART IV

Item 15. Financial Statement Schedules and Exhibits

a.We have filed the following documents as part of this Annual Report:

1.Consolidated Financial Statements.

The following financial statements are filed as part of this report:

Our consolidated financial statements are listed under Part II, Item 8. "Index to Consolidated Financial Statements" in this Annual Report.

2.Financial Statement Schedules

All financial statement schedules have been omitted because they are not applicable, not material or the required information is shown under Part II, Item 8. “Index to Consolidated Financial Statements” in this Annual Report.

3.Exhibits

The following exhibits, as required by Item 601 of Regulation S-K, which are incorporated herein by reference, are filed or furnished with this Annual Report, in each case as indicated therein.

Incorporation by Reference

ExhibitNumber Description Form SEC File No. Exhibit Filing Date

3.1* Articles of Amalgamation, as amended, as currently in effect

4.1* Form of Common Shares Certificate of the Company

4.2 Reference is made to Exhibits 3.1 and 3.2

4.3* Description of the Registrant's Common Shares

10.20+* Form of Inducement Grant Option Commitment

21.1* List of Subsidiaries of Registrant

24.1* Power of Attorney (contained in signature page of this report)

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

* Filed herewith.

+ Indicates a management contract or compensatory plan.

Item 16. Form 10-K Summary

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

AURINIA PHARMACEUTICALS INC.

February 24, 2021 By: /s/ Peter Greenleaf

Peter Greenleaf

Chief Executive Officer

(Principal Executive Officer)

SIGNATURES AND POWER OF ATTORNEY

We, the undersigned directors and officers of Aurinia Pharmaceuticals Inc., hereby severally constitute and appoint Peter Greenleaf and Joseph Miller, and each of them singly, our true and lawful attorneys, with full power to them, and to each of them singly, to sign for us and in our names in the capacities indicated below, any and all amendments to this Annual Report on Form 10-K, and to file or cause to be filed the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as each of us might or could do in person, and hereby ratifying and confirming all that said attorneys, and each of them, or their substitute or substitutes, shall do or cause to be done by virtue of this Power of Attorney.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name Title Date

/s/ Peter Greenleaf Chief Executive Officer, Director February 24, 2021

Peter Greenleaf (Principal Executive Officer)

/s/ Joseph Miller Chief Financial Officer February 24, 2021

Joseph Miller (Principal Financial and Accounting Officer)

/s/ George M. Milne, Jr. Ph.D. Chairman February 24, 2021

George M. Milne, Jr., Ph.D.

/s/ Daniel Billen, Ph.D. Director February 24, 2021

Daniel Billen, Ph.D.

/s/ R. Hector MacKay-Dunn, J.D., Q.C. Director February 24, 2021

R. Hector MacKay-Dunn, J.D., Q.C.

/s/ Joseph P. Hagan Director February 24, 2021

Joseph P. Hagan

Michael Hayden, C.M., OBC, MB, ChB, Ph.D., FRCP(C), FRSC

/s/ David R.W. Jayne, M.D., FRCP, FRCPE, FMedSci Director February 24, 2021

David R.W. Jayne, M.D., FRCP, FRCPE, FMedSci

/s/ Jill Leversage Director February 24, 2021

Jill Leversage

/s/ Timothy P. Walbert Director February 24, 2021

Timothy P. Walbert

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F-2

F-3

AURINIA PHARMACEUTICALS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

As of December 31,

Assets

Current assets:

Short term investments (4) 125,979 —

Accrued interest and other receivables (6) 1,018 368

Prepaid expenses and deposits 6,153 8,750

Non-current assets:

Long term investments (4) 24,380 —

Other non-current assets 247 209

Property and equipment, net (7) 4,786 93

Acquired intellectual property and other intangible assets, net (8) 9,332 8,862

Right of use asset (15) 5,489 —

Liabilities and Shareholders' Equity

Current liabilities:

Accounts payable and accrued liabilities (9) 24,797 11,177

Operating lease liability (15) 788 —

Royalty obligation (14) 294 —

Non-current liabilities:

Operating lease liability (15) 7,619 —

Commitments and Contingencies (13)

Shareholders’ Equity:

Accumulated other comprehensive loss (16) (805) (805)

Total liabilities and shareholders' equity $ 463,661 $ 324,301

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

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Years ended December 31,

Revenues:

Contract revenue (2) — — 345

Operating expenses:

Income tax benefit (expense) (12) 94 (144) (73)

Basic and diluted loss per common share (18) $ (0.87) $ (0.95) $ (0.63)

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

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Shares Amount

Exercise of warrants (16) 1 2 (1) — — 1

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

F-6

Years ended December 31,

Cash flows from operating activities:

Depreciation of property and equipment (7) 82 33 20

Net changes in operating assets and liabilities:

Accrued interest and other receivables (650) (151) (108)

Right of use assets (15) (5,489) — —

Lease liabilities (15) 8,407 — —

Cash flows from investing activities:

Purchase of short-term debt securities (4) (202,951) — (36,084)

Purchase of long-lived assets (5,584) (85) (74)

Purchase of cloud based arrangements (1,675) — —

Capitalized patent costs (84) (16) —

Cash flows from financing activities:

Supplemental cash flow information:

Non-cash investing and financing activities:

Cash paid for legal settlement $ — $ 100 $ —

Cash paid for taxes $ 261 $ 59 $ —

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

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1. Organization and Description of Business

Aurinia Pharmaceuticals Inc. (Aurinia) or the Company is a commercial-stage biopharmaceutical company focused on developing and commercializing therapies to treat targeted patient populations that are suffering from serious diseases with a high unmet medical need. The Company has developed LUPKYNIS, an investigational drug, for the treatment of adult patients with active LN and continues to conduct pre-clinical, clinical, and regulatory advancement to support the voclosporin development program.

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, Rockville, Maryland, United States.

Aurinia is incorporated pursuant to the Business Corporations Act (Alberta). The Company’s common shares are currently listed and traded on the Nasdaq Global Market (Nasdaq) under the symbol AUPH and on the Toronto Stock Exchange (TSX) under the symbol AUP.

These 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).

2. Summary of Significant Accounting Policies

Basis of presentation: The Company follows accounting standards established by the Financial Accounting Standards Board (FASB) to ensure consistent reporting of financial condition, results of operations, and cash flows. References to generally accepted accounting principles (GAAP) or U.S. GAAP in these footnotes are to the FASB Accounting Standards Codification (ASC or the Codification). Previously, the Company prepared its consolidated financial statements under International Financial Reporting Standards (IFRS) as permitted by securities regulators in Canada, as well as in the United States under the status of a Foreign Private Issuer as defined by the United States Securities and Exchange Commission (SEC). At the end of the second quarter of 2020, the Company determined that it no longer qualified as a Foreign Private Issuer under the SEC rules. As a result, beginning January 1, 2021 the Company is required to report with the SEC on domestic forms and comply with domestic company rules in the United States. The transition to U.S. GAAP was made retrospectively for all periods from the Company’s inception. New accounting standards implemented subsequent to January 1, 2018 were adopted on their required adoption date.

