Stoke Therapeutics, Inc. 10-K

Item 9A. Controls and Procedures. Management’s Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Financial Officer (Our principal accounting officer) and Chief Executive Officer (Our principal executive officer), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) as of December 31, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on our management’s evaluation (with the participation of our Chief Executive Officer and our Chief Financial Officer), as of the end of the period covered by this report, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level. 94 Management’s Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework issued in 2013. Based upon the assessments, management has concluded that as of December 31, 2021 our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. This Annual Report on Form 10-K does not include an attestation report from our independent registered public accounting firm due to a transition period established by the rules of the Securities and Exchange Commission for newly public companies. Additionally, for so long as we remain an “emerging growth company” under the JOBS Act or a “smaller reporting company,” our independent registered public accounting firm is not required to attest to the effectiveness of our internal control over financial reporting. Changes in Internal Control over Financial Reporting There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness. Inherent Limitations on Effectiveness of Controls Internal control over financial reporting may not prevent or detect all errors and all fraud. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Item 9B. Other Information. None. Item 9C. Disclosure Regarding Foreign Jurisdictions That Prevent Inspections. None. 95 PART III Item 10. Directors, Executive Officers and Corporate Governance. The information required by this Item 10 will be included in our Definitive Proxy Statement to be filed with the Securities and Exchange Commission, or SEC, with respect to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference. We have adopted a Code of Conduct that applies to all of our officers, directors, and employees, including our principal executive officer, principal financial officer, principal accounting officer, and controller, or persons performing similar functions, which is posted on our website. Our Code of Conduct is a “code of ethics,” as defined in Item 406(b) of Regulation S-K. We will make any legally required disclosures regarding amendments to, or waivers of, provisions of our Code of Conduct on our website. The information contained on, or accessible from, our website is not part of this Annual Report on Form 10-K by reference or otherwise. Item 11. Executive Compensation. The information required by this Item 11 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by this Item 12 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this Item 13 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference. Item 14. Principal Accounting Fees and Services. The information required by this Item 14 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2022 Annual Meeting of Stockholders and is incorporated herein by reference . 96 PART IV Item 15. Exhibits, Financial Statement Schedules. (a) The following documents are filed as a part of this Form 10-K: Financial Statements Our consolidated financial statements are listed in the “Index to Consolidated Financial Statements” under Part II, Item 8 of this Form 10-K. Financial Statement Schedules Financial statement schedules not listed have been omitted because they are not applicable, or the required information is shown in the consolidated financial statements or notes thereto. Exhibits Exhibit Number Description Form File No. Exhibit Filing Date Exhibit No. Filed/Furnished Herewith 3.1 Restated Certificate of Incorporation. 10-Q 001-38938 August 14, 2019 3.1 3.2 Restated Bylaws, as amended S-3 333-239801 July 10, 2020 3.2 4.1 Form of Common Stock Certificate S-1 333-231700 June 7, 2019 4.1 4.2 Amended and Restated Investors’ Rights Agreement, dated October 22, 2018, by and among the Registrant and certain of its stockholders. S-1 333-231700 May 23, 2019 4.2 4.3 Description of Common Stock Registered Under Section 12 of the Securities Exchange Act of 1934. 10-K 001-38938 March 9, 2021 4.3 10.1 * Form of Indemnification Agreement with directors and officers. S-1 333-231700 June 7, 2019 10.1 10.2 * 2014 Equity Incentive Plan, as amended, and forms of award agreements. S-1 333-231700 May 23, 2019 10.2 10.3 * 2019 Equity Incentive Plan, and forms of award agreements. S-1 333-231700 June 7, 2019 10.4 10.4 * 2019 Employee Stock Purchase Plan, and forms of award agreements. S-1 333-231700 June 7, 2019 10.5 10.5* Amended and Restated Executive Employment Agreement, by and between the Registrant and Edward M. Kaye, effective as of October 21, 2020 10-Q 001-38938 November 12, 2020 10.1 10.6* Amended and Restated Executive Employment Agreement, by and between the Registrant and Stephen J. Tulipano, effective as of October 21, 2020. 10-Q 001-38938 November 12, 2020 10.2 10.7* Amended and Restated Executive Employment Agreement, by and between the Registrant and Barry Ticho, effective as of October 21, 2020. 10-K 001-38938 March 9, 2021 10.7 10.8* Change of Control and Severance Agreement, by and between the Registrant and Edward M. Kaye, effective as of October 21, 2020. 10-Q 001-38938 November 12, 2020 10.4 10.9* Change of Control and Severance Agreement, by and between the Registrant and Stephen J. Tulipano, effective as of October 21, 2020. 10-Q 001-38938 November 12, 2020 10.5 10.10* Change of Control and Severance Agreement, by and between the Registrant and Barry Ticho, effective as of October 21, 2020. 10-K 001-38938 March 9, 2021 10.10 97 Exhibit Number Description Form File No. Exhibit Filing Date Exhibit No. Filed/Furnished Herewith 10.11 Lease Agreement, dated as of September 8, 2021, by and between ARE-MA Region No. 24, LLC and the Registrant. 10-Q 001-38938 November 8, 2021 10.1 10.12 Lease Agreement, by and between MIT 139 Main Street Leasehold LLC, and the Registrant., as amended to date 10-Q 001-38938 August 10, 2021 10.1 10.13 Scientific Advisory Board Agreement by and between the Registrant and Adrian Krainer, Ph.D., dated June 1, 2021 X 10.14 Controlled Equity Offering Sales Agreement, dated as of July 10, 2020, between the Registrant, Cantor Fitzgerald & Co. and Stifel, Nicolaus & Company, Incorporated. S-3 333-239801 July 10, 2020 1.2 21.1 Subsidiary of the Registrant. S-1 333-231700 May 23, 2019 21.1 23.1 Consent of independent registered public accounting firm. X 31.1 Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 31.2 Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 32.1** Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X 32.2** Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X 101.INS Inline XBRL Instance Document. X 101.SCH Inline XBRL Taxonomy Extension Schema Document. X 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. X 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. X 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. X 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. X 104 