Mirum Pharmaceuticals, Inc. 10-K

Item 7A. Quantitative and Qualitative Disclosures about Market Risk. Interest Rate Risk Our cash, cash equivalents and investments as of December 31, 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. We have entered into the RIPA. Our primary exposure to market risk is that the interest rate on the liability may vary during the term of the agreement primarily due to the level of forecasted net sales. A significant increase or decrease in net sales will materially impact the revenue interest liability, interest expense and the time period for repayment. We do not believe a change in interest rate has had a material effect on our results of operations during the year ended December 31, 2020. 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 the Euro, we do not currently believe that foreign currency could 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. 123 Item 8. Financial Statement s and Supplementary Data. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm 125 Consolidated Balance Sheets 126 Consolidated Statements of Operations 127 Consolidated Statements of Comprehensive Loss 128 Consolidated Statements of Redeemable Convertible Preferred Stock, Redeemable Common Stock and Stockholders’ Equity (Deficit) 129 Consolidated Statements of Cash Flows 130 Notes to Consolidated Financial Statements 131 124 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Mirum Pharmaceuticals, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Mirum Pharmaceuticals, Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, redeemable convertible preferred stock, redeemable common stock and stockholders’ equity (deficit) and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Ernst & Young LLP We have served as the Company's auditor since 2019. Irvine, California March 9, 2021 125 Mirum Pharmaceuticals, Inc. Consolidated Balance Sheets (In thousands, except share and per share data) December 31, 2020 2019 Assets Current assets: Cash and cash equivalents $ 142,086 $ 11,970 Short-term investments 89,734 104,690 Prepaid expenses and other current assets 4,530 2,703 Total current assets 236,350 119,363 Long-term investments — 23,292 Property and equipment, net 1,293 1,372 Operating lease right-of-use assets 1,949 2,361 Other assets 1,272 324 Total assets $ 240,864 $ 146,712 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 3,151 $ 3,351 Accrued expenses 13,411 9,328 Operating lease liabilities 636 397 Derivative liability 1,264 — Total current liabilities 18,462 13,076 Revenue interest liability, net 47,651 — Operating lease liabilities, noncurrent 2,627 3,251 Other liabilities 29 36 Total liabilities 68,769 16,363 Commitments and contingencies Stockholders’ equity: Preferred stock, $0.0001 par value; 10,000,000 shares authorized as of December 31, 2020 and 2019, respectively; zero shares issued and outstanding as of December 31, 2020 and 2019, respectively; and liquidation value of $0 as of December 31, 2020 and 2019, respectively — — Common stock, $0.0001 par value; 200,000,000 shares authorized as of December 31, 2020 and 2019, respectively; 30,032,600 shares issued and 29,776,544 shares outstanding, excluding 256,056 shares subject to repurchase as of December 31, 2020; and 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 345,180 200,119 Accumulated deficit (173,171 ) (69,901 ) Accumulated other comprehensive income 83 129 Total stockholders’ equity 172,095 130,349 Total liabilities and stockholders’ equity $ 240,864 $ 146,712 The accompanying notes are an integral part of these consolidated financial statements. 126 Mirum Pharmaceuticals, Inc. Consolidated Statements of Operations (In thousands, except share and per share data) Year Ended December 31, 2020 2019 Operating expenses: Research and development $ 81,605 $ 42,991 General and administrative 22,691 11,752 Total operating expenses 104,296 54,743 Loss from operations (104,296 ) (54,743 ) Other income (expense): Interest income 1,559 2,232 Interest expense (335 ) — Other expense, net (192 ) (21 ) Net loss before provision for income taxes (103,264 ) (52,532 ) Provision for income taxes 6 21 Net loss $ (103,270 ) $ (52,553 ) Net loss per share, basic and diluted $ (4.09 ) $ (4.58 ) Weighted-average shares of common stock outstanding, basic and diluted 25,251,968 11,486,367 The accompanying notes are an integral part of these consolidated financial statements. 127 Mirum Pharmaceuticals, Inc. Consolidated Statements of Comprehensive Loss (In thousands) Year Ended December 31, 2020 2019 Net loss $ (103,270 ) $ (52,553 ) Other comprehensive gain (loss): Unrealized (loss) gain on available-for-sale investments (75 ) 156 Cumulative translation adjustments 29 (27 ) Comprehensive loss $ (103,316 ) $ (52,424 ) The accompanying notes are an integral part of these consolidated financial statements. 128 Mirum Pharmaceuticals, Inc. Consolidated Statements of Redeemable Convertible Preferred Stock, Redeemable Common Stock and Stockholders’ Equity (Deficit) (In thousands, except share and per share data) Series A Redeemable Convertible Preferred Stock Redeemable Common Stock Preferred Stock Common Stock Additional Paid-In Accumulated Accumulated Other Comprehensive Total Stockholders’ Equity Shares Amount 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 ) Issuance of Series A redeemable convertible preferred stock at $1.00259507 per share, net of issuance costs of $23 59,844,699 59,977 — — — — — — — — — — Issuance of common stock in initial public offering, net of issuance costs of $7,800 — — — — — — 5,000,000 — 67,200 — — 67,200 Conversion of Series A redeemable convertible preferred stock into common stock on initial public offering (119,752,983 ) (119,826 ) — — — — 14,969,118 1 119,825 — — 119,826 Reclassification of redeemable common stock into common stock on initial public offering — — (1,859,151 ) (6,990 ) — — 1,859,151 — 6,990 — — 6,990 Restricted common stock vested in the period — — — — — — 135,350 — — — — — Stock-based compensation — — — — — — — — 6,070 — — 6,070 Net loss — — — — — — — — — (52,553 ) — (52,553 ) Other comprehensive income — — — — — — — — — — 129 129 Balance as of December 31, 2019 — $ — — $ — — $ — 22,600,338 $ 2 $ 200,119 $ (69,901 ) $ 129 $ 130,349 Issuance of common stock in underwritten public offerings, net of issuance costs of $8,322 — — — — — — 6,150,000 1 114,678 — — 114,679 Issuance of common stock in connection with Revenue Interest Purchase Agreement — — — — — — 509,164 — 10,766 — — 10,766 Issuance of common stock in at-the-market offerings, net of issuance costs of $314 — — — — — — 305,969 — 6,279 — — 6,279 Issuance of common stock in connection with common stock option exercises — — — — — — 47,604 — 328 — — 328 Issuance of common stock in connection with Employee Stock Purchase Plan — — — — — — 29,876 — 456 — — 456 Restricted common stock vested in the period — — — — — — 133,593 — — — — — Stock-based compensation — — — — — — — — 12,554 — — 12,554 Net loss — — — — — — — — — (103,270 ) — (103,270 ) Other comprehensive loss — — — — — — — — — — (46 ) (46 ) Balance as of December 31, 2020 — $ — — $ — — $ — 29,776,544 $ 3 $ 345,180 $ (173,171 ) $ 83 $ 172,095 The accompanying notes are an integral part of these consolidated financial statements. 