Stoke Therapeutics, Inc. 10-Q

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 consolidated results of operations together with the section entitled “Risk Factors” and our interim condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should carefully read the sections entitled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Overview We are pioneering a new way to treat the underlying causes of severe genetic diseases by precisely upregulating protein expression. We are developing novel antisense oligonucleotide (“ASO”), medicines that target ribonucleic acid (“RNA”), and modulate precursor-messenger RNA, splicing to upregulate protein expression where needed and with appropriate specificity to near normal levels. We utilize our proprietary technology platform, Targeted Augmentation of Nuclear Gene Output (“TANGO”), to design ASOs to upregulate the expression of protein by individual genes in a patient. Our approach is designed to allow us to deliver in a highly precise, durable and controlled manner disease-modifying therapies to a wide range of relevant tissues, including the central nervous system, eye, kidney and liver. We were incorporated in June 2014. In July 2015 and April 2016, we entered into worldwide license agreements with Cold Spring Harbor Laboratory (“CSHL”), and the University of Southampton, respectively, with respect to certain licensed patents and applications relating to TANGO. TANGO exploits non-productive splicing events to effect targeted enhancement of protein expression. Since our inception through June 21, 2019, our operations have been financed primarily from the sale of convertible notes payable and our convertible preferred stock. On June 21, 2019, we completed an initial public offering (“IPO”), of our common stock and issued and sold 9,074,776 shares of common stock at a public offering price of $18.00 per share, which included 1,183,666 shares sold upon full exercise of the underwriters’ option to purchase additional shares of common stock resulting in net proceeds of $151.9 million after deducting underwriting discounts and commissions but before deducting offering costs of approximately $2.5 million. As of September 30, 2020 and December 31, 2019 we had $191.7 million and $222.7 million, respectively, in cash, cash equivalents and restricted cash. Since inception, we have had operating losses, the majority of which are attributable to research and development activities. Our net losses were $13.7 million and $8.6 million for the three months ended September 30, 2020 and 2019, respectively and $37.7 million and $22.2 million for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, we had an accumulated deficit of $95.7 million and as of December 31, 2019 we had an accumulated deficit of $58.0 million. 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. We expect to continue to incur net losses for the foreseeable future, and we expect our research and development expenses, general and administrative expenses, and capital expenditures will continue to increase. In particular, we expect our expenses and losses to increase as we continue our development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products, as well as hire additional personnel, develop commercial infrastructure, pay fees to outside consultants, lawyers and accountants, and incur increased costs associated with being a public company such as expenses related to services associated with maintaining compliance with Nasdaq listing rules and Securities and Exchange Commission (“SEC”) requirements, insurance and investor relations costs. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and our expenditures on other research and development activities. Based upon our current operating plan, we believe that our existing cash, cash equivalents and restricted cash as of September 30, 2020, will enable us to fund our operating expenses and capital expenditure requirements into 2023. To date, we have not had any products approved for sale and have not generated any product sales. We do not expect to generate any revenues from product sales unless and until we successfully complete development and obtain regulatory approval for one or more of our product candidates, which we expect will 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. As a result, until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through equity offerings, debt financings or other capital sources, including potentially 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. Any failure to raise capital as and 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 capital, we will need to delay, reduce or terminate planned activities to reduce costs. 