Inline Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) X † Registrant has omitted certain portions of the exhibit pursuant to Item 601(b)(10) of Regulation S-K. * Indicates a management contract or compensatory plan or arrangement in which directors or executive officers are eligible to participate. ** The certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-K and are not deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall they be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act. 98 Item 16. Form 10-K Summary None. 99 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized . STOKE THERAPEUTICS, INC. Date: March 10, 2022 By: /s/ Edward M. Kaye, M.D. Edward M. Kaye, M.D. Chief Executive Officer POWER OF ATTORNEY Each person whose individual signature appears below hereby authorizes and appoints Edward M. Kaye and Stephen J. Tulipano, and each of them, with full power of substitution and re-substitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Name Title Date /s/ Edward M. Kaye Chief Executive Officer and Director March 10, 2022 Edward M. Kaye, M.D. (Principal Executive Officer) /s/ Stephen J. Tulipano Chief Financial Officer March 10, 2022 Stephen J. Tulipano (Principal Financial and Accounting Officer) /s/ Julie A. Smith Director March 10, 2022 Julie A. Smith /s/ Seth L. Harrison Director March 10, 2022 Seth L. Harrison, M.D. /s/ Adrian R. Krainer Director March 10, 2022 Adrian R. Krainer, Ph.D. /s/ Arthur A. Levin Director March 10, 2022 Arthur A. Levin, Ph.D. /s/ Arthur O. Tzianabos Director March 10, 2022 Arthur O. Tzianabos, Ph.D. /s/ Jennifer C. Burstein Director March 10, 2022 Jennifer C. Burstein /s/ Garry E. Menzel Director March 10, 2022 Garry E. Menzel 100 STOKE THERAPEUTICS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of independent registered public accounting firm 102 Consolidated balance sheets 103 Consolidated statements of operations and comprehensive loss 104 Consolidated statements of stockholders’ equity 105 Consolidated statements of cash flows 106 Notes to consolidated financial statements 107 101 Report of independent registered public accounting firm To the Stockholders and Board of Directors Stoke Therapeutics, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Stoke Therapeutics, Inc. and subsidiary (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years then ended, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ KPMG LLP We have served as the Company’s auditor since 2019. Boston, Massachusetts March 10, 2022 102 Stoke Therapeutics, Inc. Consolidated balance sheets (in thousands, except share and per share amounts) As of December 31, 2021 2020 Assets Current assets: Cash and cash equivalents $ 144,895 $ 287,308 Marketable securities 74,915 — Prepaid expenses and other current assets 9,159 6,435 Deferred financing costs 117 181 Interest receivable 132 6 Total current assets 229,218 293,930 Restricted cash 569 205 Operating lease right-of-use assets 4,939 1,115 Property and equipment, net 4,139 2,675 Total assets $ 238,865 $ 297,925 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 2,385 $ 1,495 Accrued and other current liabilities 14,754 9,930 Total current liabilities 17,139 11,425 Long term liabilities 3,949 422 Total liabilities 21,088 11,847 Commitments and contingencies (Note 7) Stockholders’ equity Common stock, par value of $ 0.0001 per share; 300,000,000 shares authorized, 36,902,499 and 36,577,149 shares issued and outstanding as of December 31, 2021 and 2020, respectively 4 4 Additional paid-in capital 414,024 396,352 Accumulated other comprehensive loss ( 168 ) — Accumulated deficit ( 196,083 ) ( 110,278 ) Total stockholders’ equity 217,777 286,078 Total liabilities and stockholders’ equity $ 238,865 $ 297,925 The accompanying notes are an integral part of these consolidated financial statements. 103 Stoke Therapeutics, Inc. Consolidated statements of operations and comprehensive loss (in thousands, except share and per share amounts) Year Ended December 31, 2021 2020 Revenue $ — $ — Operating expenses: Research and development 54,168 32,197 General and administrative 31,897 20,847 Total operating expenses 86,065 53,044 Loss from operations ( 86,065 ) ( 53,044 ) Other income (expense): Interest income (expense), net 120 700 Other income (expense), net 140 101 Total other income (expense) 260 801 Net loss ( 85,805 ) ( 52,243 ) Net loss per share—basic and diluted $ ( 2.34 ) $ ( 1.56 ) Weighted average common shares outstanding—basic and diluted 36,739,269 33,488,456 Comprehensive loss: Net loss $ ( 85,805 ) $ ( 52,243 ) Other comprehensive loss: Unrealized loss on marketable securities ( 168 ) — Total other comprehensive loss $ ( 168 ) $ — Comprehensive loss ( 85,973 ) ( 52,243 ) The accompanying notes are an integral part of these consolidated financial statements. 104 Stoke Therapeutics, Inc. Consolidated statements of stockholders’ equity (in thousands, except share and per share amounts) Common Stock Additional paid-in Accumulated Other Comprehensive Accumulated Shares Amount capital Gain (Loss) deficit Stockholders’ equity Balance as of December 31, 2019 32,861,842 3 $ 282,460 — $ ( 58,035 ) $ 224,428 Stock-based compensation — — 5,768 — — 5,768 Issuance of common stock upon exercise of stock options 822,916 — 2,843 — — 2,843 Issuance of common stock related to employee stock purchase plan 17,391 — 352 — — 352 Issuance of common stock upon follow-on offering, net of underwriting discounts, commissions, and offering costs 2,875,000 1 104,929 — — 104,930 Net loss — — — — ( 52,243 ) ( 52,243 ) Balance as of December 31, 2020 36,577,149 $ 4 $ 396,352 $ - $ ( 110,278 ) $ 286,078 Unrealized loss on marketable securities — — — ( 168 ) — ( 168 ) Stock-based compensation — — 16,450 — — 16,450 Issuance of common stock upon exercise of stock options 304,857 — 777 — — 777 Issuance of common stock related to employee stock purchase plan 20,493 — 509 — — 509 Issuance of common stock upon follow-on offering, net of underwriting discounts, commissions, and offering costs — — ( 64 ) — — ( 64 ) Net loss — — — — ( 85,805 ) ( 85,805 ) Balance as of December 31, 2021 36,902,499 $ 4 $ 414,024 $ ( 168 ) $ ( 196,083 ) $ 217,777 The accompanying notes are an integral part of these consolidated financial statements. 105 Stoke Therapeutics, Inc. Consolidated statements of cash flows (in thousands) Year Ended December 31, 2021 2020 Cash flows from operating activities: Net loss $ ( 85,805 ) $ ( 52,243 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 974 888 Amortization and accretion of marketable securities 143 — Stock-based compensation 16,450 5,768 Loss on disposal of property and equipment 29 3 Reduction in the carrying amount of right of use assets 1,256 1,038 Changes in assets and liabilities: Prepaid expenses and other current assets ( 2,851 ) ( 2,878 ) Accounts payable and accrued liabilities 2,897 5,203 Net cash used in operating activities ( 66,907 ) ( 42,221 ) Cash flows from investing activities: Purchases of property and equipment ( 1,200 ) ( 1,050 ) Purchases of marketable securities ( 87,226 ) — Sales of marketable securities 12,000 — Net cash used in investing activities ( 76,426 ) ( 1,050 ) Cash flows from financing activities: Proceeds from issuance of common stock upon public offerings — 105,398 Payment of offering costs — ( 306 ) Proceeds from issuance of common stock upon exercise of stock options 777 2,843 Proceeds from Employee Stock Purchase Plan 509 352 Deferred financing costs — ( 179 ) Other ( 2 ) — Net cash provided by financing activities 1,284 108,108 Net increase (decrease) in cash, cash equivalents and restricted cash ( 142,049 ) 64,837 Cash, cash equivalents and restricted cash—beginning of year 287,513 222,676 Cash, cash equivalents and restricted cash—end of year $ 145,464 $ 287,513 Supplemental Disclosure of Non-Cash Investing and Financing Activities: Right-of-use assets recognized in exchange for operating leases under Topic 842 $ 5,081 $ 2,153 Property and equipment included in accrued expense and accounts payable $ 1,267 $ 6 Deferred offering costs not yet paid — $ 162 The accompanying notes are an integral part of these consolidated financial statements. 