129 Mirum Pharmaceuticals, Inc. Consolidated Statements of Cash Flows ( In thousands) Year Ended December 31, 2020 2019 Operating activities Net loss $ (103,270 ) $ (52,553 ) Reconciliation of net loss to net cash used in operating activities: Stock-based compensation 12,554 6,070 Depreciation and amortization 305 139 Amortization of operating lease right-of-use assets 318 185 Non-cash interest expense related to the revenue interest liability 335 — Net amortization (accretion) on investments 72 (326 ) Change in operating assets and liabilities: Prepaid and other current assets (1,827 ) (2,691 ) Operating lease right-of-use assets 94 (33 ) Other assets (954 ) (160 ) Accounts payable, accrued expenses and other liabilities 3,683 10,058 Operating lease liabilities (385 ) (51 ) Net cash used in operating activities (89,075 ) (39,362 ) Investing activities Proceeds from maturities of investments 85,900 24,500 Proceeds from paydown of investments 26,761 — Purchase of investments (74,562 ) (152,000 ) Purchase of property and equipment (225 ) (281 ) Net cash provided by (used in) investing activities 37,874 (127,781 ) Financing activities Proceeds from the issuance of Series A redeemable convertible preferred stock, net of issuance costs — 59,977 Proceeds from issuance of common stock in public offerings, net of issuance costs 121,087 67,200 Proceeds from issuance of common stock in private placement, net of issuance costs 10,000 — Proceeds from issuance of common stock pursuant to equity award plans 784 — Proceeds from revenue interest liability, net of issuance costs 49,575 — Payment of deferred offering costs in connection with the shelf registration and sales agreement (158 ) — Net cash provided by financing activities 181,288 127,177 Effect of exchange rate on cash and cash equivalents 29 (27 ) Net increase (decrease) in cash and cash equivalents 130,116 (39,993 ) Cash and cash equivalents at beginning of period 11,970 51,963 Cash and cash equivalents at end of period $ 142,086 $ 11,970 Supplemental disclosure of cash flow information: Cash paid for income taxes $ 11 $ 21 Operating cash flows paid for operating lease $ 576 $ 170 Noncash investing and financing activities: Revenue interest liability issuance costs included in accrued liabilities $ 229 $ — Deferred offering costs included in accrued liabilities $ 129 $ 164 Compound derivative liability related to revenue interest liability $ 1,264 $ — Operating lease right-of-use asset obtained in exchange for operating lease liability $ — $ 3,700 Landlord paid tenant improvements $ — $ 1,231 Conversion of Series A redeemable convertible preferred stock into common stock on initial public offering $ — $ 119,826 Reclassification of redeemable common stock into common stock on initial public offering $ — $ 6,990 The accompanying notes are an integral part of these consolidated financial statements. 130 Mirum Pharmaceuticals, Inc. Notes to Consolidated Financial Statements 1. Organization and 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 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. The Company views its operations and manages its business as one operating segment. Reverse Stock Split In July 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. 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 December 31, 2020, the Company had an accumulated deficit of $173.2 million and cash, cash equivalents and investments of $231.8 million, which are available to fund future operations. The Company believes that its cash, cash equivalents and investments as of December 31, 2020 provide sufficient capital resources to continue its operations for at least twelve months from the issuance date of the accompanying consolidated financial statements. T he 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. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty. Management expects to continue to incur additional substantial losses in the foreseeable future as a result of the Company’s research and development activities. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). 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 consolidated financial statements relate to the revenue interest liability, accrued research and development expenses, the valuation of derivative liabilities and the valuation allowance of deferred tax assets resulting from net operating losses. These estimates and assumptions are based upon historical experience, 131 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. 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 year ended December 31, 2020 that were directly a result of the COVID-19 pandemic. The Company is not aware of any specific event or circumstance that would require an update to its estimates, judgments and assumptions or a revision of the carrying value of the Company’s assets or liabilities as of the date of this filing. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents are valued at cost, which approximate their fair value. Cash equivalents may consist of money market accounts, money market funds, U.S. treasury bills and repurchase agreements. Concentrations of Credit Risk and Off-Balance Sheet Risk Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, and short and long-term investments. The Company minimizes the amount of credit exposure by investing cash that is not required for immediate operating needs in money market funds, government obligations and/or commercial paper with short maturities. To date, the Company has not experienced any losses associated with this credit risk and continues to believe that this exposure is not significant. Investments The Company classifies all investments as available-for-sale, as the sale of such securities may be required prior to maturity . Management determines the appropriate classification of its investments in debt securities at the time of purchase. Investments with original maturities beyond three months at the date of purchase and which mature at, or less than twelve months from the balance sheet date, are classified as a current asset. Investments are recorded at fair value, with unrealized gains and losses reported as accumulated other comprehensive income (loss) until realized . The Company periodically evaluates whether declines in fair values of its available-for-sale securities below their book value are other-than-temporary. This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss as well as the Company’s ability and intent to hold the available-for-sale security until a forecasted recovery occurs. Additionally, the Company assesses whether it has plans to sell the security or it is more likely than not it will be required to sell any available-for-sale securities before recovery of its amortized cost basis. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion, as well as interest and dividends, are included in interest income. Realized gains and losses from the sale of available-for-sale securities, if any, are determined on a specific identification basis and are also included in interest income. To date, the Company has not identified any other than temporary declines in fair value of its investments. Fair Value of Financial Instruments The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in 132 pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: Level 1: Observable inputs such as quoted prices in active markets; Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. The carrying amounts of all cash equivalents, accounts payable and accrued liabilities are reasonable estimates of their fair value. Property and Equipment Property and equipment are recorded at cost less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets, ranging from three to five years. Leasehold improvements are amortized over the shorter of their useful lives or the related lease term. As of December 31, 2020, property and equipment consisted primarily of leasehold improvements of $1.3 million and furniture and equipment of $0.3 million. As of December 31, 2019, property and equipment consisted primarily of leasehold improvements of $1.3 million and furniture and equipment of $0.2 million. Accumulated depreciation as of December 31, 2020 and 2019 was $0.3 million and $0.1 million, respectively. Impairment of Long-Lived Assets Long -lived assets are reviewed for indications of possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amounts to the future undiscounted cash flows attributable to these assets. An impairment loss is recognized to the extent an asset group is not recoverable, and the carrying amount exceeds the projected discounted future cash flows arising from these assets. There were no impairments of long-lived assets for any of the periods presented. Deferred Offering Costs Deferred offering costs directly related to the Company’s shelf registration and sales agreement primarily consisted of legal, accounting, printing and SEC filing fees. These costs are reclassified to additional paid-in capital on a pro-rata basis as the Company completes offerings under the shelf registration, with any remaining deferred costs to be charged to results of operations at the end of the three-year life of the shelf registration. During the year ended December 31, 2020, the deferred offering costs reclassified to additional paid-in capital as a result of the transactions contemplated under a shelf registration were $59,000. Accrued Research and Development Expenses The Company accrues and expenses clinical trial activities performed by third parties based upon estimates of the proportion of work completed over the life of the individual study and patient enrollment rates in accordance with agreements established with clinical research organizations and clinical trial sites. The Company determines the estimates by reviewing contracts, vendor agreements and purchase orders and through discussions with internal clinical personnel and external service providers as to the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services. The Company makes estimates of accrued expenses as of each balance sheet date based on facts and circumstances known to the Company at that time. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly. The Company has not experienced any material differences between accrued costs and actual costs incurred for the periods presented. Nonrefundable advance payments for goods and services are deferred and recognized as expense in the period that the related goods are consumed or services are performed. 133 Revenue Interest Liability , N et The revenue interest liability, net, associated with the Revenue Interest Purchase Agreement (“RIPA”) that the Company entered into in December 2020 with Mulholland SA LLC, an affiliate of Oberland Capital LLC (“Oberland”), as agent for purchasers party thereto (the “Purchasers”), and the Purchasers, is presented net of issuance costs and a debt discount on the consolidated balance sheets. The Company imputes interest expense associated with this liability using the effective interest rate method. The effective interest rate is calculated based on the rate that would enable the debt to be repaid in full over the anticipated life of the arrangement. The interest rate on the liability may vary during the term of the agreement depending on a number of factors, including the level of forecasted net sales. The Company evaluates the interest rate quarterly based on its current net sales forecasts utilizing the prospective method. A significant increase or decrease in net sales will materially impact the revenue interest liability, interest expense and the time period for repayment. Derivative Liability The RIPA contains certain features that meet the definition of being embedded derivatives requiring bifurcation as a separate compound financial instrument apart from the RIPA. The derivative liability is initially measured at fair value on issuance and is subject to remeasurement at each reporting period with changes in fair value recognized as other income (expense) in the consolidated statements of operations as the change in fair value of derivative liability. Research and Development Expenses Research and development expenses consist primarily of fees paid to contract research organizations and other vendors for clinical, non-clinical and manufacturing services, salaries and benefits, including stock-based compensation, consultant expenses, costs related to acquiring manufacturing materials, costs related to compliance with regulatory requirements and license payments related to acquiring intellectual property rights for the Company’s product candidates. Research and development expenses are expensed as incurred. Leases The Company determines if a contractual arrangement is or contains a lease at inception. Operating lease right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset during the lease term, and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating leases are included in ROU assets, current operating lease liabilities, and long-term operating lease liabilities on the accompanying consolidated balance sheets. Operating lease ROU assets and lease liabilities are initially recognized based on the present value of the future minimum lease payments over the lease term at commencement date calculated using the Company’s incremental borrowing rate applicable to the lease asset, unless the implicit rate is readily determinable. Operating lease ROU