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Aurinia Pharmaceuticals Inc.
Consolidated Financial Statements
(Expressed in thousands of United States (U.S.) dollars)
Second quarter ended June 30, 2017
Aurinia Pharmaceuticals Inc.
Interim Condensed Consolidated Statements of Financial Position
(Expressed in thousands of U.S. dollars)
| June 30, 2017 $ | December 31, 2016 $ | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | 179,717 | 39,649 | ||||||
| Short term investments (note 3) | 10,071 | |||||||
| Accrued interest and other receivables | 285 | 86 | ||||||
| Prepaid expenses, deposits and other | 2,418 | 1,683 | ||||||
| 192,491 | 41,418 | |||||||
| Clinical trial contract deposits | 448 | |||||||
| Property and equipment | 32 | 29 | ||||||
| Acquired intellectual property and other intangible assets | 14,829 | 15,550 | ||||||
| 207,800 | 56,997 | |||||||
| Liabilities | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | 3,439 | 5,791 | ||||||
| Current portion of deferred revenue | 118 | 118 | ||||||
| Contingent consideration (note 4) | 70 | 2,021 | ||||||
| 3,627 | 7,930 | |||||||
| Deferred revenue | 501 | 560 | ||||||
| Contingent consideration (note 4) | 3,568 | 3,419 | ||||||
| Derivative warrant liabilities (note 5) | 21,639 | 9,138 | ||||||
| 29,335 | 21,047 | |||||||
| Shareholders equity | ||||||||
| Share capital | ||||||||
| Common shares (note 6) | 496,726 | 299,815 | ||||||
| Warrants (note 6) | 911 | 971 | ||||||
| Contributed surplus | 17,021 | 17,017 | ||||||
| Accumulated other comprehensive loss | (805 | ) | (805 | ) | ||||
| Deficit | (335,388 | ) | (281,048 | ) | ||||
| 178,465 | 35,950 | |||||||
| 207,800 | 56,997 | |||||||
| Subsequent events (note 11) |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
Aurinia Pharmaceuticals Inc.
Interim Condensed Consolidated Statements of Operations and Comprehensive Loss
For the three and six month periods ended
June 30, 2017 and 2016
thousands of U.S. dollars, except per share data)
| Three months ended | Six months ended | |||||||||||||||
| June 30, 2017 $ | June 30, 2016 $ | June 30, 2017 $ | June 30, 2016 $ | |||||||||||||
| Revenue | ||||||||||||||||
| Licensing revenue | 329 | 29 | 359 | 59 | ||||||||||||
| Research and development revenue | 25 | 50 | ||||||||||||||
| Contract services | 1 | 1 | 3 | |||||||||||||
| 329 | 55 | 360 | 112 | |||||||||||||
| Expenses | ||||||||||||||||
| Research and development | 7,107 | 2,406 | 14,432 | 5,730 | ||||||||||||
| Corporate, administration and business development | 2,901 | 1,835 | 6,328 | 3,027 | ||||||||||||
| Amortization of acquired intellectual property and other intangible assets | 364 | 360 | 721 | 742 | ||||||||||||
| Amortization of property and equipment | 6 | 5 | 12 | 10 | ||||||||||||
| Contract services | 1 | 1 | 2 | |||||||||||||
| Other expense (income) (note 7) | (152 | ) | 85 | (77 | ) | 169 | ||||||||||
| 10,226 | 4,692 | 21,417 | 9,680 | |||||||||||||
| Net loss before change in estimated fair value of derivative warrant liabilities | (9,897 | ) | (4,637 | ) | (21,057 | ) | (9,568 | ) | ||||||||
| Change in estimated fair value of derivative warrant liabilities (note 5) | 7,498 | 1,361 | (33,283 | ) | 2,025 | |||||||||||
| Net loss and comprehensive loss for the period | (2,399 | ) | (3,276 | ) | (54,340 | ) | (7,543 | ) | ||||||||
| Net loss per common share (note 8) (expressed in $ per share) | ||||||||||||||||
| Basic and diluted loss per common share | (0.03 | ) | (0.10 | ) | (0.78 | ) | (0.23 | ) |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
Aurinia Pharmaceuticals Inc.