Principles of consolidation: These financial statements present the consolidated financial position of the Company and its wholly owned subsidiaries as of December 31, 2020 and 2019, and the results of operations and cash flows for the three years ended December 31, 2020, 2019 and 2018. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

Segment information: The Company operates in one operating segment engaged in the research, development and commercialization of therapeutic drugs in which revenues are derived from license, contract and product revenues. Operating segments are defined as components of an enterprise where separate financial information is evaluated regularly by the chief operating decision maker, the chief executive officer, in deciding how to allocate resources and assessing performance. The chief operating decision maker allocates resources and assesses performance based upon discrete financial information at the consolidated level.

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 Company has determined the carrying values of these financial instruments approximate their fair value because of the relatively short period to maturity of the instruments.

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Financial assets and liabilities are categorized based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

Concentration of credit risk: Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist primarily of cash and cash equivalents and short term investments. The Company attempts to minimize the risks related to cash and cash equivalents and investments by investing in a broad and diverse range of financial instruments. The Company established guidelines related to credit ratings and maturities intended to safeguard principal balances, earn a return on investments and to maintain liquidity. The Company's investment portfolio is maintained in accordance with its investment policy, which defines allowable investments, specifies credit quality standards and limits the credit exposure of any single issuer. The Company does not enter into any investment transaction for trading or speculative purposes.

The Company’s investment policy limits investments to certain types of instruments such as certificates of deposit, money market instruments, obligations issued by the U.S. government and U.S. government agencies as well as corporate debt securities, and places restrictions on maturities and concentration by type and issuer. The Company may at times maintain cash balances in excess of amounts insured by the Federal Deposit Insurance Corporation and concentrated within a limited number of financial institutions. The accounts are monitored by management to mitigate the risk. The Company is exposed to financial risk related to the fluctuation of foreign currency exchange rates which could have a material effect on its future operating results or cash flows. Foreign currency risk is the risk that variations in exchange rates between the United States dollar and foreign currencies, primarily with the Canadian dollar, will affect the Company's operating and financial results. The Company holds the majority of its cash and cash equivalents in US dollars and the majority of its expenses, including clinical trial costs are also denominated in US dollars, which mitigates the risk of material foreign exchange fluctuations.

The Company currently anticipates to have 3 main customers and 1 rest of world partner for sales of LUPKYNIS. The Companymonitors 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, including their payment plans and obtains positive confirmation of the validity of the receivables. An allowance against accounts receivable is established when it is probable they will not be collected. Global economic conditions and customer-specific factors may require the Company to periodically re-evaluate the collectability of its receivables and the Company could potentially incur credit losses.

COVID-19: U.S. GAAP requires management to make estimates and assumptions that affect amounts reported in the annual consolidated financial statements and accompanying notes. The annual consolidated financial statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair presentation of results for these interim periods. The full extent to which the novel coronavirus (COVID-19) pandemic will directly or indirectly impact the Company’s estimates related to income taxes (Note 12), royalty obligation (Note 14), leases (Note 15), share based compensation (Note 17) or results of operations will depend on future developments that are uncertain at this time. As events continue to evolve and additional information becomes available, the Company’s estimates may change materially in future periods.

Cash and cash equivalents: The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist primarily of money market funds and bank money market accounts and are stated at cost, which approximate fair value. Cash and cash equivalents totaled $272.4 million as of December 31, 2020. The Company has invested its cash reserves in short term U.S. dollar denominated, fixed rate, highly liquid and highly rated financial instruments such as treasury notes, banker acceptances, bank bonds, and term deposits.

Investments: The Company classifies its debt securities as either held to maturity or available-for-sale in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 320, Investments — Debt Securities. Investments classified as held to maturity are carried at amortized cost when management has the positive intent and ability to hold them to maturity. Investments classified as available-for-sale are carried at fair value with unrealized gains and losses reported in other comprehensive income/loss within shareholders’ equity. Realized gains and losses on held to maturity and available-for-sale securities are recorded in other income (expense), net. Interest income (expense) is recorded separately on the consolidated statements of operations.The cost of securities sold is based on the specific-identification method.

F-9

Accounts receivable: Accounts receivables are stated at their net realizable value. Estimates of the Company's allowance for doubtful accounts are determined based on existing contractual payment terms, historical payment patterns of our customers and individual customer circumstances. Historically, the amounts of uncollectible accounts receivable that have been written off have been insignificant. The allowance for doubtful accounts was $0 as of December 31, 2020, 2019 and 2018.

Functional currency: The functional currency for the Company and all of its foreign subsidiaries is determined to be the U.S. dollar, therefore there is no currency translation adjustment upon consolidation as the translation is recorded in the income statement. All assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at the average exchange rate during the period. Equity transactions are translated using historical exchange rates. Foreign exchange gains and losses arising on translation or settlement of a foreign currency denominated monetary item are included in the consolidated statements of operations.

Intangible assets: Intangible assets are amortized over their useful lives using methods that correlate to the pattern in which the economic benefits are expected to be realized. All intangible assets are amortized on a straight-line basis. Implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. The Company evaluates the estimated remaining useful life of its intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization. The carrying amounts of these assets are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Refer to the long-lived assets section below for impairment considerations.

Acquired intellectual property and patents

External patent costs specifically associated with preparing, filing, obtaining and protecting patents are capitalized and amortized straight-line over the shorter of the estimated useful life and the patent life, commencing in the year of the grant of the patent. Other intellectual property expenditures are recorded as research and development expenses on the consolidated statements of operations as incurred. Patents do not contain the option to extend or renew.

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

Implementation costs of a hosting arrangement that is a service contract

The Company’s costs associated with implementing cloud computing arrangements have been capitalized as implementation costs of hosting arrangements that are service contracts. Costs capitalized include external direct costs of materials and services consumed in developing or obtaining the internal-use software, including fees paid to third parties for services to develop software during the application development stage, costs incurred to obtain software from third parties and travel expenses directly associated with developing the enterprise resource planning system. Subsequent development costs incurred are capitalized to the extent that they provide additional functionality or a new territory to the existing software and hosting arrangement.

