Mirum Pharmaceuticals, Inc. 10-Q

Item 1. Financial Statements. Mirum Pharmaceuticals, Inc. Condensed Consolidated Balance Sheets (In thousands, except share and per share data) June 30, December 31, 2020 2019 (Unaudited) (Note 2) Assets Current assets: Cash and cash equivalents $ 83,042 $ 11,970 Short-term investments 66,294 104,690 Prepaid expenses and other current assets 2,739 2,703 Total current assets 152,075 119,363 Long-term investments — 23,292 Property and equipment, net 1,423 1,372 Operating lease right-of-use assets 2,107 2,361 Other assets 161 324 Total assets $ 155,766 $ 146,712 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 3,024 $ 3,351 Accrued expenses 13,026 9,328 Operating lease liabilities 530 397 Total current liabilities 16,580 13,076 Operating lease liabilities, noncurrent 2,947 3,251 Other liabilities 31 36 Total liabilities 19,558 16,363 Commitments and contingencies Stockholders’ equity: Preferred stock, $0.0001 par value; 10,000,000 shares authorized as of June 30, 2020 and December 31, 2019, respectively; zero shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively; and liquidation value of $0 as of June 30, 2020 and December 31, 2019, respectively — — Common stock, $0.0001 par value; 200,000,000 shares authorized as of June 30, 2020 and December 31, 2019, respectively; 25,394,190 shares issued and 25,071,337 shares outstanding, excluding 322,853 shares subject to repurchase as of June 30, 2020; 22,989,987 shares issued and 22,600,338 shares outstanding, excluding 389,649 shares subject to repurchase as of December 31, 2019 3 2 Additional paid-in capital 250,349 200,119 Accumulated deficit (114,462 ) (69,901 ) Accumulated other comprehensive income 318 129 Total stockholders’ equity 136,208 130,349 Total liabilities and stockholders’ equity $ 155,766 $ 146,712 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 1 Mirum Pharmaceuticals, Inc. Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except share and per share data) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Operating expenses: Research and development $ 18,555 $ 11,589 $ 35,895 $ 16,452 General and administrative 5,042 2,445 9,734 3,766 Total operating expenses 23,597 14,034 45,629 20,218 Loss from operations (23,597 ) (14,034 ) (45,629 ) (20,218 ) Other income (expense): Interest income 405 468 1,154 700 Other income (expense), net (56 ) 9 (79 ) 4 Net loss before provision for income taxes (23,248 ) (13,557 ) (44,554 ) (19,514 ) Provision for income taxes 3 — 7 — Net loss $ (23,251 ) $ (13,557 ) $ (44,561 ) $ (19,514 ) Net loss per share, basic and diluted $ (0.93 ) $ (5.31 ) $ (1.79 ) $ (7.70 ) Weighted-average shares of common stock outstanding, basic and diluted 25,056,123 2,551,822 24,880,387 2,534,877 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 Mirum Pharmaceuticals, Inc. Condensed Consolidated Statements of Comprehensive Loss (Unaudited) (In thousands) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Net loss $ (23,251 ) $ (13,557 ) $ (44,561 ) $ (19,514 ) Other comprehensive gain (loss): Unrealized gain on available-for-sale investments 339 46 190 46 Cumulative translation adjustments 3 (18 ) (1 ) (18 ) Comprehensive loss $ (22,909 ) $ (13,529 ) $ (44,372 ) $ (19,486 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Mirum Pharmaceuticals, Inc. Condensed Consolidated Statement of Stockholders’ Equity (Unaudited) (In thousands, except share and per share data) Preferred Stock Common Stock Additional Paid-In Accumulated Accumulated Other Comprehensive Total Stockholders’ Shares Amount Shares Amount Capital Deficit Income (Loss) Equity Balance as of December 31, 2019 — $ — 22,600,338 $ 2 $ 200,119 $ (69,901 ) $ 129 $ 130,349 Issuance of common stock in follow-on public offering, net of issuance costs of $3,342 — — 2,400,000 1 44,658 — — 44,659 Restricted common stock vested in the period — — 33,398 — — — — — Stock-based compensation — — — — 2,573 — — 2,573 Net loss — — — — — (21,310 ) — (21,310 ) Other comprehensive loss — — — — — — (153 ) (153 ) Balance as of March 31, 2020 — $ — 25,033,736 $ 3 $ 247,350 $ (91,211 ) $ (24 ) $ 156,118 Issuance of common stock in connection with common stock option exercises — — 4,203 — 25 — — 25 Restricted common stock vested in the period — — 33,398 — — — — — Stock-based compensation — — — — 2,974 — — 2,974 Net loss — — — — — (23,251 ) — (23,251 ) Other comprehensive income — — — — — — 342 342 Balance as of June 30, 2020 — $ — 25,071,337 $ 3 $ 250,349 $ (114,462 ) $ 318 $ 136,208 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Mirum Pharmaceuticals, Inc. Condensed Consolidated Statement of Redeemable Convertible Preferred Stock, Redeemable Common Stock and Stockholders’ Deficit (Unaudited) (In thousands, except share and per share data) Series A Redeemable Convertible Preferred Stock Redeemable Common Stock Common Stock Additional Paid-In Accumulated Accumulated Other Comprehensive Total Stockholders’ Shares Amount Shares Amount Shares Amount Capital Deficit Income Deficit Balance as of December 31, 2018 59,908,284 $ 59,849 1,859,151 $ 6,990 636,719 $ 1 $ 34 $ (17,348 ) $ — $ (17,313 ) Restricted common stock vested in the period — — — — 35,156 — — — — — Stock-based compensation — — — — — — 218 — — 218 Net loss — — — — — — — (5,957 ) — (5,957 ) Balance as of March 31, 2019 59,908,284 $ 59,849 1,859,151 $ 6,990 671,875 $ 1 $ 252 $ (23,305 ) $ — $ (23,052 ) Restricted common stock vested in the period — — — — 33,398 — — — — — Issuance of Series A redeemable convertible preferred stock at $1.00259507 per share, net of issuance costs of $23 59,844,699 59,977 — — — — — — — — Stock-based compensation — — — — — — 1,641 — — 1,641 Net loss — — — — — — — (13,557 ) — (13,557 ) Other comprehensive income — — — — — — — — 28 28 Balance as of June 30, 2019 119,752,983 $ 119,826 1,859,151 $ 6,990 705,273 $ 1 $ 1,893 $ (36,862 ) $ 28 $ (34,940 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Mirum Pharmaceuticals, Inc. Condensed Consolidated Statement of Cash Flows (Unaudited) (In thousands) Six Months Ended June 30, 2020 2019 Operating activities Net loss $ (44,561 ) $ (19,514 ) Reconciliation of net loss to net cash used in operating activities: Stock-based compensation 5,547 1,859 Depreciation and amortization 143 43 Amortization of operating lease right-of-use assets 160 72 Net accretion of discounts on investments (7 ) (35 ) Change in operating assets and liabilities: Prepaid expenses and other current assets (36 ) (654 ) Operating lease right-of-use assets 94 (33 ) Other assets — (89 ) Accounts payable, accrued expenses and other liabilities 3,486 7,865 Operating lease liabilities (171 ) 43 Net cash used in operating activities (35,345 ) (10,443 ) Investing activities Proceeds from maturities of investments 61,900 — Proceeds from paydowns of investments 14,005 — Purchase of investments (14,020 ) (58,401 ) Purchase of property and equipment (151 ) (44 ) Net cash provided by (used in) investing activities 61,734 (58,445 ) Financing activities Proceeds from issuance of preferred stock, net of issuance costs — 59,977 Payment of deferred offering costs — (1,217 ) Proceeds from issuance of common stock in public offering, net of issuance costs 44,659 — Proceeds from issuance of common stock pursuant to equity award plans 25 Net cash provided by financing activities 44,684 58,760 Effect of exchange rate on cash and cash equivalents (1 ) (18 ) Net increase (decrease) in cash and cash equivalents 71,072 (10,146 ) Cash and cash equivalents at beginning of period 11,970 51,963 Cash and cash equivalents at end of period $ 83,042 $ 41,817 Supplemental disclosure of cash flow information: Operating lease right-of-use asset obtained in exchange for operating lease liability $ — $ 1,418 Property and equipment purchases included in accounts payable $ 42 $ — Landlord paid tenant improvements $ — $ 461 Deferred initial public offering costs in accounts payable $ — $ 565 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Mirum Pharmaceuticals, Inc. Notes to Unaudited Condensed Consolidated Financial Statements (Unaudited) 1. Description of Business Mirum Pharmaceuticals, Inc. (the “Company”) was incorporated in the State of Delaware on May 2, 2018 and is headquartered in Foster City, California. The Company is a biopharmaceutical company focused on the development and commercialization of a late-stage pipeline of novel therapies for debilitating liver diseases. The Company’s pipeline consists of two clinical-stage product candidates, maralixibat and volixibat, with mechanisms of action that have potential utility across a wide range of orphan liver diseases. The Company commenced significant operations in November 2018. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Mirum Pharmaceuticals AG. All intercompany balances and transactions among the consolidated entities have been eliminated in consolidation. Reverse Stock Split On July 3, 2019, the Company effected a 1-for-8 reverse stock split of its common stock. The par value and the authorized number of shares of common stock were not adjusted as a result of the reverse stock split. The reverse stock split resulted in an adjustment to the conversion price of the Company’s Series A redeemable convertible preferred stock (the “Series A Preferred Stock”) to reflect a proportional decrease in the number of shares of common stock to be issued upon conversion. The accompanying consolidated financial statements and notes to the consolidated financial statements give retroactive effect to the reverse stock split for all periods presented. Follow-on Public Offering On January 13, 2020, the Company completed a follow-on public offering of its common stock, pursuant to which the Company sold 2,400,000 shares of common stock at a price of $20.00 per share, resulting in net proceeds of $44.7 million after deducting underwriting discounts, commissions and offering expenses. Liquidity The Company has a limited operating history, has incurred significant operating losses since its inception, and the revenue and income potential of the Company’s business and market are unproven. As of June 30, 2020, the Company had an accumulated deficit of $114.5 million and cash, cash equivalents and investments of $149.3 million, which is available to fund future operations. The Company believes that its cash, cash equivalents and investments as of June 30, 2020 provide sufficient capital resources to continue its operations for at least twelve months from the issuance date of the accompanying unaudited condensed consolidated financial statements. As such, the unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Management expects to continue to incur additional substantial losses in the foreseeable future as a result of the Company’s research and development activities. 7 2. Summary of Significant Ac counting Policies Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, the accompanying unaudited condensed consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements. The unaudited interim financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results for the periods presented. All such adjustments are of a normal and recurring nature. The unaudited condensed consolidated balance sheet as of December 31, 2019 has been derived from the audited consolidated financial statements at that date but does not include all information and footnotes required by GAAP for complete financial statements. The operating results presented in these unaudited condensed consolidated financial statements are not necessarily indicative of the results that may be expected for any future periods. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the Company’s Annual Report on Form 10-K (“Annual Report”) for the fiscal year ended December 31, 2019, as filed with the SEC on March 12, 2020. Use of Estimates The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that impact the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in the financial statements and accompanying notes. The most significant estimates in the Company’s unaudited condensed consolidated financial statements relate to accrued research and development expenses, the valuation of investments, the valuation of common stock, equity awards and the valuation allowance of deferred tax assets resulting from net operating losses. These estimates and assumptions are based upon historical experience, knowledge of current events and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Actual results could differ materially from those estimates. In December 2019, a novel strain of coronavirus, which causes COVID-19, was identified. Due to the rapid and global spread of the virus, on March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. To slow the proliferation of COVID-19, governments have implemented extraordinary measures, which include the mandatory closure of businesses, restrictions on travel and gatherings, and quarantine and physical distancing requirements. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including clinical trial delays and costs, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19, as well as the economic impact on local, regional, national and international markets. There were no significant estimates contained in the preparation of the Company’s consolidated financial statements or impacts to the Company’s consolidated financial statements for the three or six months ended June 30, 2020 that were directly a result of the COVID-19 pandemic. Significant Accounting Policies There have been no significant changes to the accounting policies during the six months ended June 30, 2020, as compared to the significant accounting policies described in Note 2 of the “Notes to Consolidated Financial Statements” in the Company’s audited consolidated financial statements included in the Annual Report. Net Loss Per Share Basic net loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average shares of common stock outstanding for the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average shares of common stock and potentially dilutive securities outstanding for the period determined using the treasury-stock and if-converted methods. Diluted net loss per share excludes the potential impact of the Company’s common stock subject to repurchase and common stock options because their effect would be anti-dilutive due to the Company’s net loss. Since the Company had a net loss in each of the periods presented, basic and diluted net loss per share were the same. 8 The following potentially dilutive shares have been excluded from the calculation of diluted net loss per share for the periods presented due to their anti-dilutive effect: As of June 30, As of December 31, 2020 2019 Options to purchase common stock 4,921,326 3,366,812 Common stock subject to repurchase 322,853 389,649 Employee Stock Purchase Plan Contingently Issuable 7,278 — Total 5,251,457 3,756,461 Recently Adopted Accounting Pronouncements On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) No. 2018-13, Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820) , which eliminated the requirements to disclose the amount and reasons for transfers between Level 1 and Level 2 assets, the policy for timing and transfers between levels and the valuation process for Level 3 fair value measurements. The guidance modified disclosure requirements for investments in certain entities that calculate net asset value and clarifies the purpose of the measurement uncertainty disclosure. The guidance added requirements to disclose changes in unrealized gains or losses included in other comprehensive income for recurring Level 3 fair value measurements and to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. There was no impact on the accompanying unaudited condensed consolidated financial statements as of the adoption date, January 1, 2020. Other recent accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC did not, or are not believed by management to, have a material impact on the Company’s consolidated financial position, results of operations or cash flows. Recent Accounting Pronouncements Not Yet Adopted In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires an entity to utilize a new impairment model that requires measurement and recognition of expected credit losses for most financial assets and certain other instruments, including but not limited to available-for-sale debt securities. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security. The new guidance requires the use of forward-looking expected credit loss models based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount, which may result in earlier recognition of credit losses under the new guidance. The new guidance also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. Subsequent to the issuance of ASU 2016-13, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses . This ASU does not change the core principle of the guidance in ASU 2016-13, instead these amendments are intended to clarify and improve operability of certain topics included within the credit losses guidance. The FASB also subsequently issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Derivatives and Hedging (Topic 815), and Financial Instruments (Topic 842), which did not change the core principle of the guidance in ASU 2016-13 but clarified that expected recoveries of amounts previously written off and expected to be written off should be included in the valuation account and should not exceed amounts previously written off and expected to be written off. In March 2020, the FASB issued ASU No. 2020-3, Codification Improvements to Financial Instruments which makes narrow-scope improvements to various financial instruments topics, including the new credit losses standard and clarifies the following areas (i) the contractual term of a net investment in a lease should be the contractual term used to measure expected credit losses; (ii) when an entity regains control of financial assets sold, an allowance for credit losses should be recorded. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019 for public business entities, excluding smaller reporting companies. As a smaller reporting company, the guidance will be effective for the Company during the first quarter of 2023. The Company is in the process of assessing the impact adoption will have on its consolidated financial statements. 