Interim Condensed Consolidated Statements of Changes in Shareholders Equity
For the six month periods ended
June 30, 2017 and 2016
thousands of U.S. dollars)
| Common shares $ | Warrants $ | Contributed surplus $ | Deficit $ | Accumulated other comprehensive loss $ | Shareholders equity (deficit) $ | |||||||||||||||||||
| Balance January 1, 2017 | 299,815 | 971 | 17,017 | (281,048 | ) | (805 | ) | 35,950 | ||||||||||||||||
| Issue of common shares (note 6) | 173,104 | 173,104 | ||||||||||||||||||||||
| Share issue costs | (10,780 | ) | (10,780 | ) | ||||||||||||||||||||
| Exercise of warrants | 271 | (60 | ) | 211 | ||||||||||||||||||||
| Exercise of derivative warrants | 29,466 | 29,466 | ||||||||||||||||||||||
| Exercise of stock options | 4,850 | (2,215 | ) | 2,635 | ||||||||||||||||||||
| Stock-based compensation | 2,219 | 2,219 | ||||||||||||||||||||||
| Net loss and comprehensive loss for the period | (54,340 | ) | (54,340 | ) | ||||||||||||||||||||
| Balance June 30, 2017 | 496,726 | 911 | 17,021 | (335,388 | ) | (805 | ) | 178,465 | ||||||||||||||||
| Balance January 1, 2016 | 261,645 | 1,297 | 15,579 | (257,753 | ) | (805 | ) | 19,963 | ||||||||||||||||
| Issue of shares | 6,260 | 820 | 7,080 | |||||||||||||||||||||
| Share issue costs | (389 | ) | (51 | ) | (440 | ) | ||||||||||||||||||
| Stock-based compensation | 479 | 479 | ||||||||||||||||||||||
| Net loss and comprehensive loss for the period | (7,543 | ) | (7,543 | ) | ||||||||||||||||||||
| Balance June 30, 2016 | 267,516 | 2,066 | 16,058 | (265,296 | ) | (805 | ) | 19,539 |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
Aurinia Pharmaceuticals Inc.
Interim Condensed Consolidated Statements of Cash Flow
For the three and six month periods ended
June 30, 2017 and 2016
thousands of U.S. dollars)
| Three months ended | Six months ended | |||||||||||||||
| June 30, 2017 $ | June 30, 2016 $ | June 30, 2017 $ | June 30, 2016 $ | |||||||||||||
| Cash flow provided by (used in) | ||||||||||||||||
| Operating activities | ||||||||||||||||
| Net loss for the period | (2,399 | ) | (3,276 | ) | (54,340 | ) | (7,543 | ) | ||||||||
| Adjustments for: | ||||||||||||||||
| Amortization of deferred revenue | (29 | ) | (54 | ) | (59 | ) | (109 | ) | ||||||||
| Amortization of property and equipment | 6 | 5 | 12 | 10 | ||||||||||||
| Amortization of acquired intellectual property and other intangible assets | 364 | 360 | 721 | 742 | ||||||||||||
| Stock-based compensation | 978 | 150 | 2,219 | 479 | ||||||||||||
| Change in value of short-term investment | (8 | ) | (14 | ) | ||||||||||||
| Revaluation of contingent consideration | 223 | 64 | 348 | 126 | ||||||||||||
| Change in provision for restructuring costs | (39 | ) | (78 | ) | ||||||||||||
| Loss on disposal of equipment | 1 | |||||||||||||||
| Change in estimated fair value of derivative warrant liabilities | (7,498 | ) | (1,361 | ) | 33,283 | (2,025 | ) | |||||||||
| (8,363 | ) | (4,151 | ) | (17,829 | ) | (8,398 | ) | |||||||||
| Net change in other operating assets and liabilities (note 10) | (3,485 | ) | (894 | ) | (3,734 | ) | (1,867 | ) | ||||||||
| Net cash used in operating activities | (11,848 | ) | (5,045 | ) | (21,563 | ) | (10,265 | ) | ||||||||
| Investing activities | ||||||||||||||||
| Purchase of short-term investment | (10,063 | ) | (5,002 | ) | (13,107 | ) | (12,045 | ) | ||||||||
| Proceeds on disposal of short-term investment | 3,050 | 9,043 | 3,050 | 19,043 | ||||||||||||
| Purchase of equipment | (12 | ) | (16 | ) | (1 | ) | ||||||||||
| Capitalized patent costs | (3 | ) | (3 | ) | ||||||||||||
| Net cash generated from (used in) investing activities | (7,025 | ) | 4,038 | (10,073 | ) | 6,994 | ||||||||||
| Financing activities | ||||||||||||||||
| Contingent consideration milestone payments | (2,150 | ) | (2,150 | ) | ||||||||||||
| Net proceeds from issuance of shares | 6,640 | 162,324 | 6,640 | |||||||||||||
| Proceeds from exercise of derivative warrants | 19 | 8,684 | ||||||||||||||
| Proceeds from exercise of warrants | 211 | |||||||||||||||
| Proceeds from exercise of stock options | 1,655 | 2,635 | ||||||||||||||
| Net cash generated from(used in) financing activities | (476 | ) | 6,640 | 171,704 | 6,640 | |||||||||||
| Increase (decrease) in cash and cash equivalents during the period | (19,349 | ) | 5,633 | 140,068 | 3,369 | |||||||||||
| Cash and cash equivalents Beginning of period | 199,066 | 3,492 | 39,649 | 5,756 | ||||||||||||
| Cash and cash equivalents End of period | 179,717 | 9,125 | 179,717 | 9,125 |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
Aurinia Pharmaceuticals Inc.
