Aurinia Pharmaceuticals(AUPH) - 2021 Q2 - Quarterly Report

FORM 10-Q Filing Information This report is a Quarterly Report (Form 10-Q) for the period ended June 30, 2021, filed by Aurinia Pharmaceuticals Inc - The report is a Quarterly Report (Form 10-Q) for the period ended June 30, 2021, filed by Aurinia Pharmaceuticals Inc[2][3] - As of August 4, 2021, the registrant had 128,395,927 common shares outstanding, traded on The Nasdaq Global Market LLC under the symbol AUPH[4] PART I. FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, shareholders' equity, and cash flows, along with detailed notes and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements (Unaudited) This section provides the unaudited condensed consolidated financial statements for Aurinia Pharmaceuticals Inc. and its subsidiaries, including the balance sheets, statements of operations and comprehensive loss, statements of shareholders' equity, and statements of cash flows, along with detailed notes explaining the financial figures and accounting policies Condensed Consolidated Balance Sheets The company's total assets decreased from $463.7 million at December 31, 2020, to $386.3 million at June 30, 2021, primarily driven by a decrease in cash and cash equivalents and long-term investments, partially offset by an increase in short-term investments and inventories. Total liabilities remained relatively stable, while total shareholder's equity decreased Condensed Consolidated Balance Sheets (in thousands) | Item | June 30, 2021 (unaudited) | December 31, 2020 | | :------------------------------------- | :-------------------------- | :------------------ | | ASSETS | | | | Cash and cash equivalents | $121,561 | $272,350 | | Short-term investments | $197,176 | $125,979 | | Total current assets | $349,689 | $419,427 | | Total assets | $386,268 | $463,661 | | LIABILITIES | | | | Total current liabilities | $29,315 | $31,997 | | Total liabilities | $54,011 | $55,911 | | SHAREHOLDER'S EQUITY | | | | Total shareholder's equity | $332,257 | $407,750 | | Total liabilities and shareholders' equity | $386,268 | $463,661 | Condensed Consolidated Statements of Operations and Comprehensive Loss For the three and six months ended June 30, 2021, the company reported significant product revenue following LUPKYNIS approval, leading to a total revenue of $6.6 million and $7.5 million, respectively. However, increased selling, general and administrative expenses, primarily due to commercial launch activities, resulted in a net loss of $47.0 million and $97.4 million for the respective periods, an increase from the prior year Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands) | Item | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Product revenue, net | $6,591 | $0 | $7,475 | $0 | | Total revenue | $6,620 | $29 | $7,534 | $59 | | Cost of sales | $308 | $0 | $356 | $0 | | Selling, general and administrative | $43,786 | $15,449 | $83,068 | $26,502 | | Research and development | $10,091 | $11,076 | $19,924 | $24,911 | | Loss from operations | $(47,134) | $(26,863) | $(97,677) | $(53,923) | | Net loss | $(47,010) | $(26,544) | $(97,389) | $(52,476) | | Basic and diluted loss per share | $(0.37) | $(0.24) | $(0.76) | $(0.47) | Condensed Consolidated Statements of Shareholders' Equity Total shareholder's equity decreased from $407.8 million at December 31, 2020, to $332.3 million at June 30, 2021, primarily due to the net loss incurred during the period, partially offset by share-based compensation and proceeds from stock option exercises Changes in Total Shareholders' Equity (in thousands) | Item | Balance at Dec 31, 2020 | Shares issued on exercise of stock options | Share-based compensation | Net loss | Balance at June 30, 2021 | | :------------------------------------- | :---------------------- | :----------------------------------------- | :----------------------- | :------- | :----------------------- | | Common Shares Amount | $944,328 | $9,518 | $0 | $0 | $954,572 | | Additional paid-in capital | $39,383 | $(3,240) | $15,574 | $0 | $51,022 | | Accumulated deficit | $(575,156) | $0 | $0 | $(97,389) | $(672,545) | | Total Shareholders' Equity | $407,750 | $6,278 | $15,574 | $(97,389) | $332,257 | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2021, net cash used in operating activities significantly increased to $91.5 million, driven by commercial launch expenses and inventory payments. Investing activities also used $65.6 million, primarily due to investment purchases and an upfront lease payment, partially offset by proceeds from investment maturities. Financing activities provided $6.3 million from stock option exercises Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(91,520) | $(44,646) | | Net cash used in investing activities | $(65,577) | $(32,835) | | Net cash provided by financing activities | $6,308 | $3,876 | | Net decrease in cash and cash equivalents | $(150,789) | $(73,605) | | Cash and cash equivalents, end of period | $121,561 | $232,414 | Notes to Unaudited Condensed Consolidated Financial Statements