9 In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Tax es (Topic 740) . The guidance eliminates certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. This guidance also includes guidance to reduce complexity in certa in areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU 2019-12 is effective for annual and interim periods in fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the impact this change will have on its consolidated financial statements. 3. Fair Value Measurements Financial assets and liabilities subject to fair value measurements on a recurring basis and the level of inputs used in such measurements by major security type as of June 30, 2020 and December 31, 2019 are presented in the following table (in thousands): June 30, 2020 Level 1 Level 2 Level 3 Total Financial assets: Money market fund $ 81,283 $ — $ — $ 81,283 Corporate debt securities — 31,512 — 31,512 Commercial paper — 12,453 — 12,453 U.S. government bonds — 7,511 — 7,511 Asset backed securities — 14,818 — 14,818 Total $ 81,283 $ 66,294 $ — $ 147,577 December 31, 2019 Level 1 Level 2 Level 3 Total Financial assets: Money market fund $ 10,621 $ — $ — $ 10,621 Corporate debt securities — 41,668 — 41,668 Commercial paper — 35,016 — 35,016 U.S. government bonds — 22,511 — 22,511 Asset-backed securities — 28,787 — 28,787 Total $ 10,621 $ 127,982 $ — $ 138,603 The carrying amounts of certain financial instruments such as cash and cash equivalents, prepaid expenses, other current assets, accounts payable, accrued expenses, and other current liabilities as of June 30, 2020 and December 31, 2019 approximate their related fair values due to the short-term maturities of these instruments. The fair value of certain financial instruments was measured and classified within Level 1 of the fair value hierarchy based on quoted prices. Certain financial instruments classified within Level 2 of the fair value hierarchy include the types of instruments that trade in markets that are not considered to be active, but are valued based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. 10 4. Financial Instruments The fair value and amortized cost of cash equivalents and available-for-sale investments by major security type are presented in the following table (in thousands): June 30, 2020 Amortized Cost Unrealized Gain Unrealized Loss Estimated Fair Value Cash equivalents and investments: Money market fund $ 81,283 $ — $ — $ 81,283 Corporate debt securities 31,230 282 — 31,512 Commercial paper 12,453 — — 12,453 U.S. government bonds 7,501 10 — 7,511 Asset back securities 14,764 54 — 14,818 Total cash equivalents and investments $ 147,231 $ 346 $ — $ 147,577 Classified as: Cash equivalents $ 81,283 Short-term investments 66,294 Long-term investments — Total cash equivalents and investments $ 147,577 December 31, 2019 Amortized Cost Unrealized Gain Unrealized Loss Estimated Fair Value Cash equivalents and investments: Money market fund $ 10,621 $ — $ — $ 10,621 Corporate debt securities 41,556 113 (1 ) 41,668 Commercial paper 35,016 — — 35,016 U.S. government bonds 22,492 19 — 22,511 Asset-backed securities 28,762 25 — 28,787 Total cash equivalents and investments $ 138,447 $ 157 $ (1 ) $ 138,603 Classified as: Cash equivalents $ 10,621 Short-term investments 104,690 Long-term investments 23,292 Total cash equivalents and investments $ 138,603 As of June 30, 2020, the remaining contractual maturities of available-for-sale debt securities were as follows (in thousands): Estimated Fair Value Due within one year $ 65,398 One to two years 896 Total $ 66,294 During the three and six months ended June 30, 2020 and 2019, there have been no significant realized gains or losses on available-for-sale investments , and the Company did not recognize any other-than-temporary impairment losses. 11 5. Accrued Expenses Accrued expenses consists of the following (in thousands): June 30, December 31, 2020 2019 Accrued clinical trials $ 6,325 $ 4,795 Accrued professional service fees 918 777 Accrued contract manufacturing and non-clinical costs 3,397 1,540 Accrued compensation and related benefits 2,386 2,216 Total accrued expenses $ 13,026 $ 9,328 6. Asset Acquisitions Assignment and License Agreement with Shire International GmbH On November 5, 2018, the Company entered into an Assignment and License Agreement (the “Shire Agreement”) with Shire International GmbH (“Shire”). Under the terms of the Shire Agreement, Shire granted the Company an exclusive, royalty bearing worldwide license to develop and commercialize its two product candidates, maralixibat and volixibat. As part of the Shire Agreement, the Company was assigned license agreements held by Shire with Satiogen Pharmaceuticals, Inc. (“Satiogen”), Pfizer Inc. (“Pfizer”) and Sanofi-Aventis Deutschland GmbH (“Sanofi”). The Company has the right to sublicense under the Shire Agreement and additionally has the right to sublicense under the Satiogen, Pfizer and Sanofi licenses subject to the terms of those license agreements. In consideration for the rights granted to the Company under the Shire Agreement, the Company made an upfront payment to Shire on November 5, 2018 of $7.5 million and issued Shire 1,859,151 shares of its redeemable common stock with an estimated fair value of $7.0 million, or $3.76 per share. The fair value of the shares was determined using an option pricing model with key assumptions as of the date of issuance including the probabilities of liquidity scenarios, enterprise value, time to liquidity, risk-free interest rates, volatility and discount for lack of marketability. The Company accounted for the transaction as an asset acquisition as substantially all of the fair value of the gross assets acquired were concentrated in a group of similar identifiable assets thus satisfying the requirements of the screen test in ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business . The assets acquired in the transaction were measured based on the upfront payment to Shire and the fair value of the common stock shares issued to Shire, as the fair value of the consideration given was more readily determinable than the fair value of the assets received. Because the assets had not yet received regulatory approval and have no alternative future use, the fair value attributable to these assets were initially recorded as in process research and development expenses. The Company is also obligated to pay Shire up to an aggregate of $109.5 million upon the achievement of certain clinical development and regulatory milestones for maralixibat in certain indications and an additional $25.0 million upon regulatory approval of maralixibat for each and every other indication. In addition, the Company is required to pay up to an aggregate of $30.0 million upon the achievement of certain clinical development and regulatory milestones for volixibat solely for the first indication sought. Upon commercialization, the Company is obligated to pay Shire product sales milestones on total licensed products up to an aggregate of $30.0 million. The Company is also obligated to pay tiered royalties with rates ranging from low double-digits to mid-teens based upon annual worldwide net sales for all licensed products; however, these royalties are reduced in part by royalties due under the Satiogen and Sanofi licenses, as discussed below, related to maralixibat and volixibat, as applicable. The Company’s royalty obligations will continue on a licensed product-by-licensed product and country-by-country basis until the later to occur of the expiration of the last valid claim in a licensed patent covering the applicable licensed product in such country, expiration of any regulatory exclusivity for the licensed product in a country and ten years after the first commercial sale of a licensed product in such country. In July 2019, the Company achieved a development milestone related to the initiation of the Phase 3 MARCH-PFIC clinical trial and made a $2.5 million payment to Shire. As of June 30, 2020, no additional milestones had been accrued as there were no other potential milestones yet considered probable. 12 In January 2019, the Company also entered into a Transition Services Agreement (“TSA”) with Shire, which covered services provided by Shire to transfer the research and development activities and the related know-how from Shire to the Company, including continuation of work on any existing clinical trials and manufacturing activities until fully transferred. A ll transition services were completed and all pass-through costs were settled as of June 30, 2019 . As such, for the three and six months ended June 30 , 2020, there were no expenses for Shire provided services or pass-through costs recorded. For the three and six months ended June 30 , 2019, t he Company recorded $1 4,000 and $ 0 . 