106 Stoke Therapeutics, Inc. and subsidiary Notes to consolidated financial statements (in thousands, except share and per share amounts) 1. Nature of the business and basis of presentation Organization Stoke Therapeutics, Inc. (the Company) was founded in June 2014 and was incorporated under the laws of the State of Delaware . The Company is an early-stage biopharmaceutical company pioneering a new way to treat the underlying causes of severe genetic diseases by precisely upregulating protein expression. Shelf Registration In July 2020, the Company filed a universal Shelf Registration statement on Form S-3 (the “Registration Statement”) with the Securities and Exchange Commission (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, preferred 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 (“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 the $ 400,000,000 of securities that may be offered, issued and sold by the Company under the base prospectus. As of December 31, 2021, the Company had no t issued any securities in connection with the Sales Agreement. (see note 12 for sales of common stock subsequent to year end) Follow-on public offering On November 24, 2020, pursuant to a prospectus supplement to the Registration Statement, we completed an underwritten public offering, of our common stock and issued and sold 2,875,000 shares of common stock at a public offering price of $ 39.00 per share, which included 375,000 shares sold upon full exercise of the underwriters’ option to purchase additional shares of common stock resulting in net proceeds of $ 104.9 million after deducting underwriting discounts and commissions and estimated offering expenses. Uncertainties The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry including, but not limited to, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations and ability to secure additional capital to fund operations. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance-reporting capabilities. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales. Liquidity The Company expects that its operating losses and negative cash flows will continue for the foreseeable future. As of the issuance date of its consolidated financial statements for the year ended December 31, 2021, the Company expects that its cash and cash equivalents, and marketable securities will be sufficient to fund its operating expenses and capital expenditure requirements into 2024. 107 The Company plans to seek additional funding through public or private equity offerings, debt financings, other collaborations, strategic alliances and licensing arrangements (see note 12 for license and collaboration agreement entered in to January 2022) . The Company may not be able to obtain financing on acceptable terms, or at all, and the Company may not be able to enter into strategic alliances or other arrangements on favorable terms, or at all. The terms of any financing may adversely affect the holdings or the rights of the Company’s stockholders. If the Company is unable to obtain funding, the Company could be required to delay, reduce or eliminate research and development programs, product portfolio expansion or future commercialization efforts, which could adversely affect its business prospects. 2. Summary of significant accounting policies and recent accounting pronouncements Basis of presentation and consolidation The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP), and include the accounts of Stoke Therapeutics, Inc. and its wholly-owned subsidiary. Any reference in these notes to applicable guidance is meant to refer to GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”). All intercompany transactions between and among the Company and its’ consolidated subsidiary have been eliminated. Use of estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity, expenses and disclosure of contingent assets and liabilities. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Actual results could differ from those estimates. Cash and cash equivalents The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. The Company deposits its cash in checking, sweep and money market accounts. Restricted cash At December 31, 2021, restricted cash consisted of money market accounts collateralizing letters of credit issued as security deposits in connection with the Company’s leases of its corporate facilities. The following table reconciles cash and cash equivalents and restricted cash per the consolidated balance sheets to the statement of cash flows: As of December 31, 2021 2020 Cash and cash equivalents $ 144,895 $ 287,308 Restricted cash 569 205 $ 145,464 $ 287,513 Marketable Securities Marketable securities consist of government securities and obligations, corporate bonds and commercial paper with original maturities of more than 90 days. Investments are classified as available-for-sale and are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of other comprehensive income/(loss). Management determines the appropriate classification of its investments at the time of purchase and reevaluates such determination at each balance sheet date. Concentration of credit risk Financial instruments that potentially expose the Company to concentrations of credit risk primarily consist of cash and cash equivalents. The Company maintains its cash and cash equivalents at an accredited financial institution in amounts that exceed federally insured limits. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships. 108 Fair value of financial instruments ASC Topic 820, Fair Value Measurement (ASC 820), establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. ASC 820 identifies fair value as the exchange price, or 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 a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier value hierarchy that distinguishes between the following: Level 1—Quoted market prices in active markets for identical assets or liabilities. Level 2—Inputs other than Level 1 inputs that are either directly or indirectly observable, such as quoted market prices, interest rates and yield curves. Level 3—Unobservable inputs developed using estimates of assumptions developed by the Company, which reflect those that a market participant would use. To the extent the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair values requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized as Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Deferred offering costs The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs are recorded in the consolidated statement of stockholders’ equity as a reduction of additional paid-in capital. Property and equipment Property and equipment are recorded at cost less accumulated depreciation. Cost includes the acquisition costs and all costs necessary to bring the asset to the location and working condition necessary for its intended use. Depreciation expense is recognized using the straight-line method over the estimated useful life of each asset. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the accompanying consolidated statements of operations and comprehensive loss. Expenditures for normal, recurring or periodic repairs and maintenance related to property and equipment are charged to expense as incurred. The cost for planned major maintenance activities, including the related acquisition or construction of assets, is capitalized if it will result in future economic benefits. Estimated useful lives for property and equipment are as follows: Property and equipment Estimated useful life Computer and office equipment 3 - 5 years Laboratory equipment and Furniture and fixtures 5 - 7 years Leasehold improvements Lesser of estimated useful life or remaining lease term Impairment of long-lived assets The Company reviews the recoverability of its long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the assets may not be recoverable. The assessment of possible impairment is based on the ability to recover the carrying value of the assets from the expected future cash flows (undiscounted and without interest expense) of the related operations. If these cash flows are less than the carrying value of such assets, an impairment loss for the difference between the estimated fair value and carrying value is recorded. There were no impairment losses recognized during the years ended December 31, 2021 and 2020. 109 Research and development costs Research and development costs are expensed as incurred. Research and development expenses are comprised of costs incurred in performing research and development activities, including salaries and benefits, facilities costs, depreciation, third-party license fees, and costs related to third parties engaged to conduct preclinical research development activities. The Company has entered into various research and development contracts with research institutions and other companies to conduct research on its behalf. These agreements are generally cancellable. The Company records accruals for estimated ongoing research costs. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the studies, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates may be made in determining the accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates. The Company’s historical accrual estimates have not been materially different from the actual costs. Stock options The Company measures its stock-based awards granted based on the estimated fair values of the awards and recognizes the compensation for employees and nonemployees over the requisite service period. The Company uses the Black-Scholes option-pricing model to estimate the fair value of its stock-based awards. The Company has elected the practical expedient to use the midpoint between vesting date and the contractual term as the expected term for certain awards with service or performance conditions. Stock-based compensation is recognized using the straight-line method. Forfeitures of unvested stock-based awards are accounted for when they occur. Patent costs All patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty about the recovery of the expenditure. Amounts incurred are classified as general and administrative expenses in the accompanying consolidated statements of operations and comprehensive loss. Leases In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This standard established a right-of-use model that requires all lessees to recognize right-of-use assets and lease liabilities on their balance sheet that arise from leases as well as provide disclosures with respect to certain qualitative and quantitative information related to a company's leasing arrangements. The Company adopted Topic 842 on January 1, 2020 using the modified retrospective approach and elected to apply the transition method that allows companies to continue applying guidance under the lease standard in effect at that time in the comparative period financial statements and recognize a cumulative-effect adjustment to the balance sheet on the date of adoption. The Company has also elected the package of practical expedients to not reassess its prior conclusions about lease identification, lease classification and indirect costs and to not separate lease and non-lease components. Upon adoption of Topic 842 on January 1, 2020, the Company recorded right-of-use assets of $ 2.2 million, operating lease liabilities of $ 2.2 million and the elimination of deferred rent of $ 0.03 million. Adoption of the standard did no t result in the Company recording a cumulative effect adjustment. The Company determines whether an arrangement is a lease at inception. The Company accounts for a lease when it has the right to control the leased asset for a period of time while obtaining substantially all of the assets’ economic benefits. The Company determined that it held operating leases for office and laboratory space as of January 1, 2020. Operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the lease commencement date. The discount rate used to determine the present value of the lease payments is the Company’s incremental borrowing rate based on the information available at lease inception, as the Company does not have information to determine the rate implicit in the leases. Lease expense for operating leases is recognized on a straight-line basis over the reasonably assured lease term based on the total lease payments (which include initial direct costs and lease incentives). The expense is included in operating expenses in the consolidated statements of operations and comprehensive loss. The Company’s lease agreements also contain variable payments, primarily maintenance-related costs, which are expensed as incurred and not included in the measurement of the right-of-use assets and lease liabilities. 110 Income taxes The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the estimated future tax consequences attributable to temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax base. Deferred tax assets and liabilities are determined on the basis of the differences between the consolidated financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the temporary differences are expected to be settled or recovered. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies. At December 31, 2021 and 2020, the Company has recorded a full valuation allowance. Reserves are provided for tax benefits for which realization is uncertain. Such benefits are only recognized when the underlying tax position is considered more-likely-than-not to be sustained on examination by a taxing authority, assuming they possess full knowledge of the position and facts. Interest and penalties related to uncertain tax positions are recognized in the provision of income taxes; however, the Company currently has no interest or penalties related to uncertain income tax benefits. The Tax Cuts and Jobs Act (the TCJA) was enacted on December 22, 2017. The TCJA reduced the U.S. federal corporate tax rate from a top rate of 35 % to a flat rate of 21 %. The Company continues to monitor for legislative developments, issuance of regulations and technical memorandum to provide further clarification and/or interpretations of the TCJA and will adjust its consolidated financial statements as needed. Segment and geographic information Operating segments are defined as components of an entity about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company operates in one segment in the United States. The Company’s chief executive officer, as the chief operating decision-maker, manages and allocates resources to the operations of the Company on a total company basis using consolidated financial information. Emerging growth company and smaller reporting company status The Company is 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. The Company has 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 that it is (i) 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, the Company’s consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. The Company will remain an emerging growth company until the earliest of (i) the last day of its first fiscal year (a) in which the Company has total annual gross revenues of at least $1.07 billion or (b) in which the Company is deemed to be a large accelerated filer, which means the market value of the Company’s common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30 th , (ii) the date on which the Company has issued more than $1.0 billion in non-convertible debt securities during the prior three-year period, and (iii) December 31, 2024 The Company is also a “smaller reporting company,” meaning that in the event of an initial public offering the market value of its stock held by non-affiliates plus the proposed aggregate amount of gross proceeds to the Company as a result of such offering is less than $700 million and its annual revenue is less than $100 million during the most recently completed fiscal year. The Company may continue to be a smaller reporting company as long as either (i) the market value of its stock held by non-affiliates is less than $250 million or (ii) its annual revenue is less than $100 million during the most recently 111 completed fiscal year and the market value of its stock held by non-affiliates is less than $700 million. If the Company is a smaller reporting company at the time it ceases to be an emerging growth company, the Company may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company, the Company may choose to present only the two most recent fiscal years of audited financial statements in its Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation. Recently issued accounting pronouncements In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception . Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity , because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. For public business entities, the amendments in Part I of ASU-2017-11 are effective for fiscal years and interim periods within those years beginning after December 15, 2018. For all other entities, the amendments in Part I of this update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. We adopted this update on January 1, 2020 , and the adoption did not have a material impact on our consolidated financial statements. In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820), Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”. This ASU removed the following disclosure requirements: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation processes for Level 3 fair value measurements. Additionally, this update added the following disclosure requirements: (1) the changes in unrealized gains and losses for the period included in other comprehensive income and loss for recurring Level 3 fair value measurements held at the end of the reporting period; (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for all entities, for fiscal years beginning after December 15, 2019 with early adoption permitted. We adopted this update on January 1, 2020 , and the adoption did not have a material impact on our consolidated financial statements. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. It also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. This ASU is effective for interim and annual periods beginning after December 15, 2020, and early adoption is permitted. The Company adopted this standard on January 1, 2021 and the adoption of this update did not have a material impact on its consolidated financial statements. 112 3. Fair value measurements The following tables present information about the Company’s financial assets measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values: Fair value measurements as of December 31, 2021 Level 1 Level 2 Level 3 Total Cash equivalents: Money market funds $ 144,897 $ — $ — $ 144,897 Total $ 144,897 $ — $ — $ 144,897 Marketable Securities: Corporate bonds $ — $ 17,524 $ — $ 17,524 Commercial paper $ — $ 27,487 $ — $ 27,487 US Government debt securities $ — $ 29,904 $ — $ 29,904 Total $ — $ 74,915 $ — $ 74,915 Fair value measurements as of December 31, 2020 Level 1 Level 2 Level 3 Total Cash equivalents: Money market funds $ 287,308 $ — $ — $ 287,308 Total $ 287,308 $ — $ — $ 287,308 Marketable Securities: Corporate bonds $ — $ — $ — $ — Commercial paper $ — $ — $ — $ — US Government debt securities $ — $ — $ — $ — Total $ — $ — $ — $ — The Company’s cash equivalents and marketable securities are carried at fair value, determined according to the fair value hierarchy described above and in Note 2. The carrying value of the Company’s accounts payable and accrued expenses approximate their fair values due to the short-term nature of these liabilities. The Company’s assets with fair value categorized as Level 1 within the fair value hierarchy include money market funds. Money market funds are publicly traded mutual funds and are presented as cash equivalents on the consolidated balance sheets as of December 30, 2021 and December 31, 2020. The Company measures its marketable securities at fair value on a recurring basis and classifies those instruments within Level 2 of the fair value hierarchy. Marketable securities are valued using models or other valuation methodologies that use Level 2 inputs. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, volatility factors, default rates, current market and contractual prices for the underlying financial instruments, as well as other economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. There were no transfers to Level 3 in the periods presented. 