assets also include any lease payments made at or before lease commencement and exclude any lease incentives received. The Company determines the lease term as the noncancelable period of the lease and may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Leases with a term of 12 months or less are not recognized on the consolidated balance sheet. The Company’s leases do not contain any residual value guarantees. Lease expense for minimum lease payments is recognized as rent expense on a straight-line basis over the lease term. Variable lease payments include lease operating expenses. Stock-Based Compensation The Company recognizes stock-based compensation for all stock-based awards to employees based on the grant-date fair value of the award. The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model, and the assumptions used in calculating the fair value of stock-based awards represent management’s estimates and involve inherent uncertainties and the application of management’s judgment. The fair value of equity awards that are expected to vest is amortized on a straight-line basis over the requisite service period. Stock-based compensation is recognized net of actual forfeitures when they occur. All stock-based compensation costs are recorded in the consolidated statements of operations and comprehensive loss based upon the underlying employee’s role within the Company. 134 Income Taxes Income taxes are recorded using the liability method, under which deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are recorded against deferred tax assets when it is determined it is more-likely-than-not that some or all of the tax benefits will not be realized. The Company accounts for uncertain tax positions in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification No. 740, Income Taxes (“ASC 740”). When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit would more likely than not be realized assuming examination by the taxing authority. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. Interest and penalties related to unrecognized tax benefits, if any, are recorded as a component of income tax expense. 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, common stock options, contingently issuable employee stock purchase plan shares and contingently issuable overallotment shares because their effect would be anti-dilutive due to the Company’s net loss. Since the Company incurred a net loss in each of the periods presented, basic and diluted net loss per share were the same. The following outstanding 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: December 31, 2020 2019 Options to purchase common stock 5,071,740 3,366,812 Common stock subject to repurchase 256,056 389,649 Employee stock purchase plan contingently issuable 12,931 — Overallotment shares contingently issuable 562,500 — Total 5,903,227 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 consolidated financial statements as of the adoption date, January 1, 2020. In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (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 135 reduce complexity in certain 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 early adopted this guidance in the fourth quarter of 2020 . The adoption did not have a material impact on the Company’s consolidated financial statements. Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the Securities and Exchange Commission (“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. For smaller reporting companies, the guidance will be effective during the first quarter of 2023. The Company is in the process of assessing the impact adoption will have on its consolidated financial statements. In August 2020, the FASB issued ASU No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”), which simplifies the accounting for convertible instruments. The guidance removes certain accounting models that separate the embedded conversion features from the host contract for convertible instruments. ASU 2020-06 allows for a modified or full retrospective method of transition. This update is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact this change will have on its consolidated financial statements. 136 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 are presented in the following table (in thousands): December 31, 2020 Level 1 Level 2 Level 3 Total Financial assets: Money market fund $ 127,783 $ — $ — $ 127,783 U.S. treasury bills 29,997 — — 29,997 Corporate debt securities — 23,201 — 23,201 Commercial paper — 41,460 — 41,460 U.S. government bonds — 5,066 — 5,066 Asset-backed securities — 2,006 — 2,006 Total financial assets $ 157,780 $ 71,733 $ — $ 229,513 Financial liabilities: Derivative liability — — 1,264 1,264 Total financial liabilities $ — $ — $ 1,264 $ 1,264 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 December 31, 2020 and December 31, 2019 approximate their related fair values due to the short-term maturities of these instruments. 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. The carrying amount of the revenue interest liability as of December 31, 2020 approximates its fair value and is based on the Company’s contractual repayment obligation to the Purchasers, based on the current estimates of future revenues, over the life of the RIPA. The liability is considered a Level 3 input based on the three-level hierarchy. Refer to Note 6 “Revenue Interest Purchase Agreement” for further information. Derivative Liability The debt pursuant to the RIPA contains embedded derivatives requiring bifurcation as a single compound derivative instrument. The Company estimated the fair value of the derivative liability on issuance and at December 31, 2020 using a “with-and-without” method. The “with-and-without” methodology involves valuing the whole instrument on an as-is basis and then valuing the instrument without the individual embedded derivative. The difference between the entire instrument with the embedded derivative compared to the instrument without the embedded derivative was the fair value of the derivative liability on issuance and at December 31, 2020. The estimated probability and timing of underlying events triggering the exercisability of the put options contained within the RIPA, forecasted cash flows and the discount rate are significant unobservable inputs used to determine the estimated fair value of the entire instrument with the embedded derivative. As of the inception date and December 31, 2020, the discount rate used for valuation to the derivative liability is 15.9%. 