17 In July 2020, the Company filed a universal shelf registration statement on Form S-3 (the “Registration Statement”) with the SEC. The Registration Statement was declared effective by the SEC on July 20, 2020, and contains two prospectuses: a base prospectus, which covers the offering, issuance and sale by the Company of up to a maximum aggregate offering price of $400,000,000 of our common stock, p referred stock, debt securities, warrants to purchase our common stock, preferred stock or debt securities, subscription rights to purchase our common stock, preferred stock or debt securities and/or units consisting of some or all of these securities; and a sales agreement prospectus covering the offering, issuance and sale by us of up to a maximum aggregate offering price of $150,000,000 of our common stock that may be issued and sold under a Controlled Equity Offering Sales Agreement. The specific terms of any securities to be offered pursuant to the base prospectus will be specified in a prospectus supplement to the base prospectus. The $150,000,000 of common stock that may be offered, issued and sold under the sales agreement prospectus is included in t he $400,000,000 of securities that may be offered, issued and sold by the Company under the base prospectus. As of September 30, 2020, the Company has not issued any securities in connection with the Registration Statement. Business Update Regarding COVID-19 The current COVID-19 pandemic has presented a substantial public health and economic challenge around the world and is affecting our employees, patients, communities and business operations, as well as the U.S. economy and financial markets. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations, liquidity and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets. To date, our third party contract research organizations (“CROs”), contract manufacturing organizations (“CMOs”), and other third party vendors have been able to continue to provide services and supply reagents, materials, and products and currently do not anticipate any significant disruption in services or interruptions in supply. We have pursued mitigation strategies to keep key research activities on track. Our third-party CMOs continue to operate their manufacturing facilities at or near normal levels. While we currently do not anticipate any significant interruptions in our manufacturing processes, it is possible that the COVID-19 pandemic and response efforts may have an impact in the future on our third-party suppliers and CMO’s ability to manufacture reagents, materials, or products that we need to use in our research and clinical trial. However, we are continuing to assess the potential impact of the COVID-19 pandemic on our business and operations, including our expenses, our observational study, our clinical trial, and our ability to hire and retain employees. Our ability to continue our observational study may be adversely affected, directly or indirectly, by the COVID-19 pandemic. Currently we are monitoring patient enrollment in our observational study, including the duration and degree to which we may see declines in enrollment, delays in conducting in-person follow-ups, and disruptions in our ability to monitor patients due to hospitals closing sites or diverting the resources that are necessary to conduct our observational study. Despite a slowdown in new patient enrollment due to the impact of COVID-19 on sites, we believe we have achieved sufficient participation in the study to provide informative data about the natural progression of Dravet syndrome. While we continue to enroll and dose patients in our Phase 1/2a clinical trial at sites across the United States, we expect that COVID-19 precautions may directly or indirectly impact the timeline for some of our clinical trial activities due to hospitals closing sites and/or diverting the resources that are necessary to conduct clinical trials. We are pursuing approaches to help mitigate the impact to our clinical trial. Currently we have not experienced any delay in initiating our clinical trial. The COVID-19 pandemic has caused us to modify our business practices (including but not limited to curtailing or modifying employee travel, moving to partial remote work, and cancelling physical participation in meetings, events and conferences) and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, patients and business partners. Our office-based employees have been working from home since early March 2020, while ensuring essential staffing levels in our operations remain in place, including maintaining key personnel in our laboratories. For additional information on the various risks posed by the COVID-19 pandemic, please read Item 1A. Risk Factors included in this report. 18 Program Update Dravet Syndrome Program - STK-001 We designed our lead product candidate, STK-001, to treat Dravet syndrome, a severe and progressive genetic epilepsy. This program draws on a well-defined patient population based on routine genetic testing and learnings from drugs approved for the treatment of Dravet syndrome to inform the clinical and regulatory pathways for STK-001. We anticipate that the COVID-19 pandemic may directly or indirectly impact the timeline of our clinical program for STK-001. We submitted an investigational new drug application (“IND”) for STK-001 to the U.S. Food and Drug Administration (the “FDA”), in late 2019. In the first quarter of 2020, we received communication from the FDA confirming that we may proceed with clinical dosing of the first 2 cohorts of the planned Phase 1/2a clinical trial (the “MONARCH Study”). In March 2020, the Company announced the FDA had placed a partial clinical hold on doses of STK-001 above 20mg in the MONARCH Study, pending additional preclinical testing