4 million for services provided by Shire under the TSA , respectively . Additionally, the Company recorded a reduction of estimated expenses of $0.3 million and $ 0.1 million for pass - through costs related to continuation of work on existing clin ical trials and manufacturing activities for the three and six months ended June 30, 2019 , respectively . The reduction of estimated expenses for the three and six months ended June 30, 2019 was related to a final reconciliation of expenses and agreement on final amounts due to Shire. Satiogen License Through the Shire Agreement, the Company was assigned a license agreement with Satiogen pursuant to which the Company obtained an exclusive, worldwide license to certain patents and know-how, with the right to sublicense to a third party subject to certain financial considerations. The Company is obligated to pay to Satiogen up to an aggregate of $10.5 million upon the achievement of certain milestones, of which $0.5 million was for initiation of certain development activities, $5.0 million for the completion of regulatory approvals and $5.0 million for commercialization activities. Additionally, the Company will be required to pay a low single-digit royalty on net sales. The Company’s royalty obligations continue on a licensed product-by-licensed product and country-by-country basis until the expiration of the last valid claim in a licensed patent covering the applicable licensed product in such country. Royalty obligations under the Satiogen license are creditable against the royalty obligations to Shire under the Shire Agreement. In July 2019, the Company achieved a development milestone related to the initiation of the Phase 3 MARCH-PFIC clinical trial and made a $0.5 million payment to Satiogen. As of June 30, 2020, no additional milestones had been accrued as there were no other potential milestones yet considered probable. Pfizer License Through the Shire Agreement, the Company was assigned a license agreement with Pfizer pursuant to which the Company obtained an exclusive, worldwide license to certain Pfizer know-how with a right to sublicense. Upon commercialization of any product utilizing the licensed product, the Company will be required to pay to Pfizer a low single-digit royalty on net sales of product sold by the Company, its affiliates or sublicensees. The Company’s royalty obligations continue on a licensed product-by-licensed product basis until the eighth anniversary of the first commercial sale of such licensed product anywhere in the world. Sanofi License Through the Shire Agreement, the Company was assigned a license agreement with Sanofi pursuant to which the Company obtained an exclusive, worldwide license to certain patents and know-how with the right to sublicense to a third party subject to certain financial considerations. The Company is obligated to pay up to an aggregate of $36.0 million upon the achievement of certain regulatory, commercialization and product sales milestones. Additionally, upon commercialization, the Company is required to pay tiered royalties in the mid to high single-digit range based upon net sales of licensed products sold by the Company and sublicensees in a calendar year, subject to adjustments in certain circumstances. The Company’s royalty obligations continue on a licensed product-by-licensed product and country-by-country basis until the later to occur of the expiration of the last valid claim in a licensed patent covering the applicable licensed product in such country and ten years after the first commercial sale of a licensed product in such country. Royalty obligations under the Sanofi license are creditable against the royalty obligations to Shire under the Shire Agreement. As of June 30, 2020, no milestones had been accrued as there were no potential milestones yet considered probable. 7. Stockholders’ Equity (Deficit) In connection with the Company’s initial public offering in July 2019, all of the outstanding shares of the Company’s Series A Preferred Stock automatically converted into 14,969,118 shares of common stock and the 1,859,151 shares of the Company’s redeemable common stock classified in mezzanine equity were reclassified to permanent equity due to the expiration of the deemed redemption feature associated with the stock. Common Stock In August and October 2018, the Company issued 1,187,500 shares of common stock as founder shares for services rendered to the Company, valued at $0.0001 per share for consideration of approximately $950. On November 5, 2018, in connection with the 13 issuance of the Series A Preferred Stock, vesting conditions were placed on 562,500 previously issued founder shares. These shares vest over 4 years and are subject to repurchase by the Company in the event of termination of services. S hares subject to r epurchase are not deemed, for accounting purposes, to be outstanding until those shares vest. In April 2019, the Company repurchased 25,78 2 shares of the common stock from a former employee in connection with termination of employment. As of June 30, 2020 and December 31, 2019, 322,853 and 389,649 shares of common stock, respectively, were subject to repurchase by the Company. The unvested stock liability related to these shares is immaterial to all periods presented. Each share of common stock is entitled to one voting right. Common stockholders are entitled to dividends when funds are legally available and declared by the Company’s board of directors. Common Stock Reserved for Issuance Common stock reserved for issuance is as follows: As of June 30, As of December 31, 2020 2019 Stock options issued and outstanding 4,921,326 3,366,812 Reserved for future stock awards or option grants 1,453,225 1,112,443 Reserved for employee stock purchase plan 729,899 500,000 7,104,450 4,979,255 8. Stock-Based Compensation Equity Incentive Plans On November 5, 2018, the Company adopted the 2018 Equity Incentive Plan (the “2018 Plan”), which permits the granting of stock awards and incentive and nonstatutory stock options to employees, directors and consultants of the Company. In July 2019, the Company’s board of directors and stockholders approved and adopted the 2019 Equity Incentive Plan (the “2019 Plan”). The 2019 Plan became effective on July 17, 2019. Under the 2019 Plan, the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units and other stock or cash-based awards to individuals who are then employees, officers, directors or consultants of the Company. A total of 1,401,443 shares of common stock were approved to be initially reserved for issuance under the 2019 Plan, including 101,443 shares that remained available for issuance under the 2018 Plan as of July 17, 2019. Shares subject to outstanding awards under the 2018 Plan as of the effective date of the 2019 Plan that are subsequently canceled, forfeited or repurchased by the Company will be added to the shares reserved under the 2019 Plan. In addition, the number of shares of common stock available for issuance under the 2019 Plan will be automatically increased on the first day of each calendar year during the ten-year term of the 2019 Plan, beginning with January 1, 2020 and ending with January 1, 2029, by an amount equal to 5% of the outstanding number of shares of the Company’s common stock on December 31st of the preceding calendar year or such lesser amount as determined by the Company’s board of directors. As of June 30, 2020, 965,725 shares of common stock were available for issuance under the 2019 Plan. On March 18, 2020, the compensation committee of the Company’s board of directors approved and adopted the 2020 Inducement Plan (the “2020 Inducement Plan”). Under the 2020 Inducement Plan, the Company may grant nonstatutory stock options, stock appreciation rights, restricted stock and restricted stock units to new employees entering into employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4) . The 2020 Inducement Plan authorized 750,000 shares of the Company’s common stock for future issuance. As of June 30, 2020, 487,500 shares of common stock were available for issuance under the 2020 Inducement Plan. 14 Stock Options The fair value of each employee and non-employee stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. Due to the Company’s limited operating history and a lack of company specific historical and implied volatility data, the Company estimated expected volatility based on the historical volatility of a group of similar companies that are publicly traded. The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards. Due to the lack of historical exercise history, the expected term of the Company’s stock options for employees has been determined utilizing the “simplified” method for awards. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is zero based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future. The following assumptions were used to estimate the fair value of stock option awards granted during the following periods: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Exercise price $11.51-$18.46 $2.94-$6.27 $10.40-$24.52 $2.94-$6.27 Expected term (in years) 5.5-6.1 6.0-6.3 5.5-6.1 6.0-6.3 Expected volatility 92.59%-95.85% 73.88%-75.12% 77.07%-95.85% 73.88%-75.12% Risk-free interest rate 0.37%-0.56% 1.98%-2.25% 0.37%-1.73% 1.98%-2.46% Expected dividend yield — — — — Grant date fair value of options granted $8.81-$13.86 $8.37-$10.46 $7.38-$16.59 $7.47-$10.46 The following table summarizes stock option activity during the six months ended June 30, 2020 (in thousands, except share and per share data): Number of Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Life (in Years) Aggregate Intrinsic Value Outstanding as of December 31, 2019 3,366,812 $ 5.14 9.3 $ 65,235 Granted 1,748,967 $ 17.47 Exercised (4,203 ) $ 5.86 Canceled and forfeited (190,250 ) $ 9.27 Outstanding as of June 30, 2020 4,921,326 $ 9.37 9.0 $ 50,186 Vested and exercisable as of June 30, 2020 1,052,705 $ 4.73 8.5 $ 15,570 Intrinsic value is calculated as the difference between the exercise price of the underlying options and the fair value of the common stock for the options that had exercise prices that were lower than the per share fair value of the common stock on the date of exercise. As of June 30, 2020, the total unrecognized stock-based compensation related to unvested stock option awards granted was $36.3 million, which the Company expects to recognize over a weighted-average period of approximately 3.1 years. Restricted Stock On November 5, 2018, in connection with the issuance of Series A Preferred Stock, the Company’s founders agreed to modify their outstanding shares of common stock to include vesting provisions that require continued service to the Company in order to vest in those shares. As such, the 562,500 modified shares of common stock became compensatory upon such modification. The total compensation cost resulting from the modification was $1.7 million. The modified shares have a four-year vesting period and a measurement date fair value of $2.936 per share. For the three months ended June 30, 2020 and 2019, 33,398 and 33,398 shares vested, respectively. For the six months ended June 30, 2020 and 2019, 66,796 and 68,554 shares vested, respectively. As of June 30, 2020, the total unrecognized compensation expense related to unvested restricted stock was $0.9 million expected to be recognized over a weighted-average period of approximately 2.4 years. 2019 Employee Stock Purchase Plan 15 In July 2019, the Company’s board of directors and stockholders approved and adopted the 2019 Employee Stock Purchase Plan (the “ESPP”). The ESPP became effective on July 17, 2019. A total of 500,000 shares of common stock were approved to be initially res erved for issuance under the ESPP. In addition, the number of shares of common stock available for issuance under the ESPP will be automatically increased on the first day of each calendar year during the first ten-years of the term of the ESPP, beginning with January 1, 2020 and ending with January 1, 2029, by an amount equal to the lessor of (i) 1% of the outstanding number of shares of common stock on December 31st of the preceding calendar year, (ii) 1,500,000 shares of common stock or (iii) such lesser amount as determined by the Company’s board of directors. As of June 30 , 2020, no shares were issued under the ESPP and there were 729,899 shares available for future issuance . Stock-based compensation expense is reflected in the unaudited condensed consolidated statements of operations as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 General and administrative $ 1,714 $ 1,003 $ 3,246 $ 1,150 Research and development 1,260 638 2,301 709 Total $ 2,974 $ 1,641 $ 5,547 $ 1,859 9. Leases In January 2019, the Company entered into an operating lease agreement for office space, which consisted of approximately 5,600 square feet (the “Lease”). Pursuant to the Lease, the lease term is approximately four years with an option to extend the term for one five-year term, which at the time was not reasonably assured of exercise and therefore, not included in the lease term. The Lease contained a tenant improvement allowance of $0.4 million, which has been recorded as leasehold improvements in the accompanying consolidated balance sheets with a corresponding reduction of the right-of-use (“ROU”) asset at inception of the Lease. Rent payments commenced in August 2019. In November 2019, the Company amended the Lease to extend the term through March 2025. This extension was accounted for as a lease modification and the Company recorded an increase to the ROU asset and lease liability of $0.6 million at the time of the amendment. Additionally, pursuant to the Lease, as amended, the Company expanded the office space by 5,555 square feet for a five-year term expiring in March 2025. The Company accounted for this expanded space as a separate contract as there were material additional rights of use that were not included under the terms of the initial Lease. The Lease, as amended, contained a tenant improvement allowance of $0.8 million in connection with the expanded space, which has been recorded as leasehold improvements on the accompanying consolidated balance sheet with a corresponding reduction of the ROU asset at inception of the lease for the expanded space. The ROU and corresponding lease liabilities were estimated using a weighted-average incremental borrowing rate of 8%. As of June 30, 2020, the Company recorded an aggregate ROU asset of $2.1 million and an aggregate lease liability of $3.5 million in the accompanying consolidated balance sheet. The weighted-average remaining lease term is 4.6 years. As of June 30, 2020, undiscounted future minimum payments under the Company’s operating leases are as follows: Year Ending December 31, Undiscounted Rent Payments 2020 (remaining six months) $ 357 2021 865 2022 890 2023 918 2024 928 2025 230 Total undiscounted lease payments 4,188 Less: imputed interest (711 ) Total lease liability $ 3,477 16 Rent expense was $ 0.2 million and $ 0.1 million for the three months ended June 30 , 2020 and 2019 , respectively , and $ 0.3 million and $0.1 million for the six months ended June 30, 2020 and 2019, respectively. Variable lease payments for operating expenses were immaterial for the three and six months ended June 30 , 2020 and 201 9. 17 Item 2. Management’ s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and notes thereto and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K (“Annual Report”) for the year ended December 31, 2019, which was filed with the Securities and Exchange Commission (“SEC”) on March 12, 2020. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to the “Company”, “Mirum,” “we,” “us” and “our” refer to Mirum Pharmaceuticals, Inc. and its consolidated subsidiary. Forward-Looking Statements In addition to historical financial information, this discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” under Part II, Item 1A below. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “predict,” “should,” “will” or the negative of these terms or other similar expressions. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements . Overview We are a biopharmaceutical company focused on the development and commercialization of a late-stage pipeline of novel therapies for debilitating liver diseases. We focus on diseases for which the unmet medical need is high and the biology for treatment is clear. Our pipeline consists of two clinical-stage product candidates with mechanisms of action that have potential utility across a wide range of orphan cholestatic liver diseases. We are initially developing maralixibat for the treatment of pediatric patients with Alagille syndrome (“ALGS”), progressive familial intrahepatic cholestasis (“PFIC”) and biliary atresia. Based on improvements in pruritus, or itching, and other outcomes and disease markers observed in Phase 2 clinical trials, we are planning to initiate a rolling submission of a New Drug Application (“NDA”), for the treatment of cholestatic pruritus associated with ALGS in the third quarter of 2020. We expect to complete the rolling submission of our NDA in the first quarter of 2021 and we are planning for a potential launch in ALGS in the second half of 2021. We are also conducting the Phase 3 MARCH clinical trial in PFIC. Further, we have conducted an initial analysis of our long-term treatment data in PFIC against a natural history control group in conjunction with the NAtural course and Prognosis of PFIC and Effect of biliary Diversion Consortium and have shared these results with regulators. Based on feedback from regulators, we are preparing to submit a marketing authorization application for the treatment of PFIC2 to the European Medicines Agency (“EMA”) in the fourth quarter of 2020. We are developing volixibat for the treatment of adult patients with cholestatic liver diseases, including primary sclerosing cholangitis (“PSC”) and intrahepatic cholestasis of pregnancy (“ICP”). We were incorporated in May 2018 and commenced operations in November 2018. To date, we have focused primarily on acquiring and in-licensing our product candidates, maralixibat and volixibat, organizing and staffing our company, business planning, raising capital, and preparing for advancement of our product candidates into clinical development. We have a limited operating history and incurred significant operating losses since our inception and expect to continue to incur significant operating losses for the foreseeable future. We have no products approved for commercial sale and have never