137 The following table provides a summary of the change in the estimated fair value of the Company’s derivative liability , classified as Level 3 in the fair value hierarchy : Balance at January 1, 2020 $ — Initial fair value of derivative liability 1,264 Balance at December 31, 2020 $ 1,264 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): December 31, 2020 Amortized Cost Unrealized Gain Unrealized Loss Estimated Fair Value Cash equivalents and investments: Money market fund $ 127,783 — — $ 127,783 U.S. treasury bills 29,995 2 — 29,997 Corporate debt securities 23,126 75 — 23,201 Commercial paper 41,460 — — 41,460 U.S. government bonds 5,067 — (1 ) 5,066 Asset-backed securities 2,001 5 — 2,006 Total cash equivalents and investments $ 229,432 $ 82 $ (1 ) $ 229,513 Classified as: Cash equivalents $ 139,779 Short-term investments 89,734 Total cash equivalents and investments $ 229,513 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 December 31, 2020, the remaining contractual maturities of available-for-sale debt securities were less than 12 months. During the years ended December 31, 2020 and 2019, there have been no significant realized gains or losses on available-for-sale investments. During the years ended December 31, 2020 and 2019, no investments had been in a continuous unrealized loss position for more than 12 months and the Company did not recognize any other-than-temporary impairment losses on these securities. 138 5. Accrued Expenses Accrued expenses consist of the following (in thousands): December 31, 2020 2019 Accrued clinical trials 3,673 4,795 Accrued professional service fees 2,157 777 Accrued contract manufacturing and non-clinical costs 2,780 1,540 Accrued compensation and related benefits 4,801 2,216 Total accrued expenses $ 13,411 $ 9,328 6. Revenue Interest Purchase Agreement In December 2020, the Company entered into the RIPA to obtain financing for the commercialization and further development of maralixibat and other working capital needs. Pursuant to the RIPA, the Company received $50.0 million in December 2020, less certain transaction expenses. The Company may be entitled to receive up to approximately $150.0 million in subsequent installments as follows : (i) $65.0 million upon acceptance for review by the U.S. Food and Drug Administration (“FDA”) of a New Drug Application submitted by the Company for maralixibat as a treatment for pruritus due to Alagille syndrome (“ALGS”) on or prior to a specified date; (ii) $35.0 million upon FDA approval of maralixibat as a treatment for ALGS on or prior to a specified date; and (iii) up to $50.0 million at the option of the Purchasers to finance in-licenses or other acquisitions on or prior to December 31, 2022. As consideration for such payments, the Purchasers have the right to receive certain revenue interests (the “Revenue Interests”) from the Company based on annual net sales of maralixibat , if approved, which will be tiered payments (the “Revenue Interest Payments”) based on whether such annual net sales are (i) less than or equal to $350.0 million (“Tier 1”), (ii) exceeding $350.0 million and less than or equal to $1.1 billion (“Tier 2”), or (iii) exceeding $1.1 billion (“Tier 3”). The Revenue Interest Payments will initially be 9.75% (at Tier 1) and 2.00% (at Tier 2 and Tier 3) of such annual net sales. If the Purchasers have received Revenue Interest Payments in an amount equal to or greater than 110.0% of the total payments actually made by the Purchasers to the Company, exclusive of transaction expenses (the “Cumulative Purchaser Payments”), on or prior to December 31, 2026, the Revenue Interests shall be reduced to 2.00% at Tier 1 and 0.00% at Tier 3 for all subsequent calendar years beginning on January 1, 2027. If the Purchasers have not received Revenue Interest Payments in an amount equal to or greater than 110.0% of the Cumulative Purchaser Payments on or prior to December 31, 2026, the Revenue Interests shall be increased for all subsequent calendar years beginning on January 1, 2027 to a single defined rate (with no separate tiers) that would have provided the Purchasers with an amount equal to 110.0% of the Cumulative Purchaser Payments on or prior to December 31, 2026 had such rate applied to Tier 1 of initial Revenue Interest Payments. The Purchasers’ rights to receive the Revenue Interest Payments shall terminate on the date on which the Purchasers have received Revenue Interest Payments of 195.0% of the Cumulative Purchaser Payments, unless the RIPA is terminated earlier. Under the RIPA, the Company has an option (the “Call Option”) to terminate the RIPA and repurchase future Revenue Interests at any time upon advance written notice. Additionally, the Purchasers have an option (the “Put Option”) to terminate the RIPA and to require the Company to repurchase future Revenue Interests upon enumerated events such as a bankruptcy event, an uncured material breach, a material adverse effect or a change of control, or upon the 12 th anniversary of the first payment made by Purchasers. If the Put Option is exercised prior to the first anniversary of the closing date by the Purchasers (except pursuant to a change of control), the required repurchase price will be 120.0% of the Cumulative Purchaser Payments (minus all payments Company has made to the Purchasers in connection with the Revenue Interests). In all other cases, if the Put Option or the Call Option are exercised, the required repurchase price will be 175.0% of the Cumulative Purchaser Payments (minus all payments Company has made to the Purchasers in connection with the Revenue Interests), if such option is exercised prior to 139 the third anniversary of the closing date, and 195.0 % of the Cumulative Purchaser Payments (minus all payments Company has made to the Purchasers in connection with the Revenue Interests) if such option is exercised thereafter. In addition, the RIPA contains various representations and warranties, information rights, non-financial covenants, indemnification obligations and other provisions that are customary for a transaction of this nature. The Purchaser’s obligations to fund the scheduled installments are subject to certain customary conditions as set forth in the RIPA. Concurrently with the RIPA, the Company entered into a Common Stock Purchase Agreement (“CSPA”) with certain affiliates of Oberland, pursuant to which the Company sold an aggregate of 509,164 shares of its common stock for an aggregate purchase price of $10.0 million. The $50.0 million received pursuant to the RIPA and $10.0 million received pursuant to the CSPA was allocated between the resulting financial instruments on a relative fair value basis, with $49.2 million allocated to the debt under the RIPA and $10.8 million allocated to the common stock issued under the CSPA. The Put Options under the RIPA that are exercisable by Purchasers upon certain contingent events were determined to be embedded derivatives requiring bifurcation and separately accounted for as a single compound derivative instrument. The Company recorded the initial fair value of the derivative liability of $1.3 million as a debt discount, which will be amortized to interest expense over the expected term of the debt using the effective