# Aurinia Pharmaceuticals Inc.: Form 10-Q for the period ended Sep 30, 2023

- Company: [Aurinia Pharmaceuticals Inc.](/companies/auph.md) (CIK 1600620)
- Form: 10-Q
- Filed: 2023-11-02
- Accepted by EDGAR: Nov 2, 2023, 06:05 ET
- Period: 2023-09-30
- Accession: 0001600620-23-000044
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1600620/000160062023000044/auph-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1600620/000160062023000044/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $54.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $130.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $6.8m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $8.8m | us-gaap:CostOfRevenue |
| Research and development | 3 months, 2023-07-01 to 2023-09-30 | $13.6m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2023-01-01 to 2023-09-30 | $39.4m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | −$16.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | −$62.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $1.4m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $1.5m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $298.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $92.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | −$13.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | −$51.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.09 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.36 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.09 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.36 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 142,847,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 143,085,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | −$47.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2023-09-30 | $45.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $426.5m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $555.0m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $73.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $163.1m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-09-30 | $391.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 26,736 characters.

*The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q. The information in this discussion contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended, (the Exchange Act), which are subject to the “safe harbor” created by those sections, as well as “forward-looking information” as defined in applicable Canadian securities laws. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans; objectives of management; the key potential benefits of LUPKYNIS; our belief that we have sufficient financial resources to fund our current plans for at least the next few years; our potential to receive certain payments and royalties under our agreement with Otsuka Pharmaceuticals Co. Ltd., or Otsuka; and that an investigational new drug (IND) application (or equivalent) is expected to be submitted for AUR200 in 2023 and AUR300 in 2024. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “propose,” “intend,” “continue,” “potential,” “possible,” “foreseeable,” “likely,” “unforeseen” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We have made numerous assumptions about the forward-looking statements and information contained herein, including among other things, assumptions about: the accuracy of reported data from third-party studies and reports; that our IP rights are valid and do not infringe the IP rights of third parties; our assumptions relating to the capital required to fund operations for the next few years; the assumption that our current good relationships with our suppliers, service providers and other third parties will be maintained; assumptions relating to the burn rate of our cash for operations; assumptions relating to the capital required to fund operations for the next few years; assumptions relating to the progress of our pre-clinical activities that our third party service providers will comply with their contractual obligations. Even though management believes that the assumptions made, and the expectations represented by such statements or information are reasonable, there can be no assurance that the forward-looking information will prove to be accurate. We discuss many of these risks, uncertainties and other factors in greater detail under the heading “Risk Factors” in Part I, Item 1A of our 2022 Annual Report on Form 10-K, as filed with the U.S. Securities and Exchange Commission on February 28, 2023 and with applicable Canadian securities regulatory authorities. Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this discussion completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by our cautionary statements. Except as required by law, we assume no obligation to update our forward-looking statements publicly, or to update the reasons that actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.*

### Overview

Aurinia is a fully integrated biopharmaceutical company focused on delivering therapies to treat targeted patient populations with a high unmet medical need that are impacted by autoimmune, kidney and other rare diseases. In January 2021, we introduced LUPKYNIS® (voclosporin), the first U.S. Food and Drug, (the FDA), approved oral therapy for the treatment of adult patients with active lupus nephritis (LN). We continue to conduct pre-clinical, clinical, and regulatory activities to support the LUPKYNIS development program as well as our other assets. We engaged with Otsuka as a collaboration partner for development and commercialization of LUPKYNIS in the European Union (EU), Japan, as well as the United Kingdom, Russia, Switzerland, Norway, Belarus, Iceland, Liechtenstein and Ukraine (collectively, the Otsuka Territories).

LUPKYNIS is an orally administered calcineurin inhibitor (CNI) immunosuppressant that has been demonstrated to improve near and long-term outcomes in LN when used in combination with mycophenolate mofetil (MMF) (although MMF is not currently approved as such) and steroids. By inhibiting calcineurin, LUPKYNIS reduces cytokine activation and blocks interleukin IL-2 expression and T-cell mediated immune responses. LUPKYNIS also potentially stabilizes podocytes, which can protect against proteinuria.