113 4. Marketable Securities The following table summarizes the Company’s marketable securities as of December 31, 2021 (in thousands): December 31, 2021 Amortized Cost Unrealized Gains Unrealized Loss Fair Value Marketable securities: Corporate bonds $ 17,598 $ — $ ( 74 ) $ 17,524 Commercial paper $ 27,487 $ — $ — $ 27,487 US Government debt securities $ 29,998 $ — $ ( 94 ) $ 29,904 Total $ 75,083 $ — $ ( 168 ) $ 74,915 There were no marketable securities as of December 31, 2020. The weighted average maturity of the Company’s marketable securities as of December 31, 2021 ranges from approximately 0.2 years to 1.1 years. The Company did no t record an allowance for credit losses as of December 31, 2021 related to our marketable securities. Further, given the lack of significant change in the credit risk of these investments, the Company did not recognize any other-than-temporary impairment losses. 5. Property and equipment, net Property and equipment, net consisted of the following: As of December 31, 2021 2020 Laboratory equipment $ 4,670 $ 3,936 Furniture and fixtures 153 108 Leasehold improvements 263 210 Office equipment 108 108 Construction in progress 1,606 5 6,800 4,367 Less accumulated depreciation ( 2,661 ) ( 1,692 ) $ 4,139 $ 2,675 Depreciation expense was $ 1.0 million and $ 0.9 million for the years ended December 31, 2021 and 2020, respectively. 6. Accrued and other current liabilities Accrued and other current liabilities consisted of the following: As of December 31, 2021 2020 Accrued employee compensation costs $ 5,383 $ 4,123 Accrued professional 523 593 Accrued research and development costs 6,801 3,689 Current portion of operating lease liabilities 1,507 1,066 Other current liabilities 540 459 $ 14,754 $ 9,930 114 7. Commitments and contingencies In August 2018, the Company 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 September 2021, the Company entered into an agreement to extend the initial term of the 23,000 square foot lease for a period of three years commencing on December 15, 2021 and ending December 31, 2024 . In addition, this lease provides for the lease of an additional 15,000 square feet of rentable space beginning in April 2022 and ending on December 31, 2024 . The Company recognized a right-of-use asset and operating lease liability of $ 3.5 million for the 23,000 square feet. As the Company did not have access to the additional 15,000 square feet of space, a right of use asset was no t recognized as of December 31, 2021. In December 2018, the Company entered into an agreement to lease 2,485 square feet of space for an initial term of three years . The lease includes one renewal option for an additional two years , however, any time after the initial term the landlord may relocate the Company from the premises to a space reasonably comparable in size and utility. As the Company does not have the right to control the use of the identified asset after the initial term, the renewal option was excluded from the lease liability calculation. Lease terms commence at $ 0.2 million per annum, 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 . In June 2021, the Company amended the agreement to extend the initial term of the 2,485 square foot lease for a period of three years commencing May 1, 2022 and ending April 30, 2025 . In addition, the amendment provided for the lease of an additional 2,357 square feet of rentable space beginning on July 6, 2021 and ending on April 30, 2025 . The amended lease provides the Company with the option to extend the term of the lease for an additional two years . The Company recognized a right-of-use asset and operating lease liabilities of $ 0.7 million for the extension of the lease to April 30, 2025 and a right-of-use asset and operating lease liabilities of $ 0.8 million for the additional 2,357 square feet of rentable space. Future minimum lease payments under non-cancellable leases as of December 31, 2021, including leases entered into where access has yet to be granted, are as follows (in thousands): 2022 2,124 2023 2,532 2024 2,608 2025 173 Total lease payments $ 7,437 Less imputed interest ( 462 ) Present value of lease liabilities $ 6,975 Lease balances as of December 31, 2021 and December 31, 2020 are as follows (in thousands): As of December 31, 2021 2020 Operating right-of-use assets $ 4,939 $ 1,115 Current Portion of operating lease liabilities $ 1,507 $ 1,066 Non-current portion of operating lease liabilities 3,532 80 Total operating lease liabilities $ 5,039 $ 1,146 The weighted average remaining lease term and weighted average discount rate of our operating leases as of December 31, 2021 are as follows: Weighted average remaining lease term in years 3.1 Weighted average discount rate 4.14 % In accordance with Topic 842, lease expense incurred under operating leases was approximately $ 1.4 million for the year ended December 31, 2021, and $ 1.1 million for the year ended December 31, 2020. 115 Consulting Agreement In October 2014, the Company entered into a consulting agreement with a member of the Company’s board of directors, who is also an employee of Cold Spring Harbor Laboratory (“CSHL”), to provide consulting services related to scientific research related to the development of antisense-based drugs, therapies, diagnostic and research tools, products, services and intellectual property. The Company recognized expenses of $ 0.02 million for the year ended December 31, 2020. The initial term of this agreement was five years and the parties mutually agreed not to extend the consulting agreement in April 2020. Scientific Advisory Board Agreement In June 2020, the Company entered into a scientific advisory board agreement with a member of the Company’s board of directors, who is also an employee of CSHL, to provide scientific advisory services related to the Company’s Targeted Augmentation of Nuclear Gene Output (“TANGO”) antisense oligonucleotide technology and other antisense oligonucleotide technologies, as well as current and future therapeutic targets and programs. Following the expiration of the initial scientific agreement in June 2021, the parties entered into a subsequent scientific board agreement. The Company recognized expense of $ 0.05 million each for the years ended December 31, 2021 and 2020 for such scientific advisory services. The term of this agreement is 12 months. License and research agreements In July 2015, the Company entered into a worldwide license agreement, or the CSHL Agreement, with CSHL, with respect to TANGO patents. Under the CSHL Agreement, the Company receives an exclusive (except with respect to certain government rights and non-exclusive licenses), worldwide license under certain patents and applications relating to TANGO. The CSHL Agreement obligates the Company to make payments that are contingent upon certain milestones being achieved. The Company is also required to pay royalties, tiered based on the scope of patent coverage for each licensed product, ranging from a low-single digit percentage to a mid-single digit percentage on annual net sales. These royalty obligations apply on a licensed product-by-licensed product and country-by-country basis until the latest of (i) the expiration of the last valid claim of a CSHL patent covering the applicable licensed product or (ii) the expiration of any regulatory exclusivity for the applicable licensed product. In addition, if the Company sublicenses the rights under the CSHL Agreement, the Company is required to pay a maximum of twenty percent of the sublicense revenue to