Financial Statements Second Quarter Ended

Financial Statements

Second Quarter Ended June 30, 2020

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

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

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

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

Aurinia Pharmaceuticals Inc. or the Company is late-stage clinical 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 is currently developing voclosporin, an investigational drug, for the treatment of lupus nephritis (LN), Dry Eye Syndrome (DES) and proteinuric kidney diseases.

Aurinia's head office is located at #1203-4464 Markham Street, Victoria, British Columbia, and its registered office is located at #201, 17873-106 A Avenue, Edmonton, Alberta. Aurinia also has a US Commercial office located at 77 Upper Rock Circle, Rockville, Maryland.

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.

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).

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, 2019 which have been prepared in accordance with IFRS, as issued by International Accounting Standards Board (IASB).

These interim condensed consolidated financial statements were authorized for issue by the Board of Directors on August 6, 2020.

Basis of measurement

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

Functional and presentation currency

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

IFRS requires management to make estimates and assumptions that affect amounts reported in the interim condensed consolidated financial statements and accompanying notes. The interim condensed 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 the contingent consideration (note 6), lease liability (note 7), royalty obligation (note 8) 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.

These interim condensed consolidated financial statements follow the same accounting policies and methods of their application as the December 31, 2019 annual audited consolidated financial statements.

The fair value of the short term investment(s) at June 30, 2020 was $32,059,000 (December 31, 2019 - $nil). The average weighted duration of the interest-bearing securities held at June 30, 2020 was 0.38 years and the weighted average yield to maturity was 1.08%.

Income taxes recoverable

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted by the United States Government to amongst other provisions, provide emergency assistance for individuals, families and businesses affected by the coronavirus pandemic. The CARES Act permits net operating loss (NOL) carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company's United States subsidiary generated net operating losses for the six months ended June 30, 2020 which will allow it to carryback sufficient losses to fully recover income taxes related to its 2015 to 2019 taxation years.

The Company recorded a net income tax expense of $22,000 and a recovery of $214,000 in the statement of operations and comprehensive loss for the three and six months ended June 30, 2020. The expense for the three months ended June 30, 2020 comprised of a recovery of $241,000 related to this loss carryback provision less a $263,000 provision for income taxes owing related to its United States and United Kingdom subsidiaries. The recovery for the three months ended March 31, 2020 comprised of a recovery of $240,000 related to the loss carryback provision less a $3,000 provision for income taxes related to its United Kingdom subsidiary.

The income tax recoverable of $205,000 is comprised of the income tax recovery of $481,000 less $276,000 outstanding at June 30, 2020 for 2019 United States subsidiary income taxes.

The outstanding fair value of contingent consideration payable to ILJIN, a related party and affiliated shareholder, 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, the remaining payments of up to $7,750,000 may be paid dependent on the achievement of pre-defined clinical and marketing milestones.

During 2019 the Company paid ILJIN $100,000, upon the achievement of a specific milestone. Previously, in 2017 the Company paid ILJIN $2,150,000 upon the achievement of two specific milestones. These payments reduced the original $10,000,000 contingent consideration to $7,750,000.

At June 30, 2020, if all of the remaining milestones are met, the timing of these payments is estimated to occur as follows:

The fair value estimates at June 30, 2020 were based on a weighted average discount rate of 2.4% (December 31, 2019 - 10%) and a presumed payment range between 50% and 86% (December 31, 2019 - 50% and 86%). The decrease of the discount rate was primarily attributable to the significant decline in interest rates caused by the COVID-19 pandemic. The fair value of this contingent consideration as at June 30, 2020 was estimated to be $5,980,000 (December 31, 2019 - $5,113,000) and was determined by estimating the probability and timing of achieving the milestones and applying the income approach.

The change in discount rate and passage of time, on revaluation, resulted in an increase in contingent consideration of $271,000 and $867,000 respectively for the three and six months ended June 30, 2020 compared to an increase in contingent consideration of $87,000 and $80,000 respectively for the three and six months ended June 30, 2019.

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 $744,000 as at June 30, 2020. 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 $744,000 as at June 30, 2020. If the discount rate were to increase by 2%, this would decrease the NPV of the obligation by approximately $152,000. If the discount rate were to decrease by 2%, this would increase the NPV of the obligation by approximately $162,000.

During March 2020, the Company entered into a commercial office lease for its US commercial center of operations in Rockville, Maryland (MD lease). The Company recognized a $5,804,000 right-of-use asset (ROU asset) and a $5,804,000 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%.

The recognition of the MD lease resulted in the following adjustments to the statement of financial position:

The recognition of the MD lease resulted in the following adjustments to the statement of operations and comprehensive loss:

The amortization expense related to the ROU asset is presented with the amortization of property and equipment in the statement of operations and comprehensive loss.

In addition to the ROU assets, the Company presents all property and equipment together on the statement of financial position:

The Company has two short term leases for office spaces in Victoria and Edmonton. For the three and six months ended June 30, 2020, the Company incurred short-term lease expense of $66,000 and $137,000 and variable lease expense of $nil and $nil, respectively. This is compared to $15,000 and $31,000 of short term lease expense and $17,000 and $31,000 of variable lease expense for the three and six month period ended June 30, 2019.