Voclosporin, the active ingredient in LUPKYNIS, is made by a modification of a single amino acid of the cyclosporine molecule. The mechanism of action of LUPKYNIS has been validated with certain earlier generation CNIs for the prevention of rejection in patients undergoing solid organ transplants and in several autoimmune indications, including uveitis, 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.

On August 17, 2021, we announced the addition of two novel assets, AUR200 and AUR300. AUR200 and AUR300 are currently undergoing pre-clinical development with projected submission to the FDA (or their equivalent) for AUR200 in 2023 and for AUR300 in 2024.

On September 15, 2022, the EC granted marketing authorization of LUPKYNIS. The centralized marketing authorization is valid in all EU member states as well as in Iceland, Liechtenstein, Norway and Northern Ireland. The approval triggered a $30.0 million milestone payment to us, which was recognized as collaboration revenue for the year ended December 31, 2022. On November 29, 2022 the Medicines and Healthcare products Regulatory Agency (MHRA) had granted marketing authorization of LUPKYNIS in Great Britain. On April 24, 2023, LUPKYNIS received regulatory approval in Switzerland. We continue to progress with regulatory approval with Otsuka on the other Otsuka Territories.

### Recent Developments

On April 5, 2023, we announced promising results from the AURORA Renal Biopsy Sub-Study. The addition of LUPKYNIS on top of the then current standard of care MMF and low-dose steroids in our Phase 3 AURORA 1 and AURORA 2 studies led to significantly earlier and greater reductions in proteinuria while maintaining stable renal function, as evidenced by a stable eGFR slope over time. To further characterize the long-term impact of LUPKYNIS on the kidney at the histologic level, repeat biopsies were collected from selected patients in both treatment arms (the active control arm with patients treated with only MMF and steroids, and the study arm of voclosporin in combination with MMF and steroids). The patients in the voclosporin treatment arm demonstrated histologic activity improvement with stable chronicity scores similar to the active control arm of MMF and low dose steroids alone over the 18-months average treatment period at the time of repeat biopsy.

On April 11, 2023, we announced that the United States Patent and Trademark Office (USPTO) had issued a new and refined method of use patent titled IMPROVED PROTOCOL FOR TREATMENT OF LUPUS NEPHRITIS. Our newly issued U.S. Patent (No. 11,622,991) reflects the unique and proprietary dosing regimen of its currently marketed product, LUPKYNIS. Specifically, this patent further refines the method of using LUPKYNIS in combination with MMF and corticosteroids using eGFR as a method of pharmacodynamically dosing the product in patients with lupus nephritis. The newly issued patent provides coverage that supplements Aurinia’s existing U.S. Patent No. 10,286,036, which is listed in the Orange Book and claims an FDA-approved method of using LUPKYNIS. The claims in this additional patent add further specificity on dosing consistent with the FDA approved product label. This patent has the potential to provide an additional layer of patent protection for LUPKYNIS up to 2037. U.S. Patent No. 11,622,991 is listed in the Orange Book.

On June 29, 2023, we announced that our Board of Directors had initiated an exploration of strategic alternatives.

On August 18, 2023, we appointed Dr. Karen Smith and Jeffrey A. Bailey to our Board of Directors. Dr. Smith and Mr. Bailey both have deep experience in biopharma leadership, commercial strategy, mergers and acquisitions and advancing therapeutic pipelines. We have also appointed Dr. Daniel G. Billen as Chair of the Board of Directors. He has been a member of the Board since 2019.

On September 21, 2023, we appointed Dr. Robert T. Foster, who is the CEO of Hepion Pharmaceuticals, to our Board of Directors. Dr. Foster founded Isotechnika Pharma Inc. in 1993 and was its Chairman and CEO for approximately 21 years. During his tenure at Isotechnika, Dr. Foster discovered voclosporin.

### Policies and Significant Judgments and Estimates

There have been no material changes to our critical accounting policies and significant judgments and estimates as described in our Annual Report on Form 10-K for the year ended December 31, 2022.

### Product Revenues

In the United States (and territories), we sell LUPKYNIS primarily to specialty pharmacies and specialty distributors. These customers subsequently distribute our products to patients and health care providers. Revenues from product sales are recognized when the customer obtains control of our product, which typically occurs upon delivery to the customer.

*Reserves for discounts and allowances:* Product sales are recorded at the net sales price, which includes estimates of variable consideration for which reserves are established. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to our customer) or a liability (if the amount is payable to a party other than our customer).