Property, plant and equipment: Property, plant and equipment are recorded at cost. Expenditures for additions and betterments are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred; however, maintenance and repairs that improve or extend the life of existing assets are capitalized. The carrying amount of assets disposed of and the related accumulated depreciation are eliminated from the accounts in the year of disposal. Gains or losses from property and equipment disposals are recognized in the year of disposal.Property, plant and equipment is depreciated using the straight-line method over the following estimated useful lives:

Office equipment and furniture 5 years

Computer equipment and software 3 years

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Leasehold improvements are amortized over the lesser of the expected lease term or the estimated useful life of the improvement.

Recoverability and impairment of long-lived assets: ASC Topic 360 requires long-lived assets, including definite-lived intangible assets, to be evaluated for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The judgments made related to the expected useful lives of long-lived assets, definitions of lease terms and the Company’s ability to realize undiscounted cash flows in excess of the carrying amounts of these assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions, changes in usage or operating performance and other factors. If indicators are present, assets are grouped to the lowest level for which identifiable cash flows are largely independent of other asset groups and cash flows are estimated for each asset group over the remaining estimated life of each asset group. If the undiscounted cash flows estimated to be generated by the asset group are less than the asset’s carrying amount, impairment is recognized in the amount of excess of the carrying value over the fair value. The Company recorded no asset impairment charges during the years ended December 31, 2020, 2019 and 2018.

Leases: The Company assesses all contracts at inception to determine whether a lease exists. The Company’s leases are all classified either as operating or finance leases per ASC 842. Certain leases have lease and non-lease components, which are accounted for as a single lease component.

The Company leases office space under operating leases that typically provide for the payment of minimum annual rentals and may include scheduled rent increases. The Company also entered into a manufacturing agreement that contained an embedded lease of a dedicated manufacturing facility that will be accounted for as a financing lease once lease commencement begins (see Note 15).

The Company adopted ASC Topic 842 on January 1, 2019, which requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset (ROU asset), which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASC 842 also requires lessees to classify leases as either finance or operating leases based on whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification is used to evaluate whether the lease expense should be recognized based on an effective interest method or on a straight-line basis over the term of the lease.

The Company elected, for all asset classes, the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component. Leases with an initial term of 12 months or less are not recorded on the Company's consolidated balance sheet, and fixed costs associated with these arrangements are disclosed in Note 15 of the financial statements.

The Company has elected to recognize lease incentives, such as tenant improvement allowances, at the lease commencement date as a reduction of the ROU asset and lease liability until paid to the Company by the lessor, to the extent that the lease provides a specified fixed or maximum level of reimbursement, and the Company is reasonably certain to incur reimbursable costs at least equaling such amounts.

Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company used the incremental borrowing rate for all of its leases, as the implicit interest rate was not readily determinable. In determining the Company’s incremental borrowing rate of each lease, the Company considered recent rates on secured borrowings, observable risk-free interest rates and credit spreads correlating to the Company's creditworthiness, the impact of collateralization and the term of each of the Company's lease agreements. The lease terms range from 12 to 128 months.

The table in Note 15 provides supplemental balance sheet information related to the operating lease ROU assets and lease liabilities.

Royalty obligation: The Company has recorded a royalty obligation in liabilities for estimated future employee benefits relating to applicable historical employment arrangements. Pursuant to ASC Topic 710, the Company recognizes future royalty benefits provided by employee retention arrangements, as a royalty obligation, which is recognized when the Company determines that it is probable to make future payments.

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Initially, these obligations are measured at the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting periods. Subsequent re-measurements as a result of performance obligations met by the Company or changes in assumptions are recognized in the consolidated statement of operations.

The Company is required to use judgment to determine the most appropriate model to use to measure the obligation and is required to use significant judgment and estimates in determining the inputs into the model. The royalty obligation is based on an income approach using an internal risk-adjusted net present value of the future royalty payments to be made to the former executive officers which are based on the future net revenues for voclosporin.The royalty rates applied to the net revenue are dependent on the type of net revenue earned. There are multiple unobservable inputs. The determination of this royalty obligation is subject to significant judgments and estimates in determining the significant assumptions including:

•Number of patients being treated - this includes various inputs including the number of patients receiving treatment, market penetration, time to peak market penetration, speed of response to treatment, duration of treatment, patient adherence, dosing adjustments according to the approved product labeling and the timing of generics and competitors entering the market.

•Discount rate - the rate used to derive the present value of future cash flows based on the Company's estimated cost of equity rate.

Management developed the model and inputs in conjunction with their internal scientific team and utilized third party scientific studies, information provided by third party consultants engaged by the Company and research papers as sources to develop their inputs. Management believes the liability is based on reasonable assumptions, however these assumptions may be incomplete or inaccurate and unanticipated events and circumstances may occur. There are numerous significant inputs into the model all of which individually or in combination result in a material change to the obligation.

Contingencies:In the normal course of business, the Company may be subject to loss contingencies, such as legal proceedings, amounts arising from contractual arrangements and claims arising out of the Company’s business that cover a wide range of matters, including, among others, government investigations, shareholder lawsuits, product and environmental liability, and tax matters. In accordance with ASC Topic 450, Accounting for Contingencies, (ASC 450), the Company records accruals for such loss contingencies when it is probable that a liability will be incurred, and the amount of loss can be reasonably estimated. The Company, in accordance with this guidance, does not recognize gain contingencies until realized.

Revenue Recognition: Pursuant to Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC 606), the Company recognizes revenue when a customer obtains control of promised goods or services. The Company records the amount of revenue that reflects the consideration that it expects to receive in exchange for those goods or services. Revenue is recognized through a five-step process: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) a performance obligation is satisfied. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, the Company assesses the goods or services promised within each contract and determines those that are performance obligations. Revenue is recognized for the applicable performance element when each distinct performance obligation is satisfied.

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 occurs at a point in time, typically 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

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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. 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.

More specifically, these adjustments include the following:

Prompt Pay Discounts: The Company generally provides invoice discounts on product sales to its customers for prompt payment. The Company estimates that its customers will earn these discounts and fees, and deducts the full amount of these discounts and fees from its gross product revenues and accounts receivable at the time such revenues are recognized.

Customer Fees: The Company pays certain customer fees, such as fees for certain data that customers provide to the Company. The Company records fees paid to its customers as a reduction of revenue, unless the payment is for a distinct good or service from the customer and the Company can reasonably estimate the fair value of the goods or services received. If both conditions are met, the Company records the consideration paid to the customer as a G&A expense.

Government Rebates: The Company estimates its government rebates, primarily Medicaid and Medicare rebates based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability that is included in accrued expenses on the consolidated balance sheet.