These notes provide detailed explanations and disclosures regarding the company's financial statements, including its business operations, accounting policies, specific asset and liability components, revenue recognition, and other significant financial commitments and events Note 1. Organization and Description of Business Aurinia Pharmaceuticals Inc. is a commercial-stage biopharmaceutical company focused on therapies for serious diseases, with LUPKYNIS approved by the FDA on January 22, 2021, for active lupus nephritis. The company's common shares will solely trade on Nasdaq from July 30, 2021, following voluntary delisting from TSX - Aurinia Pharmaceuticals Inc. is a commercial-stage biopharmaceutical company focused on developing and commercializing therapies for targeted patient populations with serious diseases and high unmet medical needs[20] - On January 22, 2021, the U.S. Food and Drug Administration (FDA) approved LUPKYNIS for the treatment of adult patients with active lupus nephritis (LN)[20] - As of July 30, 2021, the Company's common shares will solely trade on the Nasdaq Global Market (Nasdaq) under the symbol AUPH, following voluntary delisting from the Toronto Stock Exchange (TSX)[21] Note 2. Basis of Presentation The unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP for interim information, include the accounts of the company and its wholly-owned subsidiaries, and are presented in U.S. dollars. Management believes the company has sufficient resources to fund operations for at least one year - The unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information and include the accounts of the Company and its wholly owned subsidiaries[22][24] - The financial statements are presented in U.S. dollars, which is the Company's functional currency[25] - The Company believes it has sufficient resources (cash, cash equivalents, and investments of $323.7 million as of June 30, 2021) to fund its operations for at least one year beyond the issuance date of the financial statements[26] Note 3. Summary of Significant Accounting Policies This note outlines the critical accounting estimates and significant judgments used in preparing the financial statements, including revenue recognition, cost of sales, inventory, share-based compensation, and intangible assets. It also details policies for investments, product and license revenue recognition, and recently adopted accounting pronouncements - Critical accounting estimates and judgments include revenue recognition, cost of sales, inventory, royalty obligation, contingent accruals, clinical trial liabilities, share-based compensation, intangible assets, leases, and income taxes[28][29] - Revenue from product sales (LUPKYNIS) is recognized when the customer obtains control, typically upon delivery, with reserves established for variable consideration like discounts and rebates[35][36] - The Company is exposed to credit risk from cash, investments, and accounts receivable, which is minimized by investing in diverse financial instruments and monitoring customer creditworthiness[30][32] Note 4. Investments As of June 30, 2021, the company held $202.2 million in total investments, primarily commercial paper and bonds, with $48.5 million classified as held-to-maturity and $153.6 million as available-for-sale. This represents an increase from $150.4 million at December 31, 2020 Total Investments (in thousands) | Investment Type | June 30, 2021 | December 31, 2020 | | :------------------------------------- | :------------ | :---------------- | | Short-term investments | $197,176 | $125,979 | | Long-term investments (Corporate Bonds) | $5,004 | $24,380 | | Total investments | $202,180 | $150,359 | - As of June 30, 2021, $48.5 million of investments were classified as held-to-maturity (amortized cost) and $153.6 million as available-for-sale (fair market value)[59] - The Company recognized $7 thousand and $13 thousand in unrealized gains on available-for-sale securities for the three and six months ended June 30, 2021, respectively[58] Note 5. Inventories Total inventories increased to $17.4 million at June 30, 2021, from $13.9 million at December 31, 2020, primarily due to the capitalization of finished goods inventory for LUPKYNIS following FDA approval Inventory Components (in thousands) | Component | June 30, 2021 | December 31, 2020 | | :---------------- | :------------ | :---------------- | | Work in process | $13,791 | $13,927 | | Finished goods | $3,585 | $0 | | Total inventories | $17,376 | $13,927 | - The Company commenced capitalization of LUPKYNIS inventory costs during the third quarter of 2020, once FDA approval was deemed probable[61] Note 6. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets increased to $9.2 million at June 30, 2021, from $7.2 million at December 31, 2020, mainly driven by an increase in prepaid deposits Prepaid Expenses and Other Current Assets (in thousands) | Item | June 30, 2021 | December 31, 2020 | | :------------------------------------- | :------------ | :---------------- | | Prepaid assets | $4,092 | $3,701 | | Prepaid insurance | $87 | $2,054 | | Other current assets | $886 | $1,018 | | Prepaid deposits | $4,093 | $398 | | Total prepaid expenses and other current assets | $9,158 | $7,171 | Note 7. Intangible Assets Net intangible assets slightly decreased to $9.3 million at June 30, 2021, from $9.3 million at December 31, 2020, with amortization expense for the six months ended June 30, 2021, at $1.1 million Intangible Assets, Net (in thousands) | Item | June 30, 2021 | December 31, 2020 | | :------------------------------------- | :------------ | :---------------- | | Patents, net | $350 | $448 | | Acquired intellectual property and reacquired rights, net | $6,838 | $7,356 | | Internal-use software implementation costs, net | $2,103 | $1,528 | | Total intangible assets, net | $9,291 | $9,332 | - Amortization expense for intangible assets was $1.1 million for the six months ended June 30, 2021, compared to $0.6 million for the same period in 2020[66] Note 8. Property and Equipment, net Net property and equipment increased slightly to $4.81 million at June 30, 2021, from $4.79 million at December 31, 2020, with construction in progress decreasing significantly while leasehold improvements and office equipment increased Property and Equipment, Net (in thousands) | Item | June 30, 2021 | December 31, 2020 | | :------------------------------------- | :------------ | :---------------- | | Construction in progress | $455 | $4,467 | | Leasehold improvements | $2,978 | $34 | | Office equipment and furniture | $1,621 | $83 | | Computer equipment | $265 | $381 | | Less accumulated depreciation | $(506) | $(179) | | Property and equipment, net | $4,813 | $4,786 | - Depreciation expense for the six months ended June 30, 2021, was $0.3 million, compared to nil for the same period in 2020[68] Note 9. Lease Obligations The company has operating lease obligations for offices in Victoria and Rockville, with total lease liabilities of $8.9 million at June 30, 2021. A new finance lease agreement with Lonza for a manufacturing facility, valued at approximately $96.0 million, is expected to commence in 2023 Operating Lease ROU Assets and Lease Liabilities (in thousands) | Item | June 30, 2021 | December 31, 2020 | | :------------------------------------- | :------------ | :---------------- | | Operating lease right-of-use assets | $5,615 | $5,489 | | Current operating lease liabilities | $1,112 | $788 | | Non-current operating lease liabilities | $7,824 | $7,619 | | Total lease liabilities | $8,936 | $8,407 | - Total rent expense for the six months ended June 30, 2021, was $616 thousand, up from $403 thousand in the prior year[74] - The Company expects to account for a collaborative agreement with Lonza to build a dedicated manufacturing facility as a finance lease, with present value of minimum lease payments totaling approximately $96.0 million, commencing in April 2023[78][79] Note 10. Accounts Payable and Accrued Liabilities Total accounts payable and accrued liabilities increased to $25.8 million at June 30, 2021, from $24.8 million at December 31, 2020, primarily due to an increase in other accrued liabilities and R&D projects Accounts Payable and Accrued Liabilities (in thousands) | Item | June 30, 2021 | December 31, 2020 | | :------------------------------------- | :------------ | :---------------- | | Trade payables | $2,535 | $2,635 | | Other accrued liabilities | $7,996 | $6,616 | | Accrued R&D projects | $4,483 | $4,185 | | Employee accruals | $10,817 | $11,361 | | Total accounts payable and accrued liabilities | $25,831 | $24,797 | Note 11. Non-current Liabilities Other non-current liabilities increased slightly to $16.9 million at June 30, 2021, from $16.3 million at December 31, 2020, primarily consisting of future potential employee benefit obligations - Other non-current liabilities were $16.9 million as of June 30, 2021, and $16.3 million as of December 31, 2020[82] - These liabilities primarily include obligations for future potential employee benefits contingent on uncertain future events[82] Note 12. Fair Value Measurements The company's financial assets measured at fair value totaled $323.7 million at June 30, 2021, primarily consisting of cash and cash equivalents and investments, categorized into Level 1 and Level 2 inputs Financial Assets Measured at Fair Value (in thousands) | Item | June 30, 2021 Total | December 31, 2020 Total | | :------------------------------------- | :------------------ | :---------------------- | | Deposits held with banks | $72,686 | $130,807 | | Short-term highly liquid investments | $84,476 | $141,543 | | Investments | $166,579 | $150,359 | | Total | $323,741 | $422,709 | - The Company's financial instruments are categorized into Level 1 (quoted prices in active markets) and Level 2 (observable inputs other than quoted prices) of the fair value hierarchy, with no Level 3 instruments[84][85] Note 13. License and Collaboration Agreements The company entered into a collaboration and license agreement with Otsuka in December 2020, receiving an upfront