Our estimates of reserves established for variable consideration are calculated based upon utilizing the expected value method. The transaction price, which includes variable consideration reflecting the impact of discounts and allowances, may be subject to constraint and is included in the net sales price only to the extent that it is probable that a significant reversal of the amount of the cumulative revenues recognized will not occur in a future period. Amounts related to such items are estimated at contract inception and updated at the end of each reporting period as additional information becomes available.

Significant judgment is required in estimating variable consideration. In making these estimates, we consider historical data, including patient mix to accrue for variable consideration related to inventory sold to our customers that has not yet been dispensed. We use a data aggregator and historical claims to estimate variable consideration for inventory sold to our customers, including specialty pharmacies, that has not yet been dispensed. Actual amounts may ultimately differ from our estimates. If actual results vary, we adjust these estimates, which could have an effect on earnings in the period of adjustment. As of September 30, 2023, we did not have any material adjustments to variable consideration estimates based on actual results. These specific adjustments are detailed further in our Annual Report on Form 10-K for the year ended December 31, 2022.

### Results of Operations

### Three and Nine Months ended September 30, 2023 compared to Three and Nine Months ended September 30, 2022

The following table sets forth our results of operations for the three and nine months ended September 30, 2023 and September 30, 2022.

*(in thousands)*

| Revenue | Three months ended September 30, 2023 | 2022 | Change | Nine months ended September 30, 2023 | 2022 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Product revenue, net | **$40,781** | $25,502 | $15,279 | **$116,218** | $75,142 | $41,076 |
| License, royalty and collaboration revenue | **13,734** | 30,277 | (16,543) | **14,200** | 30,453 | (16,253) |
| Total revenue, net | **54,515** | 55,779 | (1,264) | **130,418** | 105,595 | 24,823 |
| Operating expenses |  |  |  |  |  |  |
| Cost of sales | **6,769** | 2,447 | 4,322 | **8,753** | 4,302 | 4,451 |
| Selling, general and administrative | **47,759** | 52,169 | (4,410) | **144,964** | 148,898 | (3,934) |
| Research and development | **13,605** | 10,973 | 2,632 | **39,413** | 35,118 | 4,295 |
| Other (income) expense, net | **2,645** | (311) | 2,956 | **(695)** | 647 | (1,342) |
| Total cost of sales and operating expenses | **70,778** | 65,278 | 5,500 | **192,435** | 188,965 | 3,470 |
| Loss from operations | **(16,263)** | (9,499) | (6,764) | **(62,017)** | (83,370) | 21,353 |
| Interest expense | **(1,400)** | — | (1,400) | **(1,465)** | — | (1,465) |
| Interest income | **4,514** | 1,464 | 3,050 | **12,429** | 2,209 | 10,220 |
| Net loss before income taxes | **(13,149)** | (8,035) | (5,114) | **(51,053)** | (81,161) | 30,108 |
| Income tax expense | **298** | 954 | (656) | **92** | 973 | (881) |
| Net loss | **$(13,447)** | $(8,989) | $(4,458) | **$(51,145)** | $(82,134) | $30,989 |

22

#### Total Revenue, Net

Total net revenue was $54.5 million and $55.8 million for the three months ended September 30, 2023 and September 30, 2022, respectively. Total net revenue was $130.4 million and $105.6 million for the nine months ended September 30, 2023 and September 30, 2022, respectively.

We currently have two main customers for U.S. commercial sales of LUPKYNIS and a collaboration partnership with Otsuka for sales of semi-finished product and license, royalty and collaboration revenue in the Otsuka Territories.

The percentage of total revenues, net from our main customers were as follows:

|  | Three months ended September 30, 2023 | 2022 | Nine months ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Product revenue, net | **77%** | 48% | **90%** | 74% |
| License, royalty and collaboration revenue | **21%** | 52% | **9%** | 26% |

#### Product Revenue, Net

Net product revenue was $40.8 million and $25.5 million for the three months ended September 30, 2023 and September 30, 2022, respectively. Net product revenue was $116.2 million and $75.1 million for the nine months ended September 30, 2023 and September 30, 2022, respectively. The increase for both periods is primarily due to an increase from our two main customers for LUPKYNIS sales, driven predominantly by further penetration of the LN market. This penetration can be demonstrated, in part, by 436 and 1,353 additional prescriptions (which we generally refer to as patient start forms (PSFs)) received during the three and nine months ended September 30, 2023, compared to 374 and 1,244 PSFs received during the three and nine months ended September 30, 2022; as well as a total of approximately 1,939 patients on therapy as of September 30, 2023, compared to approximately 1,354 patients on therapy as of September 30, 2022.