CSHL, which may be reduced to a mid-teens or a mid-single digit percentage upon achievement of certain clinical milestones for the applicable licensed product. Finally, the Company is required to pay an annual license maintenance fee of $ 0.01 million, which amount is creditable against any owed royalty or milestone payments. The maximum aggregate potential milestone payments payable total approximately $ 0.9 million. Additionally, certain licenses under the CSHL Agreement require the Company to reimburse CSHL for certain past and ongoing patent related expenses, however there were no expenses related to these reimbursable patent costs during the years ended December 31, 2021 and 2020. In April 2016, the Company entered into an exclusive, worldwide license agreement with the University of Southampton, or the Southampton Agreement, whereby the Company acquired rights to foundational technologies related to the Company’s TANGO technology. Under the Southampton Agreement, the Company receives an exclusive, worldwide license under certain licensed patents and applications relating to TANGO. Under the Southampton Agreement, the Company may be obligated to make additional payments that are contingent upon certain milestones being achieved, as well as royalties on future product sales. These royalty obligations survive until the latest of (i) the expiration of the last valid claim of a licensed patent covering a subject product or (ii) the expiration of any regulatory exclusivity for the subject product in a country. In addition, if the Company sublicenses its rights under the Southampton Agreement, the Company is required to pay a mid-single digit percentage of the sublicense revenue to the University of Southampton. The maximum aggregate potential milestone payments payable by the Company total approximately 0.4 million pounds sterling (approximately $ 0.5 million as of December 31, 2021). As of December 31, 2021, and 2020, the Company has recorded no liabilities under the Southampton Agreement. For the year ended December 31, 2021 these expenses were $ 0.12 million compared to $ 0.09 million for the year ended December 31, 2020. Additionally, certain licenses under the Southampton Agreement require the Company to reimburse the University of Southampton for certain past and ongoing patent related expenses. (see note 12 for payments to University of Southampton) 116 Litigation The Company may periodically become subject to legal proceedings and claims arising in connection with ongoing business activities, including claims or disputes related to patents that have been issued or that are pending in the field of research on which it is focused. As of December 31, 2021, the Company had no legal proceedings to which it was a party or to which its property was subject. 8. Share-Based Compensation In June 2019, the Company’s board of directors and stockholders approved the 2019 Equity Incentive Plan (the “2019 Plan”) which became effective on June 17, 2019 and replaced the Company’s 2014 Equity Incentive Plan (the “2014 Plan”). In addition to the shares of common stock reserved for future issuance under the 2014 Plan that were added to the 2019 Plan upon its effective date, the Company initially reserved 2,200,000 shares of common stock for issuance under the 2019 Plan. The number of shares reserved for issuance under the Company’s 2019 Plan will increase automatically on January 1 of each of 2020 through 2029 by the number of shares equal to 4 % of the aggregate number of outstanding shares of the Company’s common stock as of the immediately preceding December 31, or a lesser number as may be determined by the Company’s board of directors. As of December 31, 2021 there were no shares available for future issuance under the 2014 Plan and 2,372,006 shares were available under the 2019 Plan. During the years ended December 31, 2021 and December 31, 2020, the Company granted options to purchase 1,311,897 and 1,231,532 shares of common stock to certain of its employees, and directors, respectively. The options vest up to four years except for certain options granted to members of our board of directors which vest over one or three years and are exercisable at a per share price equal to the fair value of the common stock on the grant date. A summary of stock option activity for awards is presented below: Number of shares Weighted average exercise price Weighted average remaining contractual life (years) Aggregate intrinsic value ( 1) Outstanding as of December 31, 2020 4,454,422 $ 8.80 8.0 $ 236,685 Granted 1,311,897 53.93 Exercised ( 287,566 ) 2.70 Forfeited ( 41,973 ) 40.12 Expired ( 1,476 ) 28.73 Outstanding as of December 31, 2021 5,435,304 $ 19.77 8.0 $ 64,981 Exercisable as of December 31, 2021 3,103,635 $ 9.74 6.9 $ 52,003 (1) The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the estimated fair value of the common stock for the options that were in the money at December 31, 2021 and 2020. The weighted average grant date fair value per share of stock options granted during the years ended December 31, 2021 and 2020 was $ 34.07 and $ 14.75 , respectively. The aggregate grant date fair value of stock options granted during the years ended December 31, 2021 and 2020 was approximately $ 44.7 million and $ 18.2 million, respectively. The aggregate intrinsic value of stock options exercised during the year ended December 31, 2021 and 2020 was approximately $ 9.9 million and $ 27.3 million, respectively. 117 Stock-based compensation and stock options The Company recorded stock-based compensation expense of $ 16.5 million and $ 5.8 million during the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, there was $ 45.0 million of unrecognized compensation cost related to unvested stock-based compensation arrangements granted under the 2014 and the 2019 Plans. The compensation is expected to be recognized over a weighted average period of 2.8 years as of December 31, 2021. Stock-based compensation expense recorded as research and development and general and administrative expenses in the accompanying consolidated statements of operations and comprehensive loss is as follows: Year ended December 31, 2021 2020 Research and development $ 6,215 $ 1,875 General and administrative 10,235 3,893 $ 16,450 $ 5,768 The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of an award. The fair values of the options granted to employees and directors were calculated using the following assumptions for the years ended December 31, 2021 and 2020: Year ended December 31, 2021 2020 Risk-free interest rate 0.78-1.51% 0.38-1.48% Expected dividend yield 0 % 0 % Expected life 5.5-6.25 years 5.5-6.25 years Expected volatility 70-73% 70 % 2019 Employee stock purchase plan In June 2019, the Company adopted the 2019 Employee Stock Purchase Plan (“ESPP”), which became effective on June 18, 2019. The Company initially reserved 315,000 shares of common stock for sale under the ESPP. At December 31, 2021, the Company had 634,580 shares available for issuance under the plan. The average grant date fair value per share under the plan was $ 46.08 for 2021. The total ESPP stock-based compensation expense for the year ended December 31, 2021 was $ 0.3 million and for the year ended December 31, 2020 was $ 0.3 million. The number of shares reserved for issuance under the ESPP will increase automatically on January 1st of each of the first ten calendar years following the first offering date by the number of shares equal to the lesser of 1 % of the total outstanding shares of the Company’s common stock as of the immediately preceding December 31 or a lower amount determined by the Company’s board of directors. The aggregate number of shares issued over the term of the ESPP will not exceed 3,150,000 shares of the Company’s common stock. 