During June 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 $3,406,000. As of June 30, 2020 there has been no accounting recognition associated with this lease, as the Company has not been granted access to the building.

Critical judgments in determining the lease term

In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated).

For leases of office space, the following factors are the most relevant:

Otherwise, the Company considers other factors including historical lease durations, government incentives received in connection with the lease, and business disruption required to replace the leased asset or relocate facilities. Most extension options in office leases have not been included in the lease liability, because the Company could replace the leasehold improvement assets and relocate facilities without significant cost or business disruption.

The Company's approximate lease obligations for the next five years are as follows:

The royalty obligation is the result of a resolution of the Board of Directors of the Company dated March 8, 2012 whereby certain executive officers at that time were provided with future potential retention benefits for remaining with the Company as follows:

(a) Pursuant to a resolution of the Board of Directors of the Company on March 8, 2012 and a termination agreement and general release dated February 14, 2014, the Company will be required to pay a royalty, equivalent to 2% of royalties received on the sale of voclosporin by licensees and/or 0.3% of net sales of voclosporin sold directly by the Company to the Chief Executive Officer at the time of the resolution. Should the Company sell substantially all of the assets of voclosporin to a third party or transfer those assets to another party in a merger in a manner such that this payment obligation is no longer operative, then the Company would be required to pay 0.3% of the value attributable to voclosporin in the transaction.

(b) In addition, pursuant to a resolution of the Board of Directors of the Company on March 8, 2012, and employment agreements, two executive officers, at the time of the resolution, are eligible to receive 0.1675% of royalty licensing revenue for royalties received on the sale of voclosporin by licensees and/or 0.025% of net sales of voclosporin sold directly by the Company. Should the Company

sell substantially all of the assets of voclosporin to a third party or transfer those assets to another party in a merger, the executives, at the time of the resolution, will be entitled to receive 0.025% of the value attributable to voclosporin in the transaction, and the entitlement to further royalty or sales payments shall end. Effective October 1, 2019 pursuant to the employment agreements all service conditions have been met. The royalty obligation will terminate upon death.

The Board of Director resolution, dated March 8, 2012, created an employee benefit obligation contingent on the occurrence of uncertain future events. The probability that the specified events will occur affects the measurement of the obligation.

As a result of the completion and results obtained of the AURORA trial in the fourth quarter of 2019 the Company re-assessed the probability of royalty obligation payments being required in the future, and has recorded the royalty obligation at December 31, 2019. Until one of the triggering events in sections (a) or (b) described above occur, no royalty payments are required to be paid. No material royalties on sales or licensing are expected to be paid in the next twelve months and therefore the royalty obligation has been classified as long term. The fair value of the royalty obligation as at June 30, 2020 was estimated to be $7,700,000 (December 31, 2019 - $7,200,000).

The royalty obligation is based on a discount rate of 10.5%. During the three months ended March 31, 2020 the Company re-assessed the royalty obligation and the reduction in discount rate to 10%, compared to 12% for the period ended December 31, 2019 was primarily attributable to the decline in interest rates caused by the COVID-19 pandemic. The change in discount rate to 10% from 12% during the three months ended March 31, 2020 and passage of time, on revaluation, resulted in an increase of $600,000 in the royalty obligation. During the three months ended June 30, 2020 the Company again re-assessed the royalty obligation and the increase in discount rate to 10.5% compared to 10% for the period ended March 31, 2020 was primarily attributable to a slight correction to the interest rates that were initially impacted by the COVID-19 pandemic. The change in discount rate to 10.5% from 10% during the three months ended June 30, 2020 and passage of time, on revaluation, resulted in an decrease of $100,000 in the royalty obligation. For the six month period ended June 30, 2020 there was an increase of $500,000 in the royalty obligation. There were no similar adjustments for the three and six month periods ended June 30, 2019.

The Company is required to use significant judgment and estimates in determining the inputs into the model. The key assumptions used by management include the estimated probability of market approval of 86%, and the discount rate of 10.5%. If the probability of success were to increase to 95% this would increase the obligation by $806,000 and if it were to decrease to 77% this would decrease the obligation by $806,000. If the discount rate were to increase to 11.6%, this would decrease the obligation by $537,000, and if it were to decrease to 9.5%, this would increase the obligation by $590,000. An increase in the estimated gross pricing by 10% would result in an increase in the obligation of $764,000 while a decrease in the estimated gross pricing by 10% would result in a decrease in the obligation of $764,000. An increase in the number of patients being treated by 10% would result in an increase in the obligation of $764,000 while a decrease in the number of patients being treated by 10% would result in a decrease in the obligation of $764,000.

In accordance with IFRS, a contract to issue a variable number of shares fails to meet the definition of equity and must instead be classified as a derivative liability and measured at fair value with changes in fair value recognized in the consolidated statements of operations and comprehensive loss at each period-end. The derivative 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.