#### License, Royalty and Collaboration Revenue

License, royalty and collaboration revenue was $13.7 million and $30.3 million for the three months ended September 30, 2023 and September 30, 2022, respectively. License, royalty and collaboration revenue was $14.2 million and $30.5 million for the nine months ended September 30, 2023 and September 30, 2022, respectively. The decrease for both periods is due to the recognition of a $30.0 million regulatory milestone from Otsuka following the EC marketing authorization of LUPKYNIS in September 2022 partially offset by the recognition of a $10.0 million pricing and reimbursement milestone in September 2023 and additional collaboration revenue from Otsuka.

#### Cost of Sales

Cost of sales were $6.8 million and $2.4 million for the three months ended September 30, 2023 and September 30, 2022, respectively. The increase is primarily due to increased sales of LUPKYNIS, coupled with the amortization of the monoplant finance right of use asset, which was placed into service in late June 2023

Cost of sales were $8.8 million and $4.3 million for the nine months ended September 30, 2023 and September 30, 2022, respectively. The increase is primarily due to increased sales of LUPKYNIS coupled with the amortization of the monoplant finance right of use asset, which was placed into service during late June 2023, partially offset by higher inventory reserves in 2022 due to the write-down of FDA validation batches.

#### Gross Margin

Gross margin for the three months ended September 30, 2023 and September 30, 2022 were approximately 88% and 96%, respectively. Gross margin for the nine months ended September 30, 2023 and September 30, 2022 were approximately 93% and 96% respectively.

#### Selling, General and Administrative Expenses

SG&A expenses decreased to $47.8 million for the three months ended September 30, 2023 compared to $52.2 million for the three months ended September 30, 2022. For the nine months ended September 30, 2023 and September 30, 2022, SG&A expenses were $145.0 million and $148.9 million, respectively. SG&A expenses consisted of the following:

*(in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Salaries, incentive pay and employee benefits | **19,563** | 20,422 | **$61,851** | $62,487 |
| Professional fees and services | **12,716** | 17,920 | **37,202** | 44,487 |
| Share-based compensation expense | **9,560** | 6,625 | **26,969** | 21,480 |
| Other corporate costs | **3,284** | 4,093 | **10,546** | 12,091 |
| Travel, trade shows and sponsorships | **2,636** | 3,109 | **8,396** | 8,353 |
|  | **$47,759** | $52,169 | **$144,964** | $148,898 |

For the three months ended September 30, 2023 compared to the same period ended September 30, 2022 the primary drivers for the decrease was a decrease in professional fees and services (including legal fees with respect to litigation matters that occurred during the three months ended September 30, 2022), partially offset by an increase in share-based compensation expense.

For the nine months ended September 30, 2023 compared to the same period ended September 30, 2022, the decrease was primarily due to a decrease in professional fees and services (including legal fees) and other corporate costs (including rent and insurance), partially offset by an increase in share-based compensation expense.

#### Research and Development Expenses

R&D expenses were $13.6 million and $11.0 million for the three months ended September 30, 2023 and September 30, 2022, respectively. For the nine months ended September 30, 2023 and September 30, 2022, R&D expenses were $39.4 million and $35.1 million, respectively. R&D expenses consisted of the following:

*(in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Contract research organizations (CRO) and developmental expenses | **$5,751** | $3,075 | **$14,046** | $15,460 |
| Clinical supply and distribution | **2,208** | 3,077 | **8,355** | 6,173 |
| Salaries, incentive pay and employee benefits | **3,619** | 3,159 | **10,879** | 9,429 |
| Share-based compensation expense | **1,975** | 1,489 | **5,679** | 3,531 |
| Other costs | **52** | 173 | **454** | 525 |
|  | **$13,605** | $10,973 | **$39,413** | $35,118 |

For the three months ended September 30, 2023 compared to the same period ended September 30, 2022, the primary drivers for the increase were due to an increase in CRO and developmental costs as the Company advances its preclinical assets.