Notes to Interim Condensed Consolidated Statements
For the three and six month periods ended
June 30, 2017 and 2016
tabular columns expressed in thousands of U.S. dollars)
Aurinia Pharmaceuticals Inc. or the Company is a clinical stage
pharmaceutical company with its head office located at #1203-4464 Markham Street, Victoria, British Columbia, V8Z 7X8. The Company has its registered office located at #201, 17904-105 Avenue, Edmonton,
Alberta, T5S 2H5 where the finance function is performed.
Aurinia Pharmaceuticals Inc. is incorporated pursuant to the Business Corporations Act
(Alberta). The Company s common shares are currently listed and traded on the NASDAQ Global Market (NASDAQ) under the symbol AUPH and on the Toronto Stock Exchange (TSX) under the symbol AUP. The Company s primary business is the
development of a therapeutic drug to treat autoimmune diseases, in particular lupus nephritis (LN).
These interim condensed consolidated financial
statements include the accounts of the Company and its wholly owned subsidiaries, Aurinia Pharma Corp., Aurinia Pharma U.S., Inc. (Delaware incorporated) and Aurinia Pharma Limited (UK incorporated).
Statement of compliance
These interim condensed consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards
( IFRS ), as applicable to interim financial reports including IAS 34, Interim Financial Reporting, and should be read in conjunction with the annual financial statements of the Company for the year ended December 31, 2016 which have
been prepared in accordance with IFRS, as issued by the International Accounting Standards Board ( IASB ).
These interim condensed consolidated
financial statements were authorized for issue by the audit committee of the Board of Directors on August 9, 2017.
Basis of measurement
These interim condensed consolidated financial statements have been prepared on a going concern and historical cost basis, other than certain financial
instruments which are recognized at fair value.
Functional and presentation currency
These interim condensed consolidated financial statements are presented in United States (US) dollars, which is the Company s functional currency.
Short-term investments, classified as held-to-maturity, are recorded initially at fair value and subsequently at amortized cost using the effective interest method. These investments consist of the following: a 6 month HSBC Bank US denominated
discount note with an effective interest rate of 1.257%, due October 13, 2017, with an amortized cost of $3,063,000 and an initial cost of $3,055,000. (December 31, 2016 - $nil); and a Bank of Montreal US denominated bond purchased on
June 21, 2017, due April 9, 2018, with an initial and amortized cost of $7,008,000 and an effective interest rate of 1.302%.
The outstanding fair value of contingent consideration payable to ILJIN SNT
Co., Ltd. (ILJIN), an affiliated shareholder and related party, is the result of an Arrangement Agreement (the Agreement) completed on September 20, 2013 between the Company, Aurinia Pharma Corp. and ILJIN. Pursuant to the Agreement, payments
of up to $10,000,000 may be paid dependent on the achievement of pre-defined clinical and marketing milestones.
In the second quarter ended June 30, 2017 the Company paid ILJIN $2,150,000 upon the achievement of two specific milestones.
Aurinia Pharmaceuticals Inc.
Notes to Interim Condensed Consolidated Statements
For the three and six month periods ended
June 30, 2017 and 2016
columns expressed in thousands of U.S. dollars)
At June 30, 2017 if all of the remaining milestones are met, the timing of these payments is estimated
to occur as follows:
| $ | ||||
| 2018 | 100 | |||
| 2020 | 2,625 | |||
| 2021 | 5,125 | |||
| 7,850 |
The fair value estimates at June 30, 2017 were based on a discount rate of 10% and an assumed probability adjusted payment
range between 50% and 95%. There were no changes in these assumptions since December 31, 2016. The fair value of this contingent consideration as at June 30, 2017 was estimated to be $3,638,000 compared to $5,440,000 at December 31,
2016. The decrease reflected the payment of the $2,150,000 offset by a $348,000 increase in the revaluation of the contingent consideration expense for the six months ended June 30, 2017.
The Company recorded in a revaluation of contingent consideration expense of $233,000 and $348,000 respectively for the three and six month periods ended
June 30, 2017 compared to $64,000 and $126,000 respectively for the same periods in 2016. The change in the revaluation amounts resulted primarily from the change in the passage of time and the achievement of the milestones in the second
quarter ended June 30, 2017. These adjustments were determined by estimating the probability and timing of achieving the milestones and applying the income approach.
This is a Level 3 recurring fair value measurement. If the probability for success were to increase by a factor of 10% for each milestone, this would
increase the net present value (NPV) of the obligation by approximately $556,000 as at June 30, 2017. If the probability for success were to decrease by a factor of 10% for each milestone, this would decrease the NPV of the obligation by
approximately $556,000 as at June 30, 2017. If the discount rate were to increase to 12%, this would decrease the NPV of the obligation by approximately $227,000. If the discount rate were to decrease to 8%, this would increase the NPV of the
obligation by approximately $248,000.