generated any revenues from product sales. We have funded our operations to date primarily through equity financings. On July 22, 2019 , we completed our initial public offering (“IPO”) pursuant to which we sold an aggregate of 5,000,000 shares of our common stock at a price of $15.00 per share, resulting in net proceeds of $67.2 million after deducting underwriting discounts, commissions and offering expenses payable by us. Upon the closing of our IPO, all outstanding shares of our Series A convertible preferred stock automatically converted into 14,969,118 shares of our common stock. On January 13, 2020, we completed a follow-on public offering of our common stock pursuant to which we sold an aggregate of 2,400,000 shares of common stock at a price of $20.00 per share, resulting in net proceeds of $44.7 million after deducting underwriting discounts, commissions and offering expenses payable by us. 18 Our net loss was $ 23.3 million and $ 13.6 million for the three months ended June 30 , 2020 and 2019, respectively , and $ 44.6 million and $19.5 million for the six months ended June 30, 2020 and 2019, respectively . As of June 30 , 2020, we had an accumulated deficit of $ 114.5 million and cash, cash equivalents and investments of $ 149.3 million. We expect our expenses and operating losses will increase substantially as we conduct our planned clinical trials, continue our research and development activities, initiate commercial preparation activities, and seek regulatory approvals for our product candidates, as well as hire additional personnel, protect our intellectual property and incur additional costs associated with being a public company. In addition, as our product candidates progress through development and toward commercialization, we will need to make milestone payments to the licensors and other third parties from whom we have in-licensed or acquired our product candidates. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending in particular on the timing of our clinical trials and non-clinical studies and our expenditures on other research and development activities. We do not expect to generate any revenue from product sales unless and until we successfully complete development and obtain regulatory approval for one or more of our product candidates, which could take a number of years. If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, until such time as we can generate substantial product revenues to support our cost structure, if ever, we expect to finance our cash needs through equity offerings, debt financings or other capital sources, including potential collaborations, licenses and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. If we are unable to raise additional capital when needed, we could be forced to delay, limit, reduce or terminate our product candidate development or future commercialization efforts or grant rights to develop and market our product candidates even if we would otherwise prefer to develop and market such product candidates ourselves. The COVID-19 pandemic has had a significant economic impact across the global marketplace presenting challenges to maintaining business continuity. We are working diligently to ensure the advancement of all of our clinical development programs in the safest manner possible. We do not currently anticipate the global pandemic of COVID-19 to impact the projected timing for submission of our NDA in the third quarter of 2020. However, due to health and safety concerns for healthcare personnel and patients, we are experiencing impacts to the enrollment and conduct of our clinical trials, including to the Phase 3 MARCH clinical trial. As such, we have withdrawn all guidance on the initiation and enrollment of the maralixibat and volixibat clinical trials. Although we did not see a significant financial impact to our business operations in the first half of 2020, there are potential impacts to our business in the future that are highly uncertain and difficult to predict such as temporary closures of our facilities or those of our third-party manufacturers or suppliers, disruptions or restrictions on our employees’ ability to travel, disruptions to or delays in ongoing preclinical studies, clinical trials, third-party manufacturing supply and other operations, the potential diversion of healthcare resources away from the conduct of clinical trials to focus on pandemic concerns, interruptions or delays in the operations of the U.S. Food and Drug Administration (“FDA”) or other regulatory authorities, and our ability to raise capital and conduct business development activities. Assignment and License Agreement with Shire In November 2018, we entered into an assignment and license agreement (“Shire License Agreement”) with Shire International GmbH (“Shire”), in which we were granted an exclusive, royalty bearing worldwide license to develop and commercialize our two product candidates, maralixibat and volixibat. As part of the Shire License Agreement, we were assigned license agreements held by Shire with Satiogen Pharmaceuticals, Inc. (“Satiogen” and altogether, the “Satiogen License”), Pfizer Inc. (“Pfizer”), and Sanofi-Aventis Deutschland GmbH (“Sanofi”). In partial consideration for the rights granted to us under the Shire License Agreement, we made an upfront payment to Shire of $7.5 million and issued Shire 1,859,151 shares of our common stock with an estimated fair value of $7.0 million. In January 2019, we entered into a Transition Services Agreement with Shire (“TSA”), which covered services to be provided by Shire to transfer certain research and development activities and the related know-how from Shire to us, including continuation of work on any existing trials and manufacturing activities until fully transferred to us. We completed the activities under the TSA and finalized amounts due to Shire for services and pass-through expenses on existing trials and manufacturing activities as of June 30, 2019. In July 2019, we achieved a development milestone under the Shire License Agreement related to the initiation of the Phase 3 MARCH clinical trial, and made a $2.5 million payment to Shire and a $0.5 million payment to Satiogen accordingly. 19 See Note 6 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report . Components of Results of Operations Operating Expenses Research and Development Expenses Research and development expenses primarily relate to non-clinical and clinical development of our product candidates. Our research and development expenses include or could include: • salaries and related expenses for employee personnel, including benefits, travel and expenses related to stock-based compensation granted to personnel in development functions; • external expenses paid to clinical trial sites, contract research organizations and consultants that conduct our clinical trials; • expenses related to drug formulation development and the production of non-clinical and clinical trial supplies, including fees paid to contract manufacturers; • licensing milestone payments related to development, regulatory or commercialization events; • expenses related to non-clinical studies; • expenses related to compliance with drug development regulatory requirements; and • other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of equipment, and other supplies. We expense research and development costs as incurred. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or the services are performed. Because our product candidates are still in clinical and non-clinical development and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of product candidates or whether, or when, we may achieve profitability. Due to the early stage nature of our programs, we do not track costs on a project by project basis. As our programs become more advanced, we intend to track the external and internal cost of each program. General and Administrative Expense General and administrative expenses consist primarily of salaries and employee-related costs, including stock-based compensation, for personnel in executive, finance and other administrative functions. Other significant costs include facility-related costs, legal fees relating to intellectual property and corporate matters, professional fees for accounting and consulting services and insurance costs. We expect that our general and administrative expenses will increase in the future as we expand our operating activities, including commercial preparation activities, increase headcount, as well as incur additional costs associated with operating as a publicly traded company, such as increased personnel expenses, legal fees, accounting fees and directors’ and officers’ liability insurance premiums and maintaining compliance with exchange listing and SEC requirements. Interest Income Interest income consists of interest earned on our cash equivalents and investments. Other Income (Expense), Net Other income (expense), net consists of transactional currency exchange gain or loss. 20 Critical Accounting Policies and Estimates Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America . The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements. We