payment of $50.0 million for LUPKYNIS development and commercialization in certain regions. Potential future regulatory milestones of up to $50.0 million and tiered royalties on net sales are fully constrained as of June 30, 2021 - On December 17, 2020, Aurinia entered into a collaboration and license agreement with Otsuka Pharmaceutical Co., Ltd. for LUPKYNIS in the EU, Japan, and other specified territories[88] - Aurinia received an upfront cash payment of $50.0 million for the license agreement, recognized in December 2020[89][90] - The agreement includes potential regulatory milestones of up to $50.0 million and tiered royalties (10-20%) on future net sales, which were fully constrained as of June 30, 2021, due to uncertainty of achievement[89][91] Note 14. Net Loss per Common Share Basic and diluted net loss per common share for the three and six months ended June 30, 2021, was $(0.37) and $(0.76), respectively, compared to $(0.24) and $(0.47) for the same periods in 2020. Stock options and warrants were anti-dilutive and excluded from diluted EPS calculation Net Loss per Common Share (in thousands, except per share data) | Item | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(47,010) | $(26,544) | $(97,389) | $(52,476) | | Weighted average common shares outstanding | 128,222 | 112,576 | 127,814 | 112,392 | | Net loss per common share | $(0.37) | $(0.24) | $(0.76) | $(0.47) | - Stock options (14,778 thousand) and warrants (1,014 thousand) were anti-dilutive and excluded from the computation of diluted loss per share for the six months ended June 30, 2021[95] Note 15. Share-based Compensation The company's equity incentive plan and ESPP allow for the issuance of additional shares. Share-based compensation expense for the six months ended June 30, 2021, was $15.6 million, significantly higher than $7.7 million in the prior year, reflecting increased grants and performance awards - The Company's Amended and Restated Equity Incentive Plan allows for an issuance of up to an additional 11.5 million shares, and the 2021 Employee Stock Purchase Plan (ESPP) allows for up to 2.5 million shares[97] Share-based Compensation Expense (in thousands) | Category | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Research and development | $1,089 | $1,080 | $2,163 | $2,297 | | Selling, general and administrative | $6,548 | $3,122 | $13,189 | $5,401 | | Capitalized under inventories | $116 | $0 | $222 | $0 | | Total share-based compensation expense | $7,753 | $4,202 | $15,574 | $7,698 | - As of June 30, 2021, there was $38.2 million of unrecognized share-based compensation expense related to unvested awards, expected to be recognized over approximately 1.2 years[104] Note 16. Income Taxes The company recognized income tax expense of $26 thousand for the six months ended June 30, 2021, due to income in a specific jurisdiction, which was not offset by tax benefits from losses in other jurisdictions due to valuation allowances - Income tax expense was $18 thousand for the three months and $26 thousand for the six months ended June 30, 2021[105] - The tax expense is due to income in a certain jurisdiction and is not offset by tax benefits from losses in other significant jurisdictions, which are fully offset by a valuation allowance[105] Note 17. Related Party Transactions The company had a $2.0 million payable to ILJIN, a related party, as of June 30, 2021, down from $6.0 million at December 31, 2020, following a $4.0 million payment - The amount payable to ILJIN, a related party (due to over 5% equity ownership), was $2.0 million as of June 30, 2021, reduced from $6.0 million at December 31, 2020, after a $4.0 million payment in Q1 2021[107] Note 18. Commitments and Contingencies The company is subject to various claims and legal proceedings, none of which are expected to have a material adverse effect. It also has manufacturing commitments with Lonza totaling approximately $25.4 million through 2023 - Management believes the ultimate resolution of current claims and legal proceedings will not have a material adverse effect on the consolidated financial position[109] - The Company has remaining total non-cancellable future manufacturing commitments with Lonza of approximately $25.4 million through 2023, with $3.5 million paid during Q2 2021[112] Note 19. Subsequent Event Effective July 30, 2021, the company voluntarily delisted its common shares from the Toronto Stock Exchange (TSX), with trading continuing solely on the Nasdaq Global Market under the symbol AUPH - On July 16, 2021, the Company announced its voluntary delisting of common shares from the TSX, effective July 30, 2021[113] - The Company's common shares will continue to trade on the Nasdaq under the symbol AUPH[113] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, highlighting key business developments, the impact of the COVID-19 pandemic, critical accounting policies, and a detailed analysis of revenues, expenses, liquidity, and cash flows Overview Aurinia is a commercial-stage biopharmaceutical company focused on LUPKYNIS