For the nine months ended September 30, 2023 compared to the same period ended September 30, 2022, the primary drivers for the increase were an increase in costs to advance the Company's preclinical assets and an increase in share-based compensation expense partially offset by the decrease in costs associated with the completion of the AURORA 2 continuation study and drug interaction study, which were substantially completed in 2022.

#### Other (Income) Expense, net

Other (income) expense, net was $2.6 million and $(0.3) million for the three months ended September 30, 2023 and September 30, 2022, respectively. The change is primarily related to expenses incurred for shareholder matters partially offset by foreign exchange gain related to the revaluation of the monoplant finance lease liability.

Other (income) expense, net was $(0.7) million and $0.6 million for the nine months ended September 30, 2023 and September 30, 2022, respectively. The change is primarily related to change in fair value assumptions driven predominantly by rising interest rates related to our deferred compensation liability and foreign exchange gain on revaluation of the monoplant finance lease liability, partially offset by expenses incurred for shareholder matter.

#### Interest Expense

Interest expense was $1.4 million and nil for the three months ended September 30, 2023 and September 30, 2022, respectively. Interest expense was $1.5 million and nil for the nine months ended September 30, 2023 and September 30, 2022, respectively. The interest expense is due to the commencement of the monoplant finance lease during the three months ended June 30, 2023.

#### Interest Income

Interest income was $4.5 million and $1.5 million for the three months ended September 30, 2023 and September 30, 2022, respectively. Interest income was $12.4 million and $2.2 million for the nine months ended September 30, 2023 and September 30, 2022, respectively. The increase for both periods is due to higher yields on our investments as a result of increased interest rates.

### Liquidity and Capital Resources

As of September 30, 2023, we had cash, cash equivalents and restricted cash of $46.4 million and investments of $292.1 million compared to cash, cash equivalents and restricted cash of $94.2 million and investments of $295.2 million at December 31, 2022. The decrease in cash, cash equivalents and restricted cash and investments is primarily related to the continued investment in commercialization activities and post approval commitments of our approved drug, LUPKYNIS, inventory purchases, advancement of our pipeline and monoplant payments partially offset by an increase in cash receipts from sales of LUPKYNIS. Cash, cash equivalents and restricted cash and investments are primarily held in U.S. dollars. As of September 30, 2023 and December 31, 2022, we had working capital of $352.6 million and $396.4 million, respectively.

We are devoting the majority of our operational efforts and financial resources towards the commercialization and post- approval commitments of our approved drug, LUPKYNIS. We are also expending efforts towards the development of our AUR200 and AUR300 assets. Taking into consideration the cash and cash equivalents and investments as of September 30, 2023, we believe that our cash position is sufficient to fund our current plans which include funding commercial activities, such as our FDA related post approval commitments, manufacturing and packaging commercial drug supply, funding our supporting commercial infrastructure, advancing our R&D programs and funding our working capital obligations for at least the next few years.

### Cash Flow Summary

The following table summarizes our cash flows for the nine months ended September 30, 2023 and September 30, 2022:

*(in thousands)*

| Net cash (used in) provided by: | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Operating activities | **$(47,773)** | $(89,979) |
| Investing activities | **(449)** | (57,614) |
| Financing activities | **447** | 1,745 |
| Net decrease in cash and cash equivalents | **$(47,775)** | $(145,848) |

Net cash used in operating activities was $47.8 million for the nine months ended September 30, 2023 compared to $90.0 million for the nine months ended September 30, 2022. The decrease in net cash used in operating activities is primarily due to an increase in cash receipts from sales of LUPKYNIS. See "Total Revenue" above for further discussion regarding our increased sales of LUPKYNIS.

Cash used in investing activities during the nine months ended September 30, 2023 was $0.4 million compared to cash used in investing activities of $57.6 million during the nine months ended September 30, 2022. The decrease was primarily related to the timing of purchases of investments and the second capital expenditure payment for the monoplant, offset by proceeds of maturities of investments.

Cash provided by financing activities during the nine months ended September 30, 2023 was $0.4 million compared to cash provided by financing activities of $1.7 million during the nine months ended September 30, 2022. The decrease was primarily due to increased proceeds from the exercise of stock options and employee share purchase plan partially offset by the principal portion of the finance lease payment for the monoplant.