to determine the safety profile of doses higher than the current no observed adverse effect level (“NOAEL”). When intrathecal doses above the NOAEL were administered to non-human primates (“NHPs”) adverse hind limb paresis was observed. This finding is known to occur following intrathecal delivery of ASOs to NHPs and is not known to translate to the human experience. When extremely high dose levels were administered, acute convulsions were observed immediately following STK-001 administration. The dose levels were well above the range of corresponding human doses that would ever be administered in the clinic and were delivered in a formulation that was at a higher concentration than would be administered in the clinic. There is no apparent correlation of these acute adverse events with the mechanism of action of STK-001. On August 5th, 2020, the first patient in the single ascending dose (“SAD”) portion (formerly, Part A) of the study was dosed with STK-001. We expect that COVID-19 precautions may directly or indirectly impact the timeline. On October 7, 2020, we announced plans to move forward with dosing of STK-001 in children and adolescents pursuant to the MONARCH Study. We announced that the FDA agreed that we could add a 30mg dose to the SAD portion of the study such that a total of three dose levels will now be evaluated: 10 mg, 20 mg, and 30mg. Dosing above 30mg in this study remains on partial clinical hold by the FDA. In addition, subject to review by the FDA, we are adding a multiple ascending dose (“MAD”) portion to the MONARCH Study, replacing Part B. This decision is based on new preclinical repeat-dose toxicology data, which were reviewed by the FDA as part of ongoing discussions with us. There were no adverse effects observed in the NHP repeat dose study. We submitted a protocol amendment to the FDA reflecting these changes to the SAD and MAD portions of the MONARCH Study. Enrollment and dosing in the MONARCH Study remain ongoing. We expect preliminary clinical data relating to the MONARCH Study in 2021. While we continue working to minimize any potential delay to continued clinical testing of STK-001, we expect that the COVID-19 pandemic may directly or indirectly impact the timeline. Our ability to continue the clinical trial or initiate the MAD portion of the clinical trial may be adversely affected, directly or indirectly, by the COVID-19 pandemic. For example, although our Phase 1/2a study of STK-001 for the treatment of Dravet syndrome has not been delayed, we plan to have clinical trial sites in various parts of the United States, some of which have had high incident rates of COVID-19 patients. Restrictions on travel and/or transport of clinical materials, as well as diversion of hospital staff and resources to COVID-19 infected patients, could disrupt trial operations as well as recruitment, possibly resulting in a slowdown in enrollment and/or deviations from or disruptions in key clinical trial activities, such as clinical trial site monitoring. These challenges may lead to difficulties in meeting protocol-specified procedures. Autosomal Dominant Optic Atrophy Program In November 2020, we announced the nomination of OPA1 as our next target for preclinical development to treat Autosomal Dominant Optic Atrophy (“ADOA”). ADOA is the most common inherited optic nerve disorder seen in clinical practice and causes progressive and irreversible vision loss in both eyes starting in the first decade of life. Many children progress to blindness. The disease affects one in 30,000 people globally with a higher incidence of approximately one in 10,000 in Denmark due to a founder effect. 65% to 90% of ADOA is caused by loss of function mutations in one allele of the OPA1 gene which leads to haploinsufficiency and disease manifestation. More than 400 different OPA1 mutations have been reported in people diagnosed with ADOA. Most mutations result in a severe decrease – up to 50% – of the normal amount of the OPA1 protein. There is no strong genotype-phenotype correlation. OPA1 is a dynamin-related GTPase that plays a key role in maintaining mitochondria structure and dynamics. The OPA1 protein is imported into the mitochondria and is the crucial molecule that mediates inner mitochondria membrane fusion and cristae morphogenesis and is critical for oxidative phosphorylation and ATP synthesis. Insufficient OPA1 activity causes mitochondria dysfunction with consequent insufficient ATP production, excess reactive oxygen species production and eventual cell death. High energy demanding cells such as neurons and cardiomyocytes are particularly susceptible to mitochondria dysfunction, and retinal ganglion cells (“RGCs”) are a neuronal cell type most susceptible to loss of OPA1 protein as evidenced by RGC death in ADOA caused by OPA1 haploinsufficiency. 