base our estimates on historical experience, known trends and events, and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions. We believe that the assumptions and estimates associated with accrued research and development expenditures and stock-based compensation have the most significant impact on our unaudited condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. There have been no significant changes during the six months ended June 30, 2020 in our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report. Recent Accounting Pronouncements A description of recent accounting pronouncements that may potentially impact our financial position, results of operations or cash flows is disclosed in Note 2 to our unaudited condensed consolidated financial statements. Results of Operations for the Three Months Ended June 30, 2020 and 2019 The following table sets forth our results of operations for the three months ended June 30, 2020 and 2019 (in thousands): Three Months Ended June 30, 2020 2019 Change Operating expenses: Research and development $ 18,555 $ 11,589 $ 6,966 General and administrative 5,042 2,445 2,597 Total operating expenses 23,597 14,034 9,563 Loss from operations (23,597 ) (14,034 ) (9,563 ) Other income (expense): — Interest income 405 468 (63 ) Other income (expense), net (56 ) 9 (65 ) Net loss before provision for income taxes (23,248 ) (13,557 ) (9,691 ) Provision for income taxes 3 — 3 Net loss $ (23,251 ) $ (13,557 ) $ (9,694 ) Research and Development Expenses Research and development expenses were $18.6 million for the three months ended June 30, 2020, an increase of $7.0 million compared to the three months ended June 30, 2019. The increase was primarily due to $4.5 million for manufacturing activities supporting clinical trial supplies and NDA registration activities, $2.7 million of personnel and other compensation related expenses reflecting an increase in our number of employees, including an increase in stock-based compensation of $0.6 million, $2.4 million for clinical trial expenses primarily associated with the PFIC and ALGS programs, and $0.6 million of consulting expenses associated with our increased clinical, manufacturing and regulatory activities. These increases were partially offset by a decrease of $3.0 million associated with development milestone expenses related to the initiation of the Phase 3 MARCH clinical trial incurred during the three months ended June 30, 2019 and a decrease of $0.2 million of non-clinical expenses. 21 General and Administrative Expenses General and administrative expenses were $5.0 million for the three months ended June 30, 2020, an increase of $2.6 million compared to the three months ended June 30, 2019. The increase was primarily due to $1.4 million of personnel and other compensation related expenses reflecting an increase in our number of employees, including an increase in stock-based compensation of $0.7 million, $0.8 million of expenses associated with operating as a public company primarily related to increased costs of insurance and audit and tax fees, $0.2 million of professional and consulting services primarily associated with commercial preparation activities, and $0.2 million of expenses related to other general and administrative expenses. Interest Income Interest income was $0.4 million for the three months ended June 30, 2020, a decrease of $0.1 million compared to the three months ended June 30, 2019. The decrease was primarily due to lower interest earned on our cash equivalents and investment balances compared to the prior year largely a result of current economic conditions. Results of Operations for the Six Months Ended June 30, 2020 and 2019 The following table sets forth our results of operations for the six months ended June 30, 2020 and 2019 (in thousands): Six Months Ended June 30, 2020 2019 Change Operating expenses: Research and development $ 35,895 $ 16,452 $ 19,443 General and administrative 9,734 3,766 5,968 Total operating expenses 45,629 20,218 25,411 Loss from operations (45,629 ) (20,218 ) (25,411 ) Other income (expense): — Interest income 1,154 700 454 Other income (expense), net (79 ) 4 (83 ) Net loss before provision for income taxes (44,554 ) (19,514 ) (25,040 ) Provision for income taxes 7 — 7 Net loss $ (44,561 ) $ (19,514 ) $ (25,047 ) Research and Development Expenses Research and development expenses were $35.9 million for the six months ended June 30, 2020, an increase of $19.4 million compared to the six months ended June 30, 2019. The increase was primarily due to $9.2 million for manufacturing activities supporting clinical trial supplies and NDA registration activities, $6.1 million for clinical trials expenses primarily associated with the PFIC and ALGS programs, $5.6 million of personnel and other compensation related expenses reflecting an increase in our number of employees, including an increase in stock-based compensation of $1.6 million, $1.2 million of consulting expenses associated with our clinical, manufacturing and regulatory activities, $0.4 million of non-clinical expenses and $0.3 million related to other general expenses. These increases were partially offset by a decrease of $3.0 million associated with development milestone expenses related to the initiation of the Phase 3 MARCH clinical trial incurred during the six months ended June 30, 2019 and $0.4 million expenses related to transition services provided by Shire in the six months ended June 30, 2019. 22 General and Administrative Expenses General and administrative expenses were $9.7 million for the six months ended June 30, 2020, an increase of $6.0 million compared to the six months ended June 30, 2019. The increase was primarily due to $3.7 million of personnel and other compensation related expenses reflecting an increase in our number of employees, including an increase in stock-based compensation of $2.1 million, $1.5 million of expenses associated with operating as a public company primarily related to increased costs of insurance and audit and tax fees, $0.6 million of professional and consulting services including $0.4 million of expenses associated with commercial preparation activities, and $0.1 million of expenses related to other general and administrative expenses. Interest Income Interest income was $1.2 million for the six months ended June 30, 2020, an increase of $0.5 million compared to the six months ended June 30, 2019. The increase was primarily due to interest earned on investments following an increase in our cash, cash equivalents and investment balances due to the proceeds related to the completion of our IPO in July 2019 and of our follow-on public offering of common stock in January 2020. Liquidity and Capital Resources Overview We had $149.3 million of cash, cash equivalents and investments as of June 30, 2020. To date, we have incurred operating losses and negative cash flows from operations. As of June 30, 2020, we had an accumulated deficit of $114.5 million. On July 22, 2019, we completed our IPO, pursuant to which we sold an aggregate of 5,000,000 shares of our common stock at a price of $15.00 per share, resulting in net proceeds of $67.2 million after deducting underwriting discounts, commissions and offering expenses payable by us. On January 13, 2020, we completed a follow-on public offering of our common stock pursuant to which we sold an aggregate of 2,400,000 shares of common stock at a price of $20.00 per share, resulting in net proceeds of $44.7 million after deducting underwriting discounts, commissions and offering expenses payable by us. Based on our current and anticipated level of operations, we believe our cash, cash equivalents and investments will be sufficient to fund current operations through at least the next 12 months. Our cash, cash equivalents and investments include money market funds, government agency securities, corporate debt and commercial paper. We maintain established guidelines relating to diversification and maturities of our investments to preserve principal and maintain liquidity. We anticipate that we will continue to incur net losses for the foreseeable future as we continue research efforts and the development of our product candidates, initiate commercial preparation activities, hire additional staff, including clinical, scientific, operational, financial and management personnel, and incur additional costs associated with being a public company. Our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures, and to a lesser extent, general and administrative expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses. Until such time, if ever, as we can generate substantial product revenue from sales of maralixibat, volixibat or any future product candidates, we expect to finance our cash needs through a combination of equity offerings, debt financings and potential collaboration, license or development agreements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect rights as a stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. 