Medicaid rebates relate to the Company's estimated obligations to states under established reimbursement arrangements. Rebate accruals are recorded in the same period that the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a liability, which is included in other current liabilities. The Company's liability for Medicaid rebates consists of estimates for claims that a state will make for the current quarter, claims for prior quarters that have been estimated for which an invoice has not been received, invoices received for claims from the prior quarters that have not been paid and an estimate of potential claims that will be made for inventory that exists in the distribution channel at period end.

For Medicare, the Company also estimates the number of patients in the prescription drug coverage gap for whom the Company will owe an additional liability under the Medicare Part D program. The Company’s liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but remains in the distribution channel inventories at the end of each reporting period.

Co-payment Assistance: Co-payment assistance represents financial assistance to qualified patients, assisting them with prescription drug co-payments required by insurance. The program is administered by the Specialty Pharmacies. The calculation of the accrual for co-payment assistance is based on the co-payments made on the Company's behalf by the Specialty Pharmacies.

License, Collaboration and Other Revenues

The Company enters into out-licensing agreements that are within the scope of ASC 606, under which it licenses certain rights to its product candidates to third parties. The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments, payments for manufacturing supply services the Company provides through its contract manufacturers, and royalties on net sales of licensed products. Each of these payments results in license, collaboration and other revenues, except for revenues from royalties on net sales of licensed products, which are classified as royalty revenues.

In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the

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transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. As part of the accounting for these arrangements, the Company must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. The Company uses key assumptions to determine the stand-alone selling price, which may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success.

Licenses of Intellectual Property: If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

Manufacturing Supply Services: Arrangements that include a promise for future supply of drug substance or drug product for either clinical development or commercial supply at the licensee’s discretion are generally considered as options. The Company assesses if these options provide a material right to the licensee and if so, they are accounted for as separate performance obligations. If the Company is entitled to additional payments when the licensee exercises these options, any additional payments are recorded in license, collaboration and other revenues when the licensee obtains control of the goods, which is typically upon delivery.

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 royalties (and sales-based milestones) will be recognized when the related sales occur.

Research and development costs: Research and development costs are accounted for in accordance with ASC Topic 730, Research and Development, (ASC 730) and are expensed as incurred. Research and development costs consist primarily of the cost of salaries, share-based compensation expenses, payroll taxes and other employee benefits, subcontractors and materials used for research and development activities, including nonclinical studies, clinical trials, manufacturing costs and professional services. The costs of services performed by others in connection with the research and development activities of the Company, including research and development conducted by others on behalf of the Company, shall be included in research and development costs and expensed as the contracted work is performed. The Company accrues for costs incurred as the services are being provided by monitoring the status of the trial or project and the invoices received from its external service providers. Where contingent milestone payments are due to third parties under research and development arrangements or license agreements, the milestone payment obligations are expensed when the milestone results are probable to be achieved.

Research and development expenses for the years ended December 31, 2020, 2019 and 2018 were $50.3 million, $52.9 million and $41.4 million, respectively, and are included in total costs and expenses on the accompanying consolidated statements of operations.

Inventory: 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. Pre-launch inventory is held as an asset when there is a high probability of regulatory approval for the product.

Inventories are valued under a standard costing method and are stated at the lower of cost or net realizable value. The Company measures inventory, which include the direct purchase cost of materials and supplies and manufacturing overhead costs, by

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approximating actual cost under a first-in, first-out basis. 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 December 31, 2020 and 2019, there was $13.9 million and $nil pre-launch inventory recognized on the consolidated balance sheets that was classified as work in process.

Shared-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 associated with service and performance-based stock options in accordance with provisions of authoritative guidance. The estimated fair value of service-based awards is determined using option pricing models that use unobservable inputs and is generally amortized on a straight-line basis over the requisite service period and is recognized based on the proportionate amount of the requisite service period that has been rendered during each reporting period. The estimated fair value of performance-based awards is measured on the grant date and is recognized when it is determined that it is probable that the performance condition will be achieved. The Company has elected a policy to estimate forfeitures based on historical forfeiture experience.

Warrants: The Company classifies issued warrants to purchase shares of its common stock as equity on its consolidated balance sheets. The Company uses the Black-Scholes model to measure the grant date fair value of the warrants at issuance. The grant date fair value of the warrants is included as a component of equity and is transferred from warrants to common shares upon exercise.

Income taxes:The Company accounts for income taxes under the asset and liability method in accordance with ASC Topic 740, Income Taxes (ASC 740). Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that such tax rate changes are enacted. The portion of any deferred tax asset for which it is more likely than not that a tax benefit will not be realized must then be offset by recording a valuation allowance. Financial statement recognition of a tax position taken or expected to be taken in a tax return is determined based on a more-likely-than-not threshold of that position being sustained. If the tax position meets this threshold, the benefit to be recognized is measured as the largest amount that is more likely than not to be realized upon ultimate settlement. The Company’s policy is to record interest and penalties on uncertain tax positions as a component of income tax expense.

3. Recent Accounting Pronouncements

Recently adopted accounting pronouncements:

On January 1, 2019, the Company adopted ASC 842, Leases, using the modified retrospective transition approach as of the period of adoption. The Company’s financial statements prior to January 1, 2019 were not modified for the application of the new lease standard. Upon adoption of ASC 842, the Company elected the “package of practical expedients,” which allowed the Company to not reassess (a) whether expired or existing contracts as of January 1, 2019 are or contain leases, (b) the lease classification for any expired or existing leases as of January 1, 2019, and (c) the treatment of initial direct costs relating to any existing leases as of January 1, 2019. The package of practical expedients was made as a single election and was consistently applied to all leases that commenced before January 1, 2019. As part of the transition, the Company completed a comprehensive review of its lease portfolio, including significant leases by geography and by asset type that were impacted by the new guidance, and enhanced its controls around leasing. Furthermore, management reviewed all of the Company’s non-facility contracts to determine whether any agreements will impact the Company’s consolidated financial statements. The adoption of ASC 842 did not result in a material change to the statement of financial position, as majority of the Company’s leases as of January 1, 2019 had a term of less than 12 months, with the exception of the Victoria office lease that did not result in a material adjustment to the statement of financial position.