19 A clinical diagnosis of dominant optic atrophy is made when a patient meets some or all of the following criteria: pathogenic variant of the OPA1 gene identified in the patient or a family member; reduced visual acuity; temporal disc pallor; visual field defect; color vision defect (acquired blue-yellow loss); thinning of retinal nerve fiber layer and abnormal visual evoked potentials. Clinical findings are based on: intraocular pressure measurement; visual field assessment; color discrimination; dilated slit lamp biomicroscopy; optical coherence tomography; or visual electrophysiology. Patients suspected of dominant optic atrophy are recommended to receive genetic testing to confirm the clinical diagnosis, help identify other family members who are affected and ensure patients avoid stressors that could increas e disease progression (e.g. smoking, alcohol). The prognosis for many patients with dominant optic atrophy is poor and the rate of visual loss can be difficult to predict given significant inter- and intra-familial variability. There are currently no available treatments for dominant optic atrophy. Because ADOA causes deterioration of the optic nerves, corrective aids such as glasses or contacts do not help to improve vision lost to the disease. Supportive services and low-vision aids are offered for patients with severely decreased visual acuity. Our ASOs are designed to target the underlying cause of ADOA, which is OPA1 haploinsufficiency, by decreasing a non-productive mRNA splicing event in the OPA1 gene to increase productive OPA1 mRNA and OPA1 protein in the retinal ganglion cells. OPA1 Preclinical Data for the Potential Treatment of ADOA We previously identified a novel exon inclusion event (“Exon X”) in OPA1 that leads to non-productive mRNA due to introduction of a premature termination codon (“PTC”) (Figure 1 below). In April 2020 and June 2020, we provided data in presentations at the American Society of Gene & Cell Therapy and the Association for Research in Vision and Ophthalmology meetings, respectively, showing that ASO-14 blocked the incorporation of Exon X with consequent dose-dependent increase in productive OPA1 mRNA and protein due to reduction of Exon X-directed non-sense mediated decay (“NMD”) of OPA1 mRNA (Figure 2 below). We have now demonstrated that a single injection of ASO-14 surrogate in the rabbit eye leads to a dose-dependent increase in ASO accumulation in the retina that correlated with an increase in target engagement (removal of Exon X) and an increase in OPA1 protein (Figure 3 below). The study was conducted using female NZW rabbits that were injected with a single dose of vehicle alone or vehicle containing ASO (n=3/group). On Days 15 and 29, the retinal tissue was collected and analyzed. Specifically, we learned that retinal exposure of ASO-14 surrogate (ST-1102) was elevated with increased dosing, dose-dependent target engagement was seen at all three time-points examined, and protein increase of OPA1 protein was observed at both Day 15 and Day 29 of the study. We further showed that in OPA1 haploinsufficient human cells, ASO-14-mediated increase in OPA1 protein translates to improved mitochondrial function as measured by the substantial restoration of Adenosine triphosphate (“ATP”) levels in the treated cells (Figure 4 below). ATP is produced by the mitochondria and is the key energy carrying molecule in cells. We observed a 20% ATP deficit in OPA1 +/- HEK293. Treatment with ASO-14 restored ATP levels to ~90% of control cells. Figure 1: A representation of the non-productive mRNA splicing event in OPA1 20 Figure 2: Inhibition of NMD with cycloheximide allows for evaluation of the abundance of this event in vitro 21 Figure 3: Rabbit ASO demonstrates dose-dependent OPA1 protein increase in rabbit retina 22 Figure 4 : Human ASO demonstrates ATP upregulation in OPA1 haploinsufficient HEK293 cells ** = P value 0.0006 *** = P value <0.0001 ### = P value 0.0006 We believe our preclinical data to date support the use of our TANGO technology to treat ADOA due to OPA1 haploinsufficiency. We have observed that ASO-mediated specific reduction in non-productive OPA1 mRNA provides an increase in productive OPA1 mRNA and an increase in OPA1 protein in a dose-dependent manner in vitro . We have also observed dose-dependent ASO exposure and consequent reduction in non-productive mRNA and increase in OPA1 protein in vivo in the rabbit retina. Test compounds were well-tolerated in wild-type rabbit for up to 29 days after intravitreal injection (maximum days evaluated). ASO-mediated increase in OPA1 protein levels in OPA1 haploinsufficient cells correlated with a substantial restoration of mitochondrial function as measured by an increase in ATP synthesis capability. The TANGO approach utilizes the wild-type OPA1 allele and can potentially be used to treat ADOA due to loss of OPA1 activity in a mutation-independent manner. As with STK-001 for Dravet syndrome, our study and development of the use of our TANGO technology to treat ADOA is subject to the risks and uncertainties stemming from the COVID-19 pandemic, which may directly or indirectly impact our ability to pursue this new target, and the timing in which we do so. Financial operations overview Revenue We currently do not have any products approved for sale and have not generated any revenue since inception. If we are able to successfully develop, receive regulatory approval for and commercialize any of our current or future product candidates alone or in collaboration with third parties, we may generate revenue from the sales of these product candidates. 