interest method. In connection with the RIPA, as of December 31, 2020, $47.7 million was recorded as a revenue interest liability on the consolidated balance sheet. The Company imputes interest expense associated with this liability using the effective interest rate method. The effective interest rate is calculated based on the rate that would enable the debt to be repaid in full over the anticipated life of the arrangement. The interest rate on this liability may vary during the term of the agreement depending on a number of factors, including the level of forecasted net sales. The Company evaluates the interest rate quarterly based on its current net sales forecasts utilizing the prospective method. A significant increase or decrease in net sales will materially impact the revenue interest liability, interest expense and the time period for repayment. The Company recorded $0.3 million in interest expense related to this arrangement for the year ended December 31, 2020. The Company incurred $0.7 million of issuance costs in connection with the RIPA, which will be amortized to interest expense over the estimated term of the debt. Revenue Interest Payments made as a result of the Company’s net sales will reduce the revenue interest liability. The following table summarizes the revenue interest liability activity during the year ended December 31, 2020 (in thousands): Revenue interest liability at inception $ 49,234 Interest expense recognized 335 Capitalized issuance costs (654 ) Debt discount from embedded derivatives (1,264 ) Revenue interest liability at December 31, 2020 $ 47,651 7. Asset Acquisitions Assignment and License Agreement with Shire International GmbH (Takeda) In November 2018, the Company entered into an Assignment and License Agreement (the “Shire Agreement”) with Shire International GmbH (“Shire”), which was subsequently acquired by Takeda Pharmaceutical Company Limited, and made an upfront payment to Shire of $7.5 million and issued Shire 1,859,151 shares of redeemable common stock with an estimated fair value of $7.0 million, or $3.76 per share. Under the terms of the Shire 140 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. The Company is 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. The Company paid development milestones of $2.5 million in July 2019 related to the initiation of the Phase 3 MARCH clinical trial of maralixibat in PFIC and $10.0 million in December 2020 upon acceptance of an MAA filing to the EMA for maralixibat for the treatment of PFIC2. Development milestones achieved prior to regulatory approval of the product are expensed by the Company in the period incurred as research and development. As of December 31, 2020, no additional milestones have been accrued as there were no other potential milestones yet considered probable. In January 2021, the Company achieved a development milestone pursuant to the Shire License Agreement, which triggered a $2.0 million payment by the Company to Shire associated with the initiation of the VISTAS Phase 2b clinical trial of volixibat in PSC. 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. All transition services were completed and all pass-through costs were settled as of June 30, 2019. As such, for the year ended December 31, 2020, there were no expenses for Shire provided services or pass-through costs recorded. The Company recorded $0.4 million for services provided by Shire under the TSA for the year ended December 31, 2019. Additionally, the Company recorded a reduction of estimated expenses of $0.1 million for pass-through costs related to continuation of work on existing clinical trials and manufacturing activities for the year ended December 31, 2019. The reduction of estimated expenses for the year ended December 31, 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 clinical trial of maralixibat in PFIC and made a $0.5 million payment to Satiogen, which was expensed by the Company as research and development expense. As of December 31, 2020, no additional milestones had been accrued as there were no other potential milestones yet considered probable. 141 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 December 31, 2020, no milestones had been accrued as there were no potential milestones yet considered probable. 8. Leases In January 2019, the Company entered into an operating lease agreement for office space which consisted of approximately 5,600 square feet (the “initial 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 ROU asset at inception of the lease. Rent payments commenced in August 2019. In November 2019, the Company amended the operating lease agreement (the “amended agreement”) to extend the term of the initial lease 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 amended agreement, the Company expanded the office space by 5,555 square feet for a five-year term expiring in March 2025 (the “expanded space”). The Company accounted for the expanded space as a separate contract as there were material additional rights of use that were not included in the initial lease. The amended lease 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 8.0%. As of December 31, 2020, the Company recorded an aggregate ROU asset of $1.9 million and an aggregate lease liability of $3.3 million in the accompanying consolidated balance sheet. The weighted-average remaining lease term is 4.1 years. 142 As of December 31, 20 20 , undiscounted future minimum payments under the Company’s operating leases are as follows (in thousands) : Year Ended December 31, Undiscounted Rent Payments 2021 869 2022 893 2023 922 2024 930 2025 230 Thereafter — Total undiscounted lease payments 3,844 Less: imputed interest (581 ) Total lease liability $ 3,263 Rent expense was $0.6 million and $0.3 million for the years ended December 31, 2020 and 2019, respectively. Variable lease payments for lease operating expenses were immaterial for the years ended December 31, 2020 and 2019. 9. Stockholders’ Equity (Deficit) Common Stock In July 2019, the Company completed its initial public offering (“IPO”) of its common stock. In connection with its IPO, the Company issued and sold 5,000,000 shares of its common stock at a price of $15.00 per share. As a result of the IPO, the Company received $67.2 million in net proceeds, after deducting underwriting discounts, commissions and offering expenses. At the closing of the IPO, 119,752,983 shares of outstanding Series A Preferred Stock were automatically converted into 14,969,118 shares of common stock , and 1,859,151 shares of redeemable common stock were reclassified into permanent equity due to the expiration of the deemed redemption feature . Following the IPO, there were no shares of Series A Preferred Stock or shares of redeemable common stock outstanding. In connection with the completion of its IPO, the Company amended and restated its certificate of incorporation to provide for 200,000,000 authorized shares of common stock with a par value of $0.0001 per share and 10,000,000 authorized shares of preferred stock with a par value of $0.0001 per share. 