### Off‑Balance Sheet Arrangements

During the periods presented, we did not have, nor do we currently have, any off‑balance sheet arrangements as such term is defined in Item 303(a)(4)(ii) of Regulation S-K under the Securities Act.

### Contractual Obligations

There have been no material changes outside the ordinary course of business to our contractual obligations and commitments as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022.

## Market risk

As filed, 5,893 characters.

Our activities can expose us to market risks which include interest rate risk, foreign currency risk, inflation risk and credit risk. Risk management is carried out by management under policies approved by our Board of Directors, with oversight provided by the Audit Committee of our Board of Directors. Our overall risk management program seeks to minimize adverse effects on our financial performance.

### Interest Rate Risk

Financial assets and financial liabilities with variable interest rates expose us to cash flow interest rate risk. We manage our interest rate risk by maximizing the interest income earned on excess funds while maintaining the liquidity necessary to conduct

operations on a day-to-day basis. As of September 30, 2023, our investment portfolio includes cash, cash equivalents, restricted cash and investments of $338.5 million that earn interest at various rates. Our investment portfolio is maintained in accordance with our investment policy, which defines allowable investments, specifies credit quality standards and limits the credit exposure of any single issuer. Our investments held during the year were comprised of highly rated instruments such as certificates of deposits, money market instruments, obligations issued by the U.S. government and U.S. government agencies as well as corporate debt securities. As of September 30, 2023, these instruments primarily have a maturity of less than a year.

As of September 30, 2023, a hypothetical decrease of 100 basis points on the interest rates of our investments would result annually in $3.0 million less interest in our portfolio.

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

### Foreign Currency Risk

We are exposed to financial risk related to the fluctuation of foreign currency exchange rates. Foreign currency risk for the Company is the risk variations in exchange rates between the U.S. dollar and foreign currencies, primarily with the Canadian dollar, Swiss Franc, Euro and Great British Pound, which could affect our operating and financial results.

As of September 30, 2023, we had an $85.5 million finance lease liability on our balance sheet related to the monoplant. An assumed 10% fluctuation in the Swiss Franc would have an approximate $8.6 million fluctuation in the valuation of the lease liability.

As of September 30, 2023, we had approximately $7.0 million of foreign denominated third-party payables included in our accounts payable and accrued liabilities. An assumed 10% fluctuation in the exchange rates associated with those payables would have an approximate $0.7 million fluctuation in the amounts due.

There were no other foreign currency fluctuations that would have had a material impact on our financial condition or results of operations as of September 30, 2023.

### Inflation Risk

Inflation has been increasing in recent periods and is expected to continue to be volatile in the future. Inflation generally affects us by increasing our cost of labor, commercial support, manufacturing and clinical trial expenditures. In addition, inflation also impacts our government rebates as it pertains to the consumer price index (CPI) penalty. Our investment portfolio may experience the risk of realized losses on our investments if we were to sell before maturity due to the market volatility caused by increased interest rates.

### Credit Risk

Our exposure to credit risk generally consists of cash and cash equivalents, investments and accounts receivable. We place our cash and cash equivalents with highly rated financial institutions and invest the excess cash in highly rated investments. Our investment policy limits investments to certain types of debt and money market instruments issued by institutions primarily with investment grade credit ratings and places restriction on maturities and concentrations by asset class and issuer. We 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, due to the short-term nature of the investments and our current ability to hold these investments to maturity. We actively monitor our cash and portfolio of investments and in particular have validated that we at no point held any deposits or securities or maintained any accounts at any banks that were subject to action from the Federal Deposit Insurance Corporation (FDIC).

We are subject to credit risk in connection with our accounts receivable due from our two main customers for U.S. commercial sales of LUPKYNIS and a collaboration partnership with Otsuka for sales of semi-finished product and license, royalty and collaboration revenue in the Otsuka Territories which accounted for approximately 97% of our net trade accounts receivable balances as of September 30, 2023. We monitor economic conditions, including the creditworthiness of our customers and collaboration partner. We regularly communicate with our customers regarding the status of receivable balances and have not experienced and issues with collectability. The timing between the recognition of revenue for product sales and the receipt of payment is not significant. Our standard credit terms range from 30 to 45 days. We estimate the allowance for doubtful accounts using the current expected credit loss, or CECL, model. Under the CECL model, the allowance for doubtful accounts reflects the net amount expected to be collected from the account receivables. During the quarter ended September 30, 2023, we did not recognize any allowance for doubtful accounts receivable related to credit risk for our customers or write any amounts off.