23 Operating expenses Research and development Research and development expenses consist primarily of costs incurred for the development of our discovery work and preclinical programs, which include: • personnel costs, which include salaries, benefits and stock-based compensation expense; • expenses incurred under agreements with consultants, third-party contract organizations that conduct research and development activities on our behalf, costs related to production of preclinical material and laboratory and vendor expenses related to the execution of preclinical studies; • scientific consulting, collaboration and licensing fees; • laboratory equipment and supplies; and • facilities costs, depreciation and other expenses related to internal research and development activities. We use our personnel and infrastructure resources across multiple research and development programs directed toward identifying and developing product candidates. Our direct research and development expenses are tracked on a program-by-program basis from the point a program becomes a clinical candidate for us and consists primarily of external costs, such as fees paid to consultants, central laboratories and contractors in connection with our preclinical activities. We do not allocate employee costs, costs associated with our technology or facility expenses, including depreciation or other indirect costs, to specific programs because these costs are currently deployed across multiple product development programs and, as such, are not separately classified. We use internal resources to manage our development activities and our employees work across multiple development programs and, therefore, we do not track their costs by program. The table below summarizes our research and development expenses incurred by development program (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 STK-001 $ 2,827 $ 3,228 $ 8,423 $ 7,565 Non-program specific and unallocated research and development expenses 5,282 3,290 14,870 9,110 Total research and development expenses $ 8,109 $ 6,518 $ 23,293 $ 16,675 We expense all research and development costs in the periods in which they are incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and third-party service providers. We expect that our expenses will increase substantially in connection with our planned discovery work, preclinical and clinical development activities in the near term and our planned clinical trials in the future. At this time, we cannot reasonably estimate the costs for completing the preclinical and clinical development of any of our other product candidates. We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our product candidates, including investments in manufacturing, as our programs advance into later stages of development and we conduct clinical trials. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain. As a result, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates. 24 Because of the numerous risks and uncertainties associated with product development, we cannot determine with certainty the duration and completion costs of the current or future preclinical studies and clinical trials or if, when, or to what extent we will generate revenues from the commercialization and sale of our product candidates. We may never succeed in achieving regulatory approval for our product candidates. The duration, costs and timing of preclinical studies and clinical trials and develo pment of our product candidates will depend on a variety of factors, which may be directly or indirectly impacted by the COVID-19 pandemic, including: • successful completion of preclinical studies and investigational new drug-enabling studies; • successful enrollment in, and completion of, clinical trials; • receipt of regulatory approvals from applicable regulatory authorities; • furthering our commercial manufacturing capabilities and arrangements with third-party manufacturers; • obtaining and maintaining patent and trade secret protection and non-patent exclusivity; • launching commercial sales of our product candidates, if and when approved, whether alone or in collaboration with others; • acceptance of our product candidates, if and when approved, by patients, the medical community and third-party payors; • effectively competing with other therapies and treatment options; • a continued acceptable safety profile following approval; • enforcing and defending intellectual property and proprietary rights and claims; and • achieving desirable medicinal properties for the intended indications. A change in the outcome of any of these factors could mean a significant change in the costs and timing associated with the development of our current and future preclinical and clinical product candidates. For example, if the FDA, or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development, or if we experience significant delays in execution of or enrollment in any of our preclinical studies or clinical trials, we could be required to expend significant additional financial resources and time on the completion of preclinical and clinical development. We expect our research and development expenses to increase for the foreseeable future as we continue the development of product candidates. General and administrative expenses General and