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (Topic 718). ASU 2018-07 simplifies the accounting for share-based payments to non-employees by aligning it with the accounting for share-based payments to employees, with certain exceptions. Some of the areas of simplification apply only to nonpublic entities. For public business entities, the amendments in ASU 2018-07 are effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Upon adoption, this was applied to certain awards held by

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a former Chairman of the Board and Chief Executive Officer. The impact of the adoption of this standard on the Company's consolidated financial statements as of January 1, 2019 is not material.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard requiresthat credit losses be reported using an expected losses model rather than the incurred losses model that is currently used, and establishesadditional disclosures related to credit risks. For available-for-sale debt securities with unrealized losses, these standards now require allowances tobe recorded instead of reducing the amortized cost of the investment. These standards limit the amount of credit losses to be recognized foravailable-for-sale debt securities to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized creditlosses if fair value increases. The adoption of the standard as of January 1, 2020 did not have a material impact on the Company’s consolidated financialstatements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirement for Fair Value Measurement. Topic 820 requires to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities. For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when the restrictions from redemptions might lapse only if the investee has communicated the timing to the entity or announced the timing publicly. The new standard also amends that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The new standard is effective for fiscal years beginning after December 15, 2019. The standard should be applied retrospectively to the date of initial application of ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The Company elected to adopt the amendment as of January 1, 2020, which did not have a material impact on the consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40)-Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software under ASC 350-40, in order to determine which costs to capitalize and recognize as an asset and which costs to expense. ASU 2018-15 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019, and can be applied either prospectively to implementation costs incurred after the date of adoption or retrospectively to all arrangements. The Company adopted ASU 2018-15 effective January 1, 2020 and applied the standard prospectively to implementation costs incurred in its cloud computing arrangements, resulting in capitalized costs of $1.7 million in 2020.

In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangement (Topic 808): Clarifying the Integration between Topic 808 and Topic 606. The new standard clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account. Further, the new standard adds unit-of-account guidance to Topic 808 to align with the guidance in Topic 606 when an entity is assessing whether the collaborative arrangement or part of the arrangement is within the scope of Topic 606. The new standard requires that in transactions with a collaborative arrangement participant that is not directly related to sales to third parties, presenting under Topic 606 is precluded if the collaborative arrangement participant is not a customer. The new standard is effective for fiscal years beginning after December 15, 2019. The standard should be applied retrospectively to the date of initial application of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The Company elected to adopt the amendment as of January 1, 2020, which did not have a material impact on the consolidated financial statements.

Recently issued accounting pronouncements not yet adopted:

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. The standard is effective for years beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2020. We intend to adopt the ASU effective January 1, 2021 with no material impact.

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4. Investments

At December 31, 2020, the Company had $126.0 million and $24.4 million of short and long term investments, respectively, mainly of commercial paper and bonds as summarized below. The Company had no investments as of December 31, 2019. These instruments are carried at fair market value which is approximately equal to amortized cost.

December 31,

Cashable Guaranteed Investment Certificate (GIC) 2,000 —

Treasury Bill 7,999 —

Treasury Bond 5,045 —

Total short term investments $ 125,979 $ —

Corporate Bonds - total long term investments 24,380 —

Total investments $ 150,359 $ —

5. Fair Value Measurement

The Company's financial instruments consist primarily of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities. The Company has determined the carrying values of these financial instruments approximate their fair value because of the relatively short period to maturity of the instruments. Estimated fair values of available-for-sale debt 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 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 Company's Level 1 instruments include cash and cash equivalents and short-term investments that are valued using quoted market prices. Level 2 instruments include the Company's short and long term investments that are valued through third-party pricing services that use verifiable observable market data.

There were no transfers between Level 1, Level 2 and Level 3 in the periods presented.

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The following tables summarize the types of assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy:

(in thousands) Level 1 Level 2 Level 3 Total

Assets:

Cash and cash equivalents:

(in thousands) Level 1 Level 2 Level 3 Total

Assets:

Cash and cash equivalents:

Short-term highly liquid investments 20,000 — — 20,000

Investments — —

6. Accrued interest and other receivables

Other receivables $ 51 $ 163

Accrued interest receivable 486 205

Income taxes recoverable 481 —

7. Property, Plant and Equipment

Property, plant and equipment as of December 31, 2020 and 2019 are as follows:

(in thousands) Estimated Useful Life(in years) 2020 2019

Construction in progress — $ 4,467 $ —

Office equipment and furniture 5 83 41

Computer equipment and software 3 381 175

Less accumulated depreciation (179) (157)

Property and equipment, net $ 4,786 $ 93

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Construction in progress assets relate to leasehold improvements and office equipment and furniture for the Company's Rockville, MD office, which are not available for use at December 31, 2020.

Depreciation expense for the years ended December 31, 2020, 2019 and 2018, was $82 thousand, $33 thousand and $20 thousand, respectively, which is included in general and administrative within operating expenses on the consolidated statements of operations.

8. Intangible Assets

Intangible assets are amortized over their useful lives on a straight-line basis. The following table summarizes the Company’s intangible assets as of December 31, 2020 and 2019:

Acquired intellectual property and reacquired rights 11 15,126 (7,770) 7,356

Acquired intellectual property and reacquired rights 12 15,126 (6,735) 8,391

Amortization expense recognized by the Company related to intangible assets was $1.3 million, $1.1 million and $1.3 million for the years ended December 31, 2020, 2019 and 2018, respectively. Amortization expense as it relates to the amortization of acquired intellectual property and other intangible assets resides within amortization on the consolidated statements of operations. The estimated aggregate amortization expense for intangible assets over the next five fiscal years ending December 31, 2021 through December 31, 2025 is approximately $7.0 million.

9. Accounts payable and accrued liabilities

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10. License and Contract Revenue

Licensing Revenue

Otsuka Contract

On December 17, 2020, the Company entered into a collaboration and license agreement with Otsuka Pharmaceutical Co., Ltd. (Otsuka) for the development and commercialization of oral LUPKYNIS for the treatment of adult patients with active LN in the European Union (EU), Japan, as well as the United Kingdom, Russia, Switzerland, Norway, Belarus, Iceland, Liechtenstein and Ukraine.

As part of the agreement, Aurinia 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 milestones. Aurinia will receive tiered royalties on future sales ranging from 10 to 20 percent (dependent on achievement of sale milestones) on net sales upon commercialization, along with additional milestone payments based on the attainment of certain annual sales by Otsuka. In addition, a supply agreement will be negotiated in the future.

The Company evaluated the Otsuka Agreement under ASC 606. Based on that evaluation, the license transferred was determined to be functional intellectual property (IP) that has significant standalone functionality. That is, the treatment of lupus nephritis and other diseases provides significant benefit to Otsuka at the point of transfer, and it is not expected that the utility of the IP will substantively change as a result of any remaining clinical trials or ongoing activities of Aurinia. The Company determined the upfront fee of $50.0 million is fixed consideration for the transfer of the license and is recognized upon transfer of the license in December 2020.