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. In January 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. In August 2020, the SEC declared effective a registration statement on Form S-3 (“Shelf Registration”) covering the sale of up to $300.0 million of the Company’s securities. Also, in August 2020, the Company entered into a sales agreement (“Sales Agreement”) with SVB Leerink LLC (“SVB Leerink”) pursuant to which the Company may elect to issue and sell, from time to time, shares of common stock having an aggregate offering price of up to $75.0 million under the Shelf Registration through SVB Leerink acting as the sales agent and/or principal. During the year ended December 31, 2020, the Company sold 305,969 shares of common stock in an at-the-market offering pursuant to the Sales Agreement at a weighted-average price of $21.55 per share, resulting in gross proceeds of $6.6 million. The net proceeds after deducting sales commissions to SVB Leerink and other issuance expenses were approximately $6.3 million. The remaining capacity under the Sales Agreement is approximately $68.4 million as of December 31, 2020. In December 2020, the Company completed an underwritten public offering of its common stock pursuant to the Shelf Registration. The Company sold 3,750,000 shares of common stock at a price of $20.00 per share, 143 resulting in net proceeds of $ 70.0 million after deducting underwriting discounts, commissions and offering expenses. In addition, the Company granted the underwriters an option, exercisable for 30 days, to purchase up to 562,500 additional shares of its common stock at the public offering price, less the underwriting discounts and commissions . I n January 2021, the underwriters partially exercised their option and purchased 375,654 shares of the Company’s common stock at a price of $ 20.00 per share, resulting in net proceeds of $ 7.1 million after deducting underwriting discounts. As of December 31, 2020 and 2019, 256,056 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. Common Stock Reserved for Issuance Common stock reserved for issuance is as follows: December 31, 2020 2019 Stock options issued and outstanding 5,071,740 3,366,812 Reserved for future stock awards or option grants 2,009,410 1,112,443 Reserved for employee stock purchase plan 700,023 500,000 Reserved for overallotment shares 562,500 — 8,343,673 4,979,255 10. Stock-Based Compensation Equity Incentive Plans In November 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 December 31, 2020, 1,093,210 shares of common stock were available for issuance under the 2019 Plan. In March 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). At adoption, the 2020 Inducement Plan authorized 750,000 shares of the Company’s common stock for future issuance. In December 2020, the Company’s board of directors authorized an additional 750,000 shares of the Company’s common stock for future issuance. As of December 31, 2020, 916,200 shares of common stock were available for issuance under the 2020 Inducement Plan. 144 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 period: Year ended December 31, 2020 2019 Exercise price $10.40-$26.59 $2.94-$15.00 Expected term (in years) 5.5-6.1 5.5-6.3 Expected volatility 77.07%-95.85% 73.88%-84.59% Risk-free interest rate 0.33%-1.73% 1.41%-2.46% Expected dividend yield — — Grant date fair value of options granted $7.38-$20.21 $5.10-$10.46 The following table summarizes stock option activity during the year ended December 31, 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 2,070,267 $ 17.87 Exercised (47,604 ) $ 6.90 Canceled and forfeited (317,735 ) $ 10.45 Outstanding as of December 31, 2020 5,071,740 $ 9.99 8.6 $ 40,631 Vested and exercisable as of December 31, 2020 1,468,291 $ 5.12 8.1 $ 18,289 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. The weighted-average grant-date fair value per share of stock options granted during the years ended December 31, 2020 and 2019 was $12.70 and $8.29 per share, respectively. The total intrinsic value of options exercised during the years ended December 31, 2020 was $0.5 million. There were no options exercised during the year ended December 31, 2019. As of December 31, 2020, the total unrecognized stock-based compensation related to unvested stock option awards granted was $33.3 million, which the Company expects to recognize over a weighted-average period of approximately 2.7 years. In January 2021, the Company granted stock options to purchase an aggregate of 1,065,200 shares of common stock pursuant to the 2019 Plan at a weighted-average exercise price of $19.19 per share and stock options to purchase an aggregate of 126,400 shares of common stock pursuant to the 2020 Inducement Plan at a weighted-average exercise price of $19.89 per share. 145 Restricted Stock In November 2018, in connection with the issuance of the 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 modified shares have a four-year vesting period and a measurement date fair value of $2.936 per share. For the years ended December 31, 2020 and 2019, 133,593 and 135,350 shares vested, respectively. The total fair value of shares vested during the years ended December 31, 2020 and 2019 was $0.4 million and $0.4 million, respectively, which was recorded as stock-based compensation in the consolidated statement of operations. As of December 31, 2020, the total unrecognized compensation expense related to unvested restricted stock was $0.8 million expected to be recognized over a weighted-average period of approximately 1.9 years. 2019 Employee Stock Purchase Plan 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 reserved 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 December 31, 2020, 29,876 shares were issued under the ESPP and the Company had 700,023 shares available for future issuance. Total stock-based compensation is reflected in the consolidated statements of operations as follows (in thousands): Year Ended December 31, 2020 2019 General and administrative $ 7,425 $ 3,711 Research and development 5,129 2,359 Total $ 12,554 $ 6,070 11. Income Taxes The Company’s losses before income taxes for the years ended December 31, 2020 and 2019 are as follows (in thousands): Year Ended December 31, 2020 2019 U.S. loss before taxes $ (103,371 ) $ (52,654 ) Foreign income before taxes 107 122 Loss before income taxes (103,264 ) (52,532 ) For the years ended December 31, 2020 and 2019, the Company had a current tax provision of $6,000 and $21,000 related to foreign taxes, respectively. A reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate is as follows: 146 Year Ended December 31, 2020 2019 Federal statutory income tax rate 21.00 % 21.00 % State tax 0.42 (1.62 ) Permanent differences (0.89 ) (0.78 ) Tax credits 6.42 7.32 Change in valuation allowance (26.96 ) (25.95 ) Total tax benefit (0.01 ) % (0.03 ) % Significant components of the Company’s deferred tax assets are as follows (in thousands): December 31, 2020 2019 Deferred tax assets: Net operating losses $ 26,122 $ 9,486 Tax credit carryforwards 11,294 4,378 Accrued expenses 812 364 Intangibles 5,560 3,570 Lease liability 661 737 Stock-based compensation 2,769 989 Total deferred tax assets 47,218 19,524 Deferred tax liabilities: Operating lease right-of-use assets (385 ) (468 ) Fixed assets (184 ) (228 ) Total deferred tax liabilities (569 ) (696 ) Valuation allowance (46,649 ) (18,828 ) Net deferred tax assets $ — $ — The valuation allowance increased by $27.8 million and $13.6 million for the years ended December 31, 2020 and 2019, respectively. The tax benefit of deductible temporary differences or carryforwards is recorded as a deferred tax asset to the extent that management assesses the realization is “more likely than not.” Future realization of the tax benefit ultimately depends on the existence of sufficient taxable income within the period available under the tax law. At December 31, 2020 and 2019, the Company has set up valuation allowances against all federal and state net deferred tax assets because based on all available evidence, these deferred tax assets are not more than likely to be realizable. The Company had federal and state net operating loss carryforwards of approximately $123.5 million and $2.6 million at December 31, 2020, and $44.4 million and $2.2 million at December 31, 2019, respectively. Federal losses do not expire, and California net operating losses will begin to expire in 2038. The Company also has federal general business credit and California research and development credit carryforwards totaling $14.5 million and $0.9 million at December 31, 2020, and $5.6 million and $0.3 million at December 31, 2019, respectively. The federal research and development credit carryforwards will begin to expire in 2038, unless previously utilized. The California research credits do not expire. In general, if the Company experiences a greater than 50 percentage point aggregate change in ownership of certain significant stockholders over a three-year period (a “Section 382 ownership change”), utilization of its pre-change NOL carryforwards and the research and development credit carryforwards is subject to an annual limitation under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and similar state laws. The annual limitation generally is determined by multiplying the value of the Company’s stock at the time of such ownership change, subject to certain adjustments, by the applicable long-term tax-exempt rate. Such limitations may result in expiration of a portion of the NOL carryforwards and research and development credit carryforwards before utilization and may be material. As of December 31, 2020, the Company has not determined to what extent a 147 potential ownership change will impact the annual limitation that may be placed on the Company’s utilization of its NOL carryovers and research and development credit carryforwards. The Company recognizes the financial statements effects of a tax position when it is more likely than not, based on technical merits, that the position will be sustained upon examination. A reconciliation of the Company’s unrecognized tax benefits is as follows (in thousands): Year Ended December 31, 2020 2019 Balance at beginning of year $ 1,490 $ 116 (Decrease) related to prior year tax positions (17 ) (20 ) Increases related to current year tax positions 2,460 1,394 Balance at end of year $ 3,933 $ 1,490 The Company has considered the amounts and probabilities of the outcomes that can be realized upon ultimate settlement with the tax authorities and determined unrecognized tax benefits primarily related to credits should be established as noted in the summary rollforward above. The unrecognized tax benefits, if recognized and in absence of full valuation allowance, would impact the income tax provision by $3.6 million and $1.5 million in 2020 and 2019, respectively. The Company’s effective income tax rate would not be impacted if the unrecognized tax benefits are recognized in 2020 and 2019. As of December 31, 2020, the Company does not believe that it is reasonably possible that its unrecognized tax benefits would significantly change in the following 12 months. The Company is subject to taxation in the United States federal jurisdiction, state jurisdictions and Switzerland. Due to the Company’s losses incurred, the Company is subject to the income tax examination by authorities since inception on May 2, 2018. The Company’s policy is to recognize interest expense and penalties related to income tax matters as tax expense. As of December 31, 2020, there were no significant accruals for interest related to unrecognized tax benefits or tax penalties. The Company has not provided U.S. income or foreign withholding taxes on the undistributed earnings of its foreign subsidiaries as of December 31, 2020 and 2019, because it intends to permanently reinvest such earnings outside of the U.S. If these foreign earnings were to be repatriated in the future, the related U.S. tax liability will be immaterial, due to the participation exemption put in place in the Tax Act. We have elected to account for Global Intangible Low-taxed Income (GILTI) as a current period expense when incurred. 12. Contingencies The Company is subject to potential liabilities under government regulations and various claims and legal actions that are pending or may be asserted from time-to-time. These matters arise in the ordinary course and conduct of the Company’s business and may include, for example, commercial, intellectual property, and employment matters. The Company intends to defend itself vigorously in such matters and when warranted, take legal action against others. Furthermore, the Company regularly assesses contingencies to determine the degree of probability and range of possible loss for potential accrual in its financial statements. An estimated loss contingency is accrued in the Company’s financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company does not accrue amounts for liabilities that it does not believe are probable. Litigation is inherently unpredictable, and unfavorable resolutions could occur. As a result, assessing contingencies is highly subjective and requires judgment about future events. During the periods presented, the Company has not recorded any accrual for loss contingencies associated with such government regulations, claims or legal actions, determined that an unfavorable outcome is probable or reasonably possible, or determined that the amount or range of any possible loss is reasonably estimable. 148 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None.