administrative expenses consist primarily of personnel costs, costs related to maintenance and filing of intellectual property, expenses for outside professional services, including legal, human resources, information technology, audit and accounting services, and facilities and other expenses. Personnel costs consist of salaries, benefits and stock-based compensation expense. We expect our general and administrative expenses to increase over the next several years to support our continued research and development activities, manufacturing activities, increased costs of operating as a public company and the potential commercialization of our product candidates. These increases are anticipated to include increased costs related to the hiring of additional personnel, developing commercial infrastructure, fees to outside consultants, lawyers and accountants, and increased costs associated with being a public company such as expenses related to services associated with maintaining compliance with Nasdaq listing rules and SEC requirements, insurance and investor relations costs. Interest Income Interest income consists primarily of interest received on our invested fund s. Other income (expense) Our other income (expense), includes (i) interest income earned on cash reserves in our operating money-market fund investment accounts and (ii) other items of income (expense), net. 25 Results of operations for the three months ended September 30, 2020 and 201 9 The following table sets forth our results of operations: Three Months Ended September 30, 2020 2019 (in thousands) Consolidated statements of operations: Revenue $ — $ — Operating expenses: Research and development 8,109 6,518 General and administrative 5,602 3,324 Total operating expenses $ 13,711 $ 9,842 Loss from operations $ (13,711 ) $ (9,842 ) Other income: Interest income 11 1,236 Other income (expense), net 16 2 Total other income $ 27 $ 1,238 Net loss $ (13,684 ) $ (8,604 ) Research and development expenses Research and development expenses were $8.1 million for the three months ended September 30, 2020 as compared to $6.5 million for the three months ended September 30, 2019, an increase of $1.6 million. The table below summarizes our research and development expenses (in thousands): Three Months Ended September 30, 2020 2019 STK-001 $ 2,827 $ 3,228 Personnel-related expenses 2,722 1,804 Third-party services 424 244 Scientific consulting 183 214 Facilities and other research and development expenses 1,953 1,028 Total research and development expenses $ 8,109 $ 6,518 The increase in research and development expenses were primarily attributable to an increase of $0.9 million in personnel costs resulting from an increase in headcount, an increase of $0.2 million in consulting, third-party services, materials and other costs as we advance our discovery, preclinical and clinical activities, and an increase of $0.9 million in facilities and other costs, partially offset by a decrease of $0.4 million in expenses our STK-001 program which comprised of third-party services and scientific consulting fees. The increases in expense reflect the accelerating pace of research and development activities and the increases in personnel, facilities, third party and consulting services to support those activities. General and administrative expenses General and administrative expenses were $5.6 million for the three months ended September 30, 2020 as compared to $3.3 million for the three months ended September 30, 2019, an increase of $2.3 million. The increase in general and administrative expenses were primarily attributable to an increase of $0.7 million in personnel costs resulting from an increase in headcount, and an increase of $1.6 million in third-party services to support our in-house personnel in various aspects of developing and supporting the business including human resources, information technology, audit, tax, public relations, communications and other general and administrative activities and expenses including stock compensation expense. Other income The change in our other income for the three months ended September 30, 2020 as compared to the three months ended September 30, 2019 primarily reflects a reduction in cash balances and a decrease in market interest rates. 26 Results of operations for the nine months ended September 30, 2020 and 2019 The following table sets forth our results of operations: Nine Months Ended September 30, 2020 2019 (in thousands) Consolidated statements of operations: Revenue $ — $ — Operating expenses: Research and development 23,293 16,675 General and administrative 15,165 7,935 Total operating expenses $ 38,458 $ 24,610 Loss from operations $ (38,458 ) $ (24,610 ) Other income: Interest income 734 2,447 Other income (expense), net 42 (2 ) Total other income $ 776 $ 2,445 Net loss $ (37,682 ) $ (22,165 ) Research and development expenses Research and development expenses were $23.3 million for the nine months ended September 30, 2020 as compared to $16.7 million for the nine months ended September 30, 2019, an increase of $6.6 million. The table below summarizes our research and development expenses (in thousands): Nine Months Ended September 30, 2020 2019 STK-001 $ 8,423 $ 7,565 Personnel-related