## Controls and procedures

As filed, 1,232 characters.

### Evaluation of Disclosure Controls and Procedures

Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, 2023, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

### Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the quarter ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 4,768 characters.

Under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 we identified important factors that could affect our financial performance and could cause our actual results for future periods to differ materially from our anticipated results or other expectations, including those expressed in any forward-looking statements made in this Quarterly Report. There has been no material change in our risk factors subsequent to the filing of our prior reports referenced above except as mentioned below. However, the risks described in our reports are not the only risks we face. Additional risks and uncertainties that we currently deem to be immaterial or not currently known to us, as well as other risks reported from time to time in our reports to the SEC, also could cause our actual results to differ materially from our anticipated results or other expectations.

In response to the ongoing armed conflict in Ukraine, the U.S. government, numerous state governments, the EU and other countries in which we conduct business have imposed a wide range of economic sanctions that restrict commerce and business dealings with Russia, certain regions of Ukraine and certain entities. This conflict may also precipitate or amplify the other risks described herein and in our Annual Report on Form 10-K for the year ended December 31, 2022, Part I. Item A. Risk Factors including risks relating to cyber security, global economic conditions and supply chains which could adversely affect our business, operations and financial condition and results.

***We report on various metrics relating to LUPKYNIS activity, and none of these metrics, in and of themselves, is indicative of current or future financial performance***

We report on various metrics relating to LUPKYNIS activity, including the number of prescriptions/PSFs, conversion rates (being the proportion of PSFs that convert into patients on therapy), persistency rates (being how long patients on therapy remain on therapy), and numbers of patients on therapy. None of these metrics, in and of themselves, is indicative of current or future financial performance. There is no guarantee that a patient for whom we receive a PSF will become a patient on therapy. Converting a patient from a PSF into a patient on therapy includes multiple steps, many of which are outside of our control, such as patients and doctors needing to coordinate applications relating to insurance coverage for LUPKYNIS, and potentially one or more appeals if coverage is denied initially. We refer to patients for whom we receive a PSF but that never convert into a patient on therapy as a cancellation. Cancellations result in zero revenue. Even when a patient becomes a patient on therapy, there is no guarantee that they will be a patient for which we receive revenue (as certain patients are eligible for our free drug program), or that they will remain on drug for any period of time (whether due to a reduction in LN activity, an actual (or perceived) drug-related adverse event, or from a lack of taking medication, or otherwise). Patients on therapy may also not take their prescribed dose of LUPKYNIS in the manner and at the times prescribed by their doctor, which could result in reduced orders of LUPKYNIS in respect of that patient on therapy versus a patient that is prescribed a higher dose of LUPKYNIS and follows their prescription exactly as prescribed. We refer to patients who have converted from a PSF into a patient on therapy, but who subsequently cease treatment (for any reason), as discontinuations. A patient on therapy who discontinues treatment generally results in zero future revenue, and discontinuations can occur at any time once a patient commences therapy.

Accordingly, our PSF activity, and related metrics, are not in and of themselves directly indicative of our current or future financial performance.

Our revenue to date is primarily the result of our two main customers in the United States (our two specialty pharmacies) who order LUPKYNIS for dispensing to patients (see further under "Policies and Significant Judgments and Estimates - Product Revenues" earlier in this Quarterly Report for further discussion). The orders for product from our two main customers do not necessarily correlate to our PSF numbers. Our revenue could therefore fluctuate in a manner contrary to our PSF trends, both where revenue could be greater than a PSF trend would indicate, or where revenue could be lesser than a PSF trend would indicate. Therefore, while we report on PSFs and related figures to provide an indication of potential prescription activity for LUPKYNIS, there is no single metric that is directly correlated to, or indicative of, our future financial performance.

Filed Nov 2, 2023.
Source: SEC EDGAR, the filing index for accession 0001600620-23-000044. Last ingested by Listed: Oct 30, 2026, 08:08 ET. No prices; not investment advice.