The remaining forms of consideration are variable because they are dependent on achieving milestones or are based on aggregate future net sales for the regions. None of the regulatory milestones have been included in the transaction price, as all milestone amounts were fully constrained. As part of its evaluation of the constraint, the Company considered numerous factors, including the magnitude of a potential reversal of revenue, uncertainty about if or when the milestone related performance obligations might be achieved and that receipt of the milestones are outside the control of the Company since they are dependent on efforts to be undertaken by Otsuka and regulatory approval by various foreign government agencies. Any consideration related to sales-based royalties (and sales-based milestones) will be recognized when the related sales occur.

Other Licensing Revenue

The Company also recorded licensing revenue of $118 thousand in 2020 (2019 - $118 thousand; 2018 - $118 thousand) related to the upfront license payment of $1.5 million received in 2010 pursuant to the 3SBio Inc. license agreement. Under the agreement, the primary substantive obligations of the Company were to grant the license and transfer intellectual knowledge to 3SBio. Under the agreement, the Company was also required to maintain the patent portfolio in China, Taiwan and Hong Kong, and to provide further support and cooperation to 3SBio over the life of the agreement. Any additional assistance provided to 3SBio was to be performed on a full cost recovery basis. The deferred licensing fee revenue is recognized on a straight-line basis as the Company satisfies the performance obligations over the life of the patents and the benefit to the customer transfers ratably throughout the patent life, which expires in 2022. As at December 31, 2020, $207 thousand (2019 - $324 thousand; 2018 - $442 thousand) of deferred revenue remains relating to this payment.

On April 17, 2017, the Company entered into an agreement with Merck Animal Health (MAH) whereby the Company granted them worldwide rights to develop and commercialize its patented nanomicellar LUPKYNIS ophthalmic solution (VOS) for the treatment of Dry Eye Syndrome in dogs. The Company received a milestone payment of $200 thousand in 2019. This agreement provided MAH with a right to use intellectual property. MAH was able to direct the use of and obtain substantially all of the benefits from the license at the time that control of the rights were transferred and therefore, this $200 thousand milestone payment was recognized as revenue in the year ended December 31, 2019. The Company is eligible to receive further payments based on certain development and sales milestones and receive royalties based on global product sales.

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Contract Revenue

In 2018 the Company earned a contract milestone of $345 thousand (CA$450,000) pursuant to a purchase and sale agreement dated February 14, 2014 between Ciclofilin Pharmaceuticals Corp. (now Hepion Pharmaceuticals, Inc.) and Aurinia Pharmaceuticals Inc. under which the Company sold the Non-Immunosuppressive Cyclosporine Analogue Molecules (NICAMs) early stage research and development asset to Ciclofilin. The Company is eligible to receive further payments based on certain development and sales milestones and to receive royalties based on global product sales. The Company has no obligations under this agreement.

11. Segment Information and Geographic Data

As the operations comprise a single reporting segment, amounts disclosed in the consolidated financial statements represent those of the single reporting unit. There was one customer that accounted for the majority of revenues at December 31, 2020 and two customers that accounted for all of the revenues in 2019 and 2018, respectively.

Revenues by Geographic Location

The following geographic information reflects revenue based on customer location:

Revenue

Long-lived Assets by Location

Long-lived assets by location consist of property plant and equipment:

Long-lived assets

United States 4,488 —

12. Income Taxes

The components of pre-tax (losses) income before income taxes for the years ended December 31, 2020, 2019 and 2018 are as follows:

Income tax (benefit) expense for the years ended December 31, 2020, 2019 and 2018 are as follows:

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Current:

Canada $ — $ — $ —

Deferred:

Canada — — —

Foreign — — —

Total deferred — — —

Income tax (benefit) expense $ (94) $ 144 $ 73

The provision for income taxes varied from the income taxes provided based on the Canadian statutory rate of 26.8%, 25.4%, and 27.0% in the years ending December 31, 2020, 2019 and 2018, respectively.

Canada statutory income tax benefit 26.8 % 25.4 % 27.0 %

Effect of tax rates on foreign jurisdictions (2.4) — —

Impact of future rates and tax rate changes 6.1 (0.9) —

Non-deductible share-based compensation (4.5) (2.1) (3.5)

Change in valuation allowance (26.0) (22.3) (23.0)

Effective tax rate 0.1 % (0.2) % (0.1) %

The tax effects of the temporary differences giving rise to the Company's net deferred tax assets as of December 31, 2020 and 2019 are summarized as follows:

Deferred tax assets:

SRED (Scientific Research and Experimental Development) 4,808 3,938

Net deferred tax assets 1,365 14

Deferred tax liabilities:

Right of use asset (1,173) —

Property and equipment (192) (14)

Deferred tax liabilities (1,365) (14)

Net deferred tax assets (liabilities) $ — $ —

The Company’s valuation allowance increased by $30.3 million in 2020 as compared to 2019 as a result of the additional pre-tax book losses that the Company has determined are not more likely than not realizable.

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At December 31, 2020, the Company had $307.8 million in total net operating loss (NOL) carryforwards which included $31.4 million for the U.S. and $272.4 million for Canada. The NOLs in the U.S. have an indefinite carryforward period. The NOLs in Canada will expire beginning 2029. As of December 31, 2020, the Company has approximately $3.9 million of Canada Investment Tax Credits and British Columbia Scientific Research and Experimental Development (SRED) with an expiration period of 2029-2040.

The Company is open to examinations with the applicable tax authorities prior to the expiration of statute of limitations, which ranges from tax years 2017 through 2019. The Company is currently under audit by the Canadian Revenue Agency for years 2017 and 2018.

13. Commitments and Contingencies

Purchase obligations: The Company has entered into contractual obligations for services and materials required for its drug manufacturing, clinical trial programs and other operational activities.

The future minimum amounts to exit the Company’s purchase obligations are as follows:

(in thousands) Purchase Obligations

Years Ending December 31:

Litigation: 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 will not have a material adverse effect on the consolidated financial position of the Company.

On December 18, 2020, the Company commenced an action in the United States District Court for the District of New Jersey against Sun Pharmaceutical Industries, Inc., Sun Pharmaceutical Industries, Ltd., and Sun Pharma Global FZE (collectively, "Sun"). The action is a claim for patent infringement under the patent laws of the United States arising from Sun's commercial manufacture, use, offer to sell, or sales within the United States, and/or importation into the United States of Sun's CEQUATM product, a CNI immunosuppressant ophthalmic solution, prior to the expiration of our United States Patent No. 10,265,375. In our action, we request relief in the form of an order confirming Sun has infringed our patent, an injunction preventing Sun from manufacturing, using or selling CEQUA, and monetary relief (including costs). Sun has not yet responded to the claim, other than to waive service on the two international Sun entities. Sun has 90 days from the initiation of our claim to file a statement of defense.