for active lupus nephritis, which was FDA-approved in January 2021. LUPKYNIS is a calcineurin inhibitor with potential best-in-class differentiation due to increased potency, limited variability, and fewer side effects compared to earlier generation CNIs - Aurinia is a commercial-stage biopharmaceutical company focused on developing and commercializing therapies for serious diseases with high unmet medical needs[116] - LUPKYNIS, approved by the FDA in January 2021 for active lupus nephritis (LN), is a calcineurin inhibitor (CNI) immunosuppressant[116][117] - Key potential benefits of LUPKYNIS include increased potency, limited inter/intra patient variability, less cholesterolemia/triglyceridemia, and limited incidence of glucose intolerance/diabetes compared to earlier generation CNIs[118][119] Developments Key developments include FDA approval of LUPKYNIS in January 2021, positive interim results from the AURORA 2 continuation study, shareholder approval of equity incentive plans, a new board appointment, Otsuka's EU marketing authorization application for voclosporin, and the voluntary delisting from TSX - FDA approved LUPKYNIS on January 22, 2021, for active LN, with post-approval studies required[120] - Interim analysis of the AURORA 2 continuation study showed sustained reductions in proteinuria with no change in eGFR at 104 weeks[120] - Shareholders approved an additional 11.5 million shares for the Equity Incentive Plan and 2.5 million shares for the 2021 ESPP in June 2021[120] - Otsuka filed an initial marketing authorization application with the European Medicines Agency for voclosporin in the EU, Norway, Iceland, and Liechtenstein[120] - The Company voluntarily delisted its common shares from the TSX, effective July 30, 2021, continuing to trade solely on Nasdaq[120] Impact of COVID-19 Pandemic The company acknowledges the potential for detrimental impacts from a prolonged COVID-19 pandemic on its clinical trials, commercial launch of LUPKYNIS, and access to capital markets - A prolonged COVID-19 pandemic could detrimentally impact ongoing/future clinical trials, the commercial launch of LUPKYNIS, and the ability to access capital markets[121] Critical Accounting Policies and Significant Judgments and Estimates The company's financial statements require significant estimates and judgments in areas such as revenue recognition, cost of sales, inventory, share-based compensation, and income taxes, with no material changes to these policies since the last annual report - The most significant areas involving critical estimates, judgments, and assumptions include revenue recognition, cost of sales, inventory, royalty obligation, contingent accruals, clinical trial liabilities, share-based compensation, intangible assets, leases, and income taxes[123][124] - There have been no material changes to the Company's critical accounting policies and estimates compared to those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2020[123] Results of Operations The company experienced a significant increase in product revenue following the LUPKYNIS launch, but this was offset by a substantial rise in selling, general and administrative expenses due to commercialization efforts, leading to an increased net loss compared to the prior year. Research and development expenses decreased due to the completion of certain trials and capitalization of supply costs Revenues Total revenue for the three and six months ended June 30, 2021, was $6.6 million and $7.5 million, respectively, primarily driven by net product revenue from LUPKYNIS, which was zero in the prior year periods Total Revenue (in thousands) | Item | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Product revenue, net | $6,591 | $0 | $7,475 | $0 | | License revenue | $29 | $29 | $59 | $59 | | Total revenue | $6,620 | $29 | $7,534 | $59 | - The significant increase in total revenue for the three and six months ended June 30, 2021, was primarily due to product revenue from LUPKYNIS following FDA approval in January 2021[127] Cost of Sales Cost of sales increased to $308 thousand and $356 thousand for the three and six months ended June 30, 2021, respectively, from nil in the prior year, directly correlating with the commercial sales of LUPKYNIS, resulting in a gross margin of approximately 95% Cost of Sales (in thousands) | Item | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cost of sales | $308 | $0 | $356 | $0 | - The increase in cost of sales was primarily a result of commercial sales of LUPKYNIS, leading to a gross margin of approximately 95% for both the three and six months ended June 30, 2021[128] Selling, General and Administrative Expenses SG&A expenses significantly increased to $43.8 million for the three months and $83.1 million for the six months ended June 30, 2021, from $15.4 million and $26.5 million in the prior year periods, primarily due to expanded commercial and administrative functions supporting the LUPKYNIS launch, including increased salaries, professional fees, and share-based compensation Selling, General