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

On December 28, 2016, the Company completed a $28,750,000 Bought Deal public offering (the Offering). Under the terms of the Offering, the Company issued 12,778,000 units at a subscription price per Unit of $2.25, each Unit consisting of one Common Share and one-half (0.50) of a Common Share purchase warrant (a Warrant), exercisable for a period of five years from the date of issuance at an exercise price of $3.00. The holders of the Warrants issued pursuant to this offering may elect, if the Company does not have an effective registration statement registering or the prospectus contained therein is not available for the issuance of the Warrant Shares to the holder, in lieu of exercising the Warrants for cash, a cashless exercise option to receive Common Shares equal to the fair value of the Warrants. The fair value is determined by multiplying the number of Warrants to be exercised 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. These Warrants will expire on December 28, 2021.

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.

There were no derivative warrant exercises during the three months ended June 30, 2020. In the three months ended March 31, 2020, a holder exercised 500 Warrants for $3.00 per share, for a gross proceeds of $1,500. These warrants had an estimated fair value of $8,855 on the date of exercise, determined using the Black-Scholes pricing model. Of this amount $8,810 was transferred from derivative warrant liabilities into equity (Common Shares) and $45 was recorded though the statement of operations and comprehensive loss as a part of the change in estimate fair value of derivative warrant liabilities. There were no derivative warrant exercises in the three and six month periods ended June 30, 2019.

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

As at June 30, 2020, the Company revalued the remaining derivative warrants at an estimated fair value of $22,451,000 (December 31, 2019 - $29,353,000). The Company recorded an increase in the estimated fair value of the derivative warrant liability of $2,952,000 and a decrease in the estimate fair value of the derivative warrant liability of $6,893,000 for the three and six months ended June 30, 2020 (June 30, 2019 - decrease of $625,000 and $1,998,000) respectively.

The following assumptions were used to estimate the fair value of the derivative warrant liability on June 30, 2020 and December 31, 2019:

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

The key Level 3 inputs used by management to estimate the fair value are the market price and the expected volatility. If the market price were to increase by a factor of 10%, this would increase the estimated fair value of the obligation by approximately $2,747,000 as at June 30, 2020. If the market price were to decrease by a factor of 10%, this would decrease the estimated fair value of the obligation by approximately $2,725,000. If the volatility were to increase by 10%, this would increase the estimated fair value of the obligation by approximately $31,000. If the volatility were to decrease by 10%, this would decrease estimated fair value of the obligation by approximately $19,000 as at June 30, 2020.

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

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

In the three month period ended March 31, 2019, the 1,738,000 derivative warrants outstanding at December 31, 2018 related to the February 14, 2014 private placement offering, were exercised. Certain holders of these Warrants elected the cashless exercise option and the Company issued 687,000 Common Shares on the cashless exercise of 1,274,000 Warrants. The remaining 464,000 warrants were exercised for cash, at a price of $3.2204 per Common Share and the Company received cash proceeds of $1,493,000 upon the issuance of 464,000 Common Shares. Pursuant to the exercise of these warrants, the Company transfered $5,920,000 from derivative warrant liabilities to equity (Common Shares) and recorded a net adjustment of $352,000 through the statement of operations and comprehensive loss. As a result, the derivative warrant liability of $6,272,000 at December 31, 2018 related to the February 14, 2014 private placement offering has been extinguished upon the exercise of the aforementioned warrants.

Unlimited Common Shares without par value

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 could sell, through at-the-market (ATM) offerings, Common Shares that would have an aggregate offering price of up to US$30,000,000.

During the first quarter ended March 31, 2019 pursuant to this agreement the ATM Facility was fully utilized resulting in gross proceeds of $30,000,000 upon the issuance of 4,608,000 Common Shares at a weighted average price of $6.51. The Company incurred share issue costs of $1,170,000 including a 3% commission of $900,000 paid to the agent and professional and filing fees of $270,000 directly related to the ATM.

Stock options are, at times, referenced in Canadian dollars (CA$).

A summary of the stock options outstanding as at June 30, 2020 and June 30, 2019 and changes during the periods ended on those dates is presented below:

The maximum number of Common Shares issuable under the Stock Option Plan is equal to 12.5% of the issued and outstanding Common Shares at the time the Common Shares are reserved for issuance. As at June 30, 2020 there were 112,705,000 Common Shares of the Company issued and outstanding, resulting in a maximum of 14,088,000 options available for issuance under the Stock

Option Plan. An aggregate total of 9,361,000 options are presently outstanding in the Stock Option Plan, representing 8.3% of the issued and outstanding Common Shares of the Company.

During 2019, the Company granted 1,600,000 inducement stock options to the Chief Executive Officer pursuant to Section 613(c) of the TSX Company Manual at a price of $6.28 (CA$8.45). The first 25% of these options vest on the one year anniversary of the grant, and the remaining 75% vest in equal amounts over 36 months following the one year anniversary date and are exercisable for a term of ten years. These options are recorded outside of the Company's stock option plan.