14. Royalty Obligation

The royalty obligations are the result of a resolution of the board of directors of the Company dated March 8, 2012 whereby certain executive officers at that time (former executive officers) were provided with future potential employee benefit obligations for remaining with the Company, for a certain period of time, and this obligation was also contingent on the occurrence of uncertain future events.The obligation was recorded once the specified events were deemed probable to occur.

As a result of the completion of the Phase 3 AURORA trial, and the results obtained from the trial in the fourth quarter of 2019, the Company re-assessed the probability of royalty obligation payments being required in the future, and recorded the royalty obligation at December 31, 2019. Until one of the triggering events occur, no royalty payments are required to be paid. Royalties on sales or licensing expected in the next twelve months have been classified as short term. The total balance of the royalty obligation at December 31, 2020 and December 31, 2019 was estimated to be $15 million and $8.2 million, respectively.

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During the year ended December 31, 2020 the Company re-assessed the royalty obligation and reduced the discount rate from 12.0% at December 31, 2019 to 10.3% at December 31, 2020. The reduction was primarily attributable to the decline in interest rates caused by the global coronavirus (COVID-19) pandemic. The change in discount rate, FDA approval of LUPKYNIS on January 22, 2021 and passage of time, on revaluation, resulted in an increase in the royalty obligation of $6.8 million for the year ended December 31, 2020.

15. Leases

All of the Company's existing leases as of December 31, 2020 are classified as operating leases. The Company's leases have a remaining term of 11 years and have an option to extend for twofive-year periods after the 11 years elapsed and an option to terminate after 7 years. As of December 31, 2020, no such options have been recognized as part of the right-of-use assets and liabilities. For the twelve months ended December 31, 2020 the Company incurred $944 thousand rent expenses, respectively. This is compared to $297 thousand of rent expense for the twelve months ended December 31, 2019. The company did not incur any variable rent expense for the years ended December 31, 2020 or 2019.

Short-term leases are leases having a term of twelve months or less. The Company recognizes the short term leases on a straight-line basis and does not record a related lease asset or liability for such leases. During the quarter ended December 31, 2020, the Company entered into an agreement to lease premises at #201, 17873 - 106A Avenue, Edmonton, Alberta, consisting of 2,248 square feet of office space, for a term commencing October 1, 2020 to September 30, 2021 at a cost of approximately $2,200 per month.

During March 2020, the Company entered into a lease for its U.S. commercial office in Rockville, Maryland (MD lease) for a total space of 30,531 square feet of office space. The Company recognized a $5.8 million ROU asset and a $5.8 million lease liability related to the lease. 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.

During August 2020, the Company entered into a binding letter of intent to lease 18,615 square feet of commercial office space in Victoria, British Columbia. The lease term is expected to begin in 2022 and the present value of the minimum lease payments for this lease are $3.1 million. As of December 31, 2020 there has been no accounting recognition associated with this lease, as the Company has not been granted access to the building.

During October 2020, the Company entered into a lease for its head office located in Victoria, British Columbia for a total space of 13,206 square feet of office space. The lease term commencing January 1, 2021 to August 31 2022 at a cost of approximately $19 thousand per month.

As of December 31, 2020, the Company received reimbursement for tenant leasehold improvements by the landlord in the amount of $2.3 million for the MD lease. The Company recorded these leasehold improvement incentives as additions to the lease liability and construction in process.

As of December 31, 2020, the Company had an operating lease right of use asset of $5.5 million and lease liability of $8.4 million on the balance sheet.

The following table provides supplemental balance sheet information related to the operating lease ROU asset and lease liabilities:

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Assets

Operating lease right of-use assets Property and equipment, net $ 5,489 $ —

Total leased assets 5,489 —

Liabilities

Current

Non-current

Operating lease liabilities Operating lease liabilities 7,619 —

Total lease liabilities $ 8,407 $ —

Weighted average remaining lease term - operating leases (in years) 10.67 —

Weighted average discount rate - operating leases 5.2 % —

The adoption of ASC 842 had no effect on retained earnings as of January 1, 2019.

The following provides a summary of the components of leasing costs and rent for the years ended December 31, 2020 and December 31, 2019:

Operating lease costs General and administrative $ 909 $ 229

Short-term lease costs General and administrative 35 68

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Cash flow and supplemental information is presented below:

Years ended December 31,

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows used in operating leases $ 232 $ 114 $ 151

Operating cash flows used in short-term leases $ 35 $ 68 $ 72

The following table provides a summary of lease liability maturities for the next five years and thereafter:

(in thousands) Operating Lease Payments

Total lease payments 11,283

Less imputed interest (2,876)

On December 15, 2020, the Company entered into a collaborative agreement with Lonza to build a dedicated manufacturing capacity 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.

Upon completion of the monoplant, the Company will have the right to maintain unobstructed use of the monoplant by paying a quarterly fixed facility fee. The first capital expenditure payment was made in February 2021.

The Company expects to account for the arrangement as a finance lease under ASC 842. As of December 31, 2020, construction of the underlying asset of the lease has yet to commence. The present value of the minimum lease payments total approximately $94 million, beginning February 2021 and expiring in 2030, and are not included in the above table.

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16. Shareholders' Equity

Common shares: The Company has authorized an unlimited number of shares of common shares, no par value. As of December 31, 2020, 2019 and 2018, 126.7 million, 111.8 million and 85.5 million Common Shares, respectively, were issued and outstanding. Each share entitles the holder to one vote on all matters submitted to a vote of the Company’s shareholders. Common shareholders are not entitled to receive dividends unless declared by the Company’s Board of Directors.

The common share activity for 2020, 2019 and 2018 is as follows:

Common Shares

Number of Shares(in thousands) Amount (in thousands)

Issued pursuant to exercise of warrants 1,172 3,977

Issued pursuant to exercise of stock options 276 1,473

Issued pursuant to At-the-Market (ATM) Facilities 6,953 45,010

Share issue costs — (13,629)

Issued pursuant to exercise of warrants 2,983 12,428

Issued pursuant to exercise of stock options 3,580 22,197

Share issue costs — (12,268)

Issued pursuant to exercise of warrants 1 2

Issued pursuant to exercise of stock options 1,593 10,107

July 27, 2020 public offering

On July 27, 2020 the Company completed a public offering of 13.3 million Common Shares at a price of $15.00 per share. Gross proceeds from this offering were $200.0 million and the share issue costs totaled an estimated $12.3 million which included a 6% underwriting commission of $12.0 million and professional fees of $268 thousand.

December 12, 2019 public offering

On December 12, 2019 the Company completed a public offering of 12.8 million common shares at a price of $15.00 per share. Gross proceeds from this offering were $191.7 million and the share issue costs totaled $11.8 million which included a 6% underwriting commission of $11.5 million and professional fees of $315 thousand.