In accordance with IFRS, a contract to issue a variable number of shares
fails to meet the definition of equity and must instead be classified as a derivative liability and measured at estimated fair value with changes in estimated fair value recognized in the consolidated statements of operations and comprehensive loss
at each period-end. The derivative liabilities will ultimately be converted into the Company s equity (common shares) when the warrants are exercised, or will be extinguished on the expiry of the
outstanding warrants, and will not result in the outlay of any cash by the Company. Immediately prior to exercise, the warrants are remeasured at their estimated fair value. Upon exercise, the intrinsic value is transferred to share capital (the
intrinsic value is the share price at the date the warrant is exercised less the exercise price of the warrant). Any remaining fair value is recorded through the statement of operations and comprehensive loss as part of the change in estimated fair
value of derivative warrant liabilities.
| December 28, 2016 Warrants | February 14, 2014 Warrants | Total | ||||||||||||||||||||||
| # of warrants | # of warrants | # of warrants | ||||||||||||||||||||||
| (in thousands) | $ | (in thousands) | $ | (in thousands) | $ | |||||||||||||||||||
| Balance at January 1, 2017 | 6,388 | 7,405 | 3,748 | 1,733 | 10,136 | 9,138 | ||||||||||||||||||
| Conversion to equity (common shares) upon exercise of warrants | (2,859 | ) | (12,399 | ) | (516 | ) | (2,834 | ) | (3,375 | ) | (15,233 | ) | ||||||||||||
| Income statement adjustment on exercise of warrants | (3,836 | ) | (195 | ) | (4,031 | ) | ||||||||||||||||||
| Revaluation of derivative warrant liabilities | 28,784 | 16,028 | 44,812 | |||||||||||||||||||||
| Balance at March 31, 2017 | 3,529 | 19,954 | 3,232 | 14,732 | 6,761 | 34,686 | ||||||||||||||||||
| Conversion to equity (common shares) upon exercise of warrants | (6 | ) | (23 | ) | (1,364 | ) | (5,526 | ) | (1,370 | ) | (5,549 | ) | ||||||||||||
| Income statement adjustment on exercise of warrants | (8 | ) | (773 | ) | (781 | ) | ||||||||||||||||||
| Revaluation of derivative warrant liabilities | (4,734 | ) | (1,983 | ) | (6,717 | ) | ||||||||||||||||||
| Balance at June 30, 2017 | 3,523 | 15,189 | 1,868 | 6,450 | 5,391 | 21,639 | ||||||||||||||||||
| Balance at January 1, 2016 | 4,548 | 5,499 | 4,548 | 5,499 | ||||||||||||||||||||
| Revaluation of derivative warrant liability | (664 | ) | (664 | ) | ||||||||||||||||||||
| Balance at March 31, 2016 | 4,548 | 4,835 | 4,548 | 4,835 | ||||||||||||||||||||
| Revaluation of derivative warrant liability | (1,361 | ) | (1,361 | ) | ||||||||||||||||||||
| Balance at June 30, 2016 | 4,548 | 3,474 | 4,548 | 3,474 |
Aurinia Pharmaceuticals Inc.
Notes to Interim Condensed Consolidated Statements
For the three and six month periods ended
June 30, 2017 and 2016
columns expressed in thousands of U.S. dollars)
Derivative warrant liability related to December 28, 2016 Bought Deal public offering
On December 28, 2016, the Company completed a $28,750,000 Offering. Under the terms of the Offering, the Company issued 12,778,000 units at a subscription
price per Unit of $2.25, each Unit consisting of one common share and one-half (0.50) of a common share purchase warrant (a Warrant), exercisable for a period of five years from the date of issuance at an
exercise price of $3.00. The holders of the Warrants issued pursuant to this offering may elect, if the Company does not have an effective registration statement registering, or the prospectus contained therein is not available for the issuance of
the Warrant Shares to the holder, in lieu of exercising the Warrants for cash, a cashless exercise option to receive common shares equal to the fair value of the Warrants based on the number of Warrants to be exercised multiplied by the weighted
average market price less the exercise price with the difference divided by the weighted average market price. If a Warrant holder exercises this option, there will be variability in the number of shares issued per Warrant.
At initial recognition on December 28, 2016, the Company recorded a derivative warrant liability of $7,223,000 based on the estimated fair value of the
Warrants with allocated share issuance costs of $655,000 recognized as other expense. As at December 31, 2016, the Company revalued the derivative warrant liability to $7,405,000.
In the three month period ended June 30, 2017, 6,000 warrants were exercised at $3.00 per share for gross proceeds of $19,000. As the Company had an