and Administrative Expenses (in thousands) | Item | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Salaries, incentive pay and employee benefits | $19,548 | $5,002 | $38,742 | $8,580 | | Professional fees and services | $12,709 | $5,702 | $21,426 | $9,561 | | Share-based compensation expense | $6,548 | $3,122 | $13,189 | $5,401 | | Other public company costs, facility costs, insurance, IT, amortization | $2,993 | $1,476 | $6,275 | $2,518 | | Travel, trade shows and sponsorships | $1,988 | $147 | $3,436 | $442 | | Total SG&A expenses | $43,786 | $15,449 | $83,068 | $26,502 | - The increase in SG&A expenses was primarily driven by the expansion of commercial and administrative functions to support the LUPKYNIS launch following FDA approval[130] Research and Development Expenses R&D expenses decreased to $10.1 million for the three months and $19.9 million for the six months ended June 30, 2021, from $11.1 million and $24.9 million in the prior year periods, mainly due to lower CRO and clinical trial expenses, and reduced clinical supply costs following LUPKYNIS approval and trial termination Research and Development Expenses (in thousands) | Item | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Contract research organizations (CRO) and third party clinical trial expenses | $5,074 | $5,335 | $9,706 | $13,347 | | Clinical supply and distribution | $1,138 | $1,971 | $2,370 | $4,380 | | Salaries, incentive pay and employee benefits | $2,713 | $2,447 | $5,737 | $4,375 | | Share-based compensation expense | $1,089 | $1,080 | $2,163 | $2,297 | | Travel, insurance, patent annuity fees, legal fees and other | $77 | $243 | $(52) | $512 | | Total R&D expenses | $10,091 | $11,076 | $19,924 | $24,911 | - The decrease in R&D expenses was primarily due to lower CRO and third-party clinical trial expenses, and reduced clinical supply and distribution costs following LUPKYNIS approval and the termination of the dry eye trial[132] Liquidity and Capital Resources Cash and investments decreased to $323.7 million at June 30, 2021, from $422.7 million at December 31, 2020, primarily due to commercial infrastructure spend, inventory payments, and an upfront manufacturing facility payment. The company believes it has sufficient resources for at least the next 12 months - Cash and cash equivalents and investments decreased to $323.7 million at June 30, 2021, from $422.7 million at December 31, 2020[133] - The decrease is primarily related to commercial infrastructure spend for LUPKYNIS launch, inventory payments, and an upfront payment for a dedicated manufacturing facility[133] - The Company believes its cash position is sufficient to fund current plans, including commercial activities, post-approval commitments, R&D programs, and corporate/working capital, for at least the next 12 months[134] Cash Flow Summary Net cash used in operating activities increased to $91.5 million for the six months ended June 30, 2021, driven by commercial launch costs and inventory. Net cash used in investing activities was $65.6 million, mainly for investment purchases and a lease payment. Net cash provided by financing activities was $6.3 million, primarily from stock option exercises Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------- | :----------------------------- | :----------------------------- | | Operating activities | $(91,520) | $(44,646) | | Investing activities | $(65,577) | $(32,835) | | Financing activities | $6,308 | $3,876 | | Net decrease in cash and cash equivalents | $(150,789) | $(73,605) | - The increase in cash used in operating activities was primarily due to commercial infrastructure spend for LUPKYNIS launch, inventory payments, and a one-time payment to a related party[136] - Investing activities included $217.0 million in investment purchases and an $11.8 million upfront lease payment, partially offset by $164.7 million from investment maturities[137] Off-Balance Sheet Arrangements The company did not have any off-balance sheet arrangements during the periods presented - The Company did not have any off-balance sheet arrangements during the periods presented[138] Contractual Obligations There have been no material changes to the company's contractual obligations and commitments outside the ordinary course of business since the last annual report - There have been no material changes to the Company's contractual obligations and commitments outside the ordinary course of business since the Annual Report on Form 10-K for the year ended December 31, 2020[139] Item 3. Quantitative and Qualitative Disclosures About Market Risks The company is exposed to market risks including interest rate, foreign currency, inflation, and credit risks. Management employs policies to minimize adverse effects, such as investing in diverse financial instruments and monitoring customer creditworthiness Interest rate risk The company manages interest rate risk by investing in a diverse portfolio of short-term, market-rate instruments, and does not expect significant impact from sudden market interest rate changes - The Company manages interest rate risk by investing in a broad and diverse range of financial instruments, including certificates of deposit, money market instruments, and government/corporate debt securities with maturities less than two years[142] - The Company does not believe its results of operations or cash flows would be significantly affected by a sudden change in market interest rates[142] Foreign currency risk The company is exposed to foreign currency fluctuations, primarily with the Canadian dollar and Swiss franc, but the majority of its cash and expenses are in U.S. dollars, limiting material foreign exchange risk - The Company is exposed to foreign currency risk, primarily with the Canadian dollar and Swiss franc[143] - The majority of cash and cash equivalents are held in U.S. dollars, and most expenses are U.S. dollar-denominated, limiting material foreign exchange fluctuations[31][143] Inflation Risk While inflation could increase labor and operational costs, it has not had a material effect on the company's business or financial results during the reported periods - Inflation may affect the Company by increasing costs of labor, commercial support, and clinical trials[144] - Inflation has not had a material effect on the Company's business, financial condition, or results of operations during the three and six months ended June 30, 2021 and 2020[144] Credit risk The company minimizes credit risk from cash, investments, and accounts receivable by investing in diverse financial instruments, adhering to credit quality standards, and monitoring customer creditworthiness - The Company minimizes credit risk related to cash, cash equivalents, and investments by investing in a broad and diverse range of financial instruments, adhering to credit ratings and maturity guidelines[145] - Creditworthiness of customers and government regulations are monitored, and an allowance for doubtful accounts is established if needed[32] Item 4. Controls and Procedures The company's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2021, and there have been no material changes in internal control over financial reporting during the quarter Evaluation of Disclosure Controls and Procedures The principal executive and financial officers evaluated the effectiveness of the company's disclosure controls and procedures as of June 30, 2021, and concluded they were effective - The principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2021[146] Changes in Internal Control over Financial Reporting There were no changes in the company's internal control over financial reporting during the quarter ended June 30, 2021, that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting - There has been no change in the Company's internal control over financial reporting during the quarter ended June 30, 2021, that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting[147] PART II. OTHER INFORMATION This section provides additional information not covered in the financial statements or MD&A, including legal proceedings, risk factors, equity sales, defaults, mine safety disclosures, other information, and a list of exhibits Item 1. Legal Proceedings The company is involved in various claims and legal proceedings in the normal course of business, but management believes their ultimate resolution will not have a material adverse effect on the company's financial position - Management believes that there are currently no claims or actions pending against the Company that could have a material adverse effect on its results of operations, financial condition, or cash flows[148] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2020 - There has been no material change in the Company's risk factors subsequent to the filing of its Annual Report on Form 10-K for the year ended December 31, 2020[149] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - No unregistered sales of equity securities and use of proceeds were reported[150] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - No defaults upon senior securities were reported[150] Item 4. Mine Safety Disclosures The company reported no mine safety disclosures - No mine safety disclosures were reported[150] Item 5. Other Information The company reported no other information required to be disclosed under this item - No other information was reported[150] Item 6. Exhibits This section lists all exhibits filed as part of this quarterly report, including articles of amalgamation, by-laws, certifications, and XBRL documents - The report includes various exhibits such as Articles of Amalgamation, By-Laws, Certifications of Principal Executive and Financial Officers (pursuant to Sarbanes-Oxley Act), and Inline XBRL documents[152][153][154][155][156][157][158][159] Signatures The report was duly signed on August 5, 2021, by Peter Greenleaf, Chief Executive Officer, and Joseph Miller, Chief Financial Officer, certifying its contents - The report was signed on August 5, 2021, by Peter Greenleaf, Chief Executive Officer, and Joseph Miller, Chief Financial Officer[161]