September 13, 2019 ATM facility

On September 13, 2019 the Company entered into an Open Market Sale Agreement (the "Sale Agreement") with Jeffries pursuant to which the Company may from time to time sell, through ATM offerings, common shares that would have an aggregate offering price of up to $40.0 million. Aurinia filed a prospectus supplement with securities regulatory authorities in Canada in the provinces of British Columbia, Alberta and Ontario, and with the United States Securities and Exchange Commission, which supplements Aurinia's short form base shelf prospectus dated March 29, 2018, and Aurinia's shelf registration statement on Form F-10 dated March 26, 2018, declared effective on March 29, 2018. Sales from the ATM offering were only conducted in the United States through Nasdaq at market prices.

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Pursuant to this agreement the Company issued 2.3 million common shares at a weighted average price of $6.40 resulting in gross proceeds of $15.0 million. The Company incurred share issue costs of $640 thousand including a 3% commission of $450 thousand paid to the agent and professional fees of $190 thousand directly related to the ATM. On December 9, 2019, the Company terminated the September 13, 2019 Sale Agreement with Jefferies LLC related to the 2019 ATM.

November 30, 2018 ATM facility

On November 30, 2018 the Company entered into an Open Market Sale Agreement (the “Sale Agreement”) with Jefferies LLC (“Jefferies”) pursuant to which the Company sold, through at-the-market (ATM) offerings, common shares that would have an aggregate offering price of up to $30.0 million. Aurinia filed a prospectus supplement with securities regulatory authorities in Canada in the provinces of British Columbia, Alberta and Ontario, and with the United States Securities and Exchange Commission, which supplements Aurinia’s short form base shelf prospectus dated March 26, 2018, and Aurinia’s shelf registration statement on Form F-10 dated March 26, 2018, declared effective on March 29, 2018. Sales from the ATM offering were only conducted in the United States through Nasdaq at market prices.

Pursuant to this agreement the ATM Facility was fully utilized resulting in gross proceeds of $30.0 million upon the issuance of 4.6 million common shares at a weighted average price of $6.51. The Company incurred share issue costs of $1.2 million including a 3% commission of $900 thousand paid to the agent and professional and filing fees of $270 thousand directly related to the ATM.

A summary of the anticipated and actual use of net proceeds used to date from the above financings is set out in the table below.

Working capital and corporate purposes 38,924 38,924

December 2019 Public Offering:

July 2020 Public Offering:

Pre-commercial and launch related activities $117,000 to $143,000 —

Working capital and corporate purposes 10,500 to 42,500 —

Warrants:

Warrant related to February 14, 2014 private placement offering:On February 14, 2014, the Company completed a $52.0 million private placement (2014 Private Offering). Under the terms of the 2014 Private Offering, a Unit consisted of one common share and one-quarter (0.25) of a common share purchase price warrant (2014 Warrant). The Company issued 18.9 million Units at a subscription price per Unit of $2.7485, exercisable for a period of five years from the date of issuance, at an exercise price of $3.2204. These February 2014 Warrants meet the scope exceptions provided in ASC 815, Derivatives and Hedging, as they are indexed to the Company’s own shares, and therefore are accounted for under ASC 505, Equity.

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In 2019, certain holders of these 2014 Warrants elected the cashless exercise option and the Company issued 0.7 million common shares in lieu of 1.3 million 2014 Warrants, which was recorded through an increase in equity (common shares) and decrease in additional paid-in capital. One holder of 464 thousand 2014 Warrants exercised these 2014 Warrants for cash and received 464 thousand common shares. The Company received cash proceeds of $1.5 million and recorded an increase in cash and additional paid in capital. In 2018, no holders of the 2014 Warrants elected the cashless exercise option. As a result, the Warrants related to the February 14, 2014 private placement offering have been extinguished upon the exercise of the aforementioned warrants, at December 31, 2019.

Warrant related to December 28, 2016 bought deal public offering:On December 28, 2016, the Company completed a $28.8 million Bought Deal public offering (2016 Public Offering). Under the terms of 2016 Public Offering, each Unit consists of one common share and one-half (0.50) of a common share purchase warrant (December 2016 Warrant). The Company issued 12.8 million Units at a subscription price per Unit of $2.25, exercisable for a period of five years from the date of issuance at an exercise price of $3.00. These December 2016 Warrants also meet the scope exceptions provided in ASC 815, Derivatives and Hedging, as they are indexed to the Company’s own shares, and therefore are accounted for under ASC 505, Equity.

At initial recognition on December 28, 2016, the Company recorded a warrant in the amount of $7.2 million based on the estimated fair value of the December 2016 Warrants with allocated share issuance costs of $655 thousand recognized as a reduction of equity.

In 2020, a holder exercised 500 Warrants at $3.00 per share for gross proceeds of $2 thousand which was recorded through an increase in cash and equity. In 2019, certain holders of these Warrants exercised at $3.00 per share for gross proceeds of $5.5 million. In 2018, no holders of these Warrants exercised.

A summary of the outstanding warrants as of December 31, 2020 is presented below:

Number of Warrants(in Thousands) Weighted-AverageExercise Price$

Expiry date:

The warrant activity for 2019 and 2018 is as follows:

Number of Warrants(in thousands)

Warrants exercised (1,832)

Warrants exercised (1)

17. Shared-Based Compensation

The Equity Incentive Plan (the Plan) was adopted and approved in 2012 and re-approved in May 2014. The Plan was amended as to Section 2.2 by the shareholders of the Company in June 2016 and amended and restated in June 2020. The purpose of the Plan is to advance the interest of the Company by encouraging equity participation in the Company through the acquisition of Common Shares.

The Plan requires the exercise price of each option to be determined by the Board of Directors and not to be less than the closing market price of the Company’s stock on the day immediately prior to the date of grant. Any options which expire may

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AUPH US Equity

AUPH · 10-K · period ended 2020-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risks

ITEM 8. Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item 9B. Other Information

Item 10. Directors, Executive Officers, and Corporate Governance

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions and Director Independence

Item 14. Principal Accountant Fees and Services

Item 15. Financial Statement Schedules and Exhibits

Item 16. Form 10-K Summary

AUPH US Equity☆

AUPH · 10-K · period ended 2020-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risks

ITEM 8. Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item 9B. Other Information

Item 10. Directors, Executive Officers, and Corporate Governance

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions and Director Independence

Item 14. Principal Accountant Fees and Services

Item 15. Financial Statement Schedules and Exhibits

Item 16. Form 10-K Summary

AUPH US Equity