23 If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may be required to relinquish valuable rights to our technologies, future revenue streams, research programs or p roduct candidates or to grant licenses on terms that may not be favorable to us. As a result of the COVID-19 pandemic and actions taken to slow its spread, the global credit and financial markets have experienced extreme volatility and disruptions, includ ing severely diminished liquidity and credit availability, declines in consumer confidence, declines i n economic growth, increases in unemployment rates and uncertainty about economic stability. If the equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult, more costly and more dilutive. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our drug development or fut ure commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. Cash Flows The following table provides a summary of the net cash flow activity for the period indicated (in thousands): Six Months Ended June 30, 2020 2019 Net cash used in operating activities $ (35,345 ) $ (10,443 ) Net cash provided by (used in) investing activities 61,734 (58,445 ) Net cash provided by financing activities 44,684 58,760 Effect of exchange rate on cash and cash equivalents (1 ) (18 ) Net increase (decrease) in cash and cash equivalents $ 71,072 $ (10,146 ) Net Cash Used in Operating Activities Net cash used in operating activities was $35.3 million for the six months ended June 30, 2020, reflecting our net loss of $44.6 million partially offset by non-cash items of $5.8 million. Non-cash items consisted primarily of $5.5 million of stock-based compensation and $0.3 million of depreciation and amortization of our fixed assets and our operating lease right-of use assets. Additionally, cash used in operating activities reflected changes in net operating assets of $3.4 million, consisting primarily of a $3.5 million increase in accounts payable, accrued expenses and other liabilities due to clinical and manufacturing activities offset by a $0.2 million decrease in our operating lease liability and a $0.1 million decrease in our right-of-use asset due to a change in the lease term. Net cash used in operating activities was $10.4 million for the six months ended June 30, 2019, which consisted primarily of our net loss of $19.5 million reduced by $1.9 million stock-based compensation expense and a $7.1 million decrease in net assets due to an increase in accounts payable, accrued expenses and other liabilities primarily due to clinical and manufacturing activities of $7.9 million, an increase in prepaid expenses and other current assets of $0.7 million and an increase in other assets of $0.1 million. Net Cash Provided by (Used in) Investing Activities Net cash provided by investing activities was $61.7 million for the six months ended June 30, 2020 primarily due to proceeds of $61.9 million from maturities of investments and proceeds of $14.0 million from paydowns of investments, partially offset by $14.0 million used in purchases of investments and $0.2 million used for purchases of property and equipment. Net cash used in investing activities was $58.4 million for the six months ended June 30, 2019, which primarily consisted of purchases of investments. Net Cash Provided by Financing Activities Net cash provided by financing activities was $44.7 million for the six months ended June 30, 2020, due to net proceeds received from the completion of a follow-on public offering of our common stock pursuant to which we sold an aggregate of 2,400,000 shares of common stock at a price of $20.00 per share. Net cash provided by financing activities was $58.8 million for the six months ended June 30, 2019, which consisted of $60.0 million in net proceeds from the issuance of 59,844,699 shares of Series A Preferred Stock, partially offset by cash payments of deferred offering costs incurred in connection with our IPO of $1.2 million. 24 Con tractual Obligations and Commitments There have been no material changes in the amount of our contractual obligations and commitments during the six months ended June 30, 2020 from those disclosed in our Annual Report. From time to time, we enter into certain types of contracts that contingently require us to indemnify parties against third-party claims, including the Shire License Agreement, and certain real estate leases, supply purchase agreements, and agreements with directors and officers. The terms of such obligations vary by contract and in most instances a maximum dollar amount is not explicitly stated therein. Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted, thus no liabilities have been recorded for these obligations on our consolidated balance sheet for the periods presented. We enter into contracts in the normal course of business with clinical research organizations and clinical sites for the conduct of clinical trials, preclinical research studies, professional consultants for expert advice and other vendors for clinical supply manufacturing or other services. These contracts generally provide for termination on notice, and therefore are cancelable contracts. Contractual Arrangements Under the Shire License Agreement, as well as our other license and acquisition agreements, we have payment obligations that are contingent upon future events such as our achievement of specified development, regulatory and commercial milestones and are required to make royalty payments in connection with the sale of products developed under those agreements. In July 2019, we achieved the first development milestone under the Shire License Agreement and Satiogen License and made an aggregate payment of $3.0 million. As for the remaining milestones, as of June 30, 2020, we were unable to estimate the timing or likelihood of achieving future milestones or making future product sales and, therefore, any related payments are not included herein. For additional information regarding these license agreements, including our payment obligations thereunder, see Note 6 to our consolidated financial statements included elsewhere in this Quarterly Report. Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements during the periods presented, and we do not currently have any off-balance sheet arrangements, as defined in the rules and regulations of the SEC. JOBS Act As an emerging growth company under the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), we can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. We intend to rely on other exemptions provided by the JOBS Act, including without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”). We will remain an emerging growth company until the earliest of (i) December 31, 2024, (ii) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion, (iii) the last day of the fiscal year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (“Exchange Act”), or (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. 25 Item 3. Quantitative and Qualitati ve Disclosures About Market Risk. Interest Rate Risk Our cash, cash equivalents and investments as of June 30, 2020 consist of readily available checking, money market funds, and investments. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. However, because of the short-term nature of the instruments in our portfolio, a sudden change in market interest rates would not be expected to have a material impact on our financial condition and/or results of operations. We do not believe that our cash, cash equivalents or investments have significant risk of default or illiquidity. While we believe our cash, cash equivalents and investments do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value. In addition, we maintain significant amounts of cash and cash equivalents at one financial institution that is in excess of federally insured limits. Foreign Currency Rate Risk Our operations include activities in the United States and Switzerland. In addition, we contract with vendors that are located outside of the United States and certain invoices are denominated in foreign currencies. While our operating results are exposed to changes in foreign currency exchange rates between the U.S. dollar and various foreign currencies, the most significant of which are the Swiss Franc and Euro, we do not currently believe that foreign currency would have a significant impact. Effects of Inflation Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation and changing prices had a significant impact on our results of operations for any periods presented herein. Item 4. Control s and Procedures. Evaluation of Disclosure Controls and Procedures Our management, with the participation and supervision of our Chief Executive Officer and our Chief Financial Officer, have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting during the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 26 PART II—OTHER INFORMATION Item 1. Legal Proceedings. From time to time, we may become involved in legal proceedings relating to claims arising from the ordinary course of business. Our management believes that there are currently no claims or actions pending against us, the ultimate disposition of which could have a material adverse effect on our results of operations, financial condition or cash flows.