expenses 7,711 5,015 Third-party services 1,176 801 Scientific consulting 800 380 Facilities and other research and development expenses 5,183 2,914 Total research and development expenses $ 23,293 $ 16,675 The increase in research and development expenses were primarily attributable to an increase of $0.9 million on our STK-001 program, comprised of third-party services and scientific consulting fees, an increase of $2.7 million in personnel costs resulting from an increase in headcount, an increase of $0.8 million in consulting, third-party services, materials and other costs as we advance our discovery and preclinical activities, and an increase of $2.2 million in facilities and other costs. General and administrative expenses General and administrative expenses were $15.2 million for the nine months ended September 30, 2020 as compared to $7.9 million for the nine months ended September 30, 2019, an increase of $7.3 million. The increase in general and administrative expenses were primarily attributable to $2.7 million in third-party services to support our in-house personnel in various aspects of developing and supporting the business including human resources, information technology, audit, tax, public relations, communications and other general and administrative activities, an increase of $2.5 million in personnel costs resulting from an increase in headcount, and an increase of $2.1 million in stock compensation expense. Other income (expense) The change in our other income (expense) for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019 principally reflects a reduction in cash balances and a decrease in market interest rates. 27 Liquidity and capital resources Since our inception through December 31, 2019, our operations have been primarily financed by net proceeds of $280.4 million from the sale of convertible notes payable and our convertible preferred stock as well as our IPO. As of September 30, 2020, we had $191.7 million in cash, cash equivalents and restricted cash. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. We have incurred losses since our inception in June 2014 and, as of September 30, 2020, we had an accumulated deficit of $95.7 million. 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. Based upon our current operating plan, we believe that our existing cash, cash equivalents and restricted cash will enable us to fund our operating expenses and capital expenditure requirements into 2023. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. We will continue to require additional financing to advance our current product candidates through clinical development, to develop, acquire or in-license other potential product candidates and to fund operations for the foreseeable future. We will continue to seek funds through equity offerings, debt financings or other capital sources, including potentially 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. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any failure to raise capital as and 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 capital, we will need to delay, reduce or terminate planned activities to reduce costs. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, and the full extent to which the COVID-19 pandemic will directly or indirectly impact our business, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to: • the scope, progress, results and costs of researching and developing our lead product candidates or any future product candidates, and conducting nonclinical studies and clinical trials; • the timing of, and the costs involved in, obtaining regulatory approvals or clearances for our lead product candidates or any future product candidates; • the number and characteristics of any additional product candidates we develop or acquire; • the timing of any cash milestone payments if we successfully achieve certain predetermined milestones; • the cost of manufacturing our lead product candidates or any future product candidates and any products we successfully commercialize, including costs associated with building-out our manufacturing capabilities; • our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of any such agreements that we may enter into; • the expenses needed to attract and retain skilled personnel; • the costs associated with being a public company; and • the timing, receipt and amount of sales of any future approved or cleared products, if any. Further, our operating plans may change, and we may need additional funds to meet operational needs and capital requirements for clinical trials and other research and development activities. We currently have no credit facility or committed sources of capital. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated product development programs. 28 Cash flows The following table summarizes our cash flows: Nine Months Ended September 30, 2020 2019 (in thousands) Net cash (used in) provided by: Operating activities $ (31,290 ) $ (20,854 ) Investing activities (960 ) (1,065 ) Financing activities 1,240 149,570 Net increase (decrease) in cash, cash equivalents and restricted cash $ (31,010 ) $ 127,651 Operating activities During the nine months ended September 30, 2020, cash used in operating activities was $31.3 million and was primarily attributable to a net loss of $37.7 million, partially offset by non-cash charges of $5.6 million for share-based compensation, depreciation, and reduction in the carrying amount of right of use assets, and a net change of $0.8 million in our net operating assets and liabilities. During the nine months ended September 30, 2019, cash used in operating activities was $20.9 million and was primarily attributable to a net loss of $22.2 million offset by non-cash charges of $1.5 million and a net change of $0.2 million in our net operating assets and liabilities. Investing activities Our investing activities during the nine months ended September 30, 2020 and 2019 have consisted principally of purchases of property and equipment. Financing activities Our financing activities during the nine months ended September 30, 2020 consisted of $1.2 million in proceeds from the issuance of common stock upon exercise of stock options and $0.4 million in proceeds from our Employee Stock Purchase Plan offset by $0.4 million in deferred financing costs. Our financing activities during the nine months ended September 30, 2019 consisted primarily of $149.4 million of net proceeds related to our IPO which occurred in June 2019. Contractual obligations and commitments The following table summarizes our contractual obligations as of September 30, 2020 and the effects that such obligations are expected to have on our liquidity and cash flows in future fiscal periods: Payments Due by Fiscal Period Total Less Than 1 Year 1 to 3 Years 4 to 5 Years More than 5 Years (in thousands) Operating lease obligations $ 1,473 $ 290 $ 1,183 $ — $ — Total $ 1,473 $ 290 $ 1,183 $ — $ — In August 2018, we entered into an agreement to lease approximately 23,000 square feet of space for a term of three years. Lease terms are triple net lease commencing at $0.9 million per year, then with 3% annual base rent increases plus operating expenses, real estate taxes, utilities and janitorial fees. The lease commencement date was December 10, 2018. In December 2018, we entered into an agreement to lease 2,485 square feet of space for a term of three years. The lease includes one renewal option for an additional two years. Lease terms commence at $0.2 million per year, with 2.5% annual base rent increases plus operating expenses, real estate taxes, utilities and janitorial fees. The lease commencement date was May 1, 2019. 29 Commitments Our commitments primarily consist of obligations under our agreements with CSHL and the University of Southampton. As of September 30, 2020, we were unable to estimate the timing or likelihood of achieving the milestones or making future product sales. For additional information regarding our agreements, see Note 5—Commitments and Contingencies of the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q . Additionally, we have entered into agreements with third-party contract manufacturers for the manufacture and processing of certain of our product candidates for preclinical testing purposes, and we have entered and will enter into other contracts in the normal course of business with contract research organizations for clinical trials and other vendors for other services and products for operating purposes. These agreements generally provide for termination or cancellation, other than for costs already incurred. Off-balance sheet arrangements During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements as defined under SEC rules. Critical accounting policies and significant judgments and estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles (“GAAP”). The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are 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 from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. There have been no significant changes 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 Operations” included in our Annual Report on Form 10-K filed with the SEC on March 23, 2020. Emerging growth company and smaller reporting company status We are an “emerging growth company,” as defined in the Jumpstart our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our condensed consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. We will remain an emerging growth company until the earliest of (1) the last day of our first fiscal year (a) in which we have total annual gross revenues of at least $1.07 billion, or (b) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30 th , (2) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period and (3) December 31, 2024. We are also a “smaller reporting company,” meaning that as of the date of our IPO, the market value of our stock held by non-affiliates was less than $700 million and its annual revenue is less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company as long as either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue is less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company, we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation. 30 Recently adopted and recently issued accounting pronouncements See Note 2—Summary of significant accounting policies and recent accounting pronouncements of the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information.