9. Net loss per share attributable to common stockholders The following table summarizes the computation of basic and diluted net loss per share attributable to common stockholders of the Company: Year ended December 31, 2021 2020 Numerator: Net loss $ ( 85,805 ) $ ( 52,243 ) Denominator: Weighted-average number of common shares, basic and diluted 36,739,269 33,488,456 Net loss per share, basic and diluted $ ( 2.34 ) $ ( 1.56 ) 118 The Company’s potential dilutive securities, which include common stock options and ESPP purchase rights, have been excluded from the computation of diluted net loss per share as the effect would be anti-dilutive. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share is the same. The Company excluded the following potential common shares, presented based on amounts outstanding at period end, from the computation of diluted net loss per share for the periods indicated because including them would have had an anti-dilutive effect: December 31, 2021 2020 Outstanding options to purchase common stock 5,435,304 4,454,424 10. Income taxes A reconciliation of the expected income tax expense (benefit) computed using the federal statutory income tax rate the Company’s effective income tax rate is as follows: Year ended December 31, 2021 2020 Expected income tax benefit at the federal statutory rate 21.0 % 21.0 % State income taxes, net of federal benefit 7.9 8.3 Non-deductible items 0.4 6.2 Research and development credit, net 4.1 1.2 Other 0.0 0.2 Change in valuation allowance ( 33.4 ) ( 36.9 ) Total 0.0 % 0.0 % The principal components of the Company’s deferred tax assets and liabilities consist of the following: As of December 31, 2021 2020 Deferred tax assets: Federal and state net operating loss carryforwards $ 52,231 $ 32,097 Research and development tax credits 7,726 2,816 Other 6,075 2,293 Gross deferred tax assets 66,032 37,206 Less: valuation allowance ( 66,032 ) ( 37,206 ) Net deferred tax assets $ — $ — As of December 31, 2021 and 2020, the Company had federal net operating loss carryforwards of $ 191.1 million and $ 116.9 million, respectively, which may be available to reduce future taxable income, and expire at various dates beginning in 2034 , for those net operating loss carryforwards generated prior to 2018. Net operating losses generated in 2018 and beyond have no expiration. As of December 31, 2021 and 2020, the Company had state net operating loss carry forwards of $ 191.4 million and $ 118.8 million, respectively, which may be available to reduce future taxable income and expire at various dates beginning in 2034 . In addition, at December 31, 2021 and 2020, the Company had federal research and development tax credit carryforwards of $ 5.4 million and $ 2.0 million, respectively, and state research and development tax credit carry forwards of $ 3.0 million and $ 1.0 million, respectively. Both federal and state research and development tax credit carry forwards may be available to reduce future tax liabilities and expire at various dates beginning in 2030 . In accordance with ASC 740, Accounting for Income Taxes , management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of net operating loss carryforwards. Management has determined that it is more likely than not that the Company will not recognize the benefits of federal and state deferred tax assets and, as a result, a full valuation allowance of $ 66.0 million and $ 37.2 million was established at December 31, 2021 and 2020, respectively. The change in the valuation allowance was an increase of $ 28.8 million and $ 19.3 million in 2021 and 2020, respectively. 119 The CARES Act temporarily repealed the 80 % taxable income limitation for tax years beginning before January 1, 2021. Federal NOL carry forwards generated from 2018 or later and Federal NOL carryforwards to taxable years beginning after December 31, 2021 will be subject to the 80 % limitation. Also, under the CARES Act, federal NOLs arising in 2018, 2019 and 2020 can be carried back 5 years. New legislation or regulation which could affect our tax burden could be enacted by any governmental authority. The Company cannot predict the timing or extent of such tax-related developments which could have a negative impact on our financial results. Additionally, the Company uses its best judgment in attempting to quantify and reserve for these tax obligations. Utilization of the net operating loss carryforwards and research and development tax credit carryforwards may be subject to a substantial annual limitation under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the Code) due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income. The Company has not conducted a formal study to assess whether a change of control has occurred or whether there have been multiple changes of control since inception due to the significant complexity and cost associated with such a study. If the Company has experienced a change of control, as defined for purposes of Section 382 and 383 of the Code, at any time since inception, utilization of the net operating loss carryforwards or research and development tax credit carryforwards may be subject to an annual limitation under Section 382 and 383 of the Code, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the net operating loss carryforwards or research and development tax credit carryforwards before utilization. The Company applies ASC 740 related to accounting for uncertainty in income taxes. The Company’s reserves related to income taxes are based on a determination of whether, and how much of, a tax benefit taken by the Company in its tax filings or positions is more likely than not to be realized following resolution of any potential contingencies present related to the tax benefit. At December 31, 2021, and 2020 the Company had no unrecognized tax benefits. Interest and penalty charges, if any, related to unrecognized tax benefits would be classified as income tax expense in the accompanying consolidated statements of operations and comprehensive loss. 11. Employee benefits In 2016, the Company established a defined-contribution savings plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). The 401(k) Plan covers all employees who meet defined minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pretax basis. On January 1, 2020, the Company began to make matching contributions up to 4 % of annual salary for those employees who are participating in the 401(k) Plan. For the year ended December 31, 2021, the Company made matching contributions of $ 0.5 million and for the year ended December 31, 2020, the Company made matching contributions of $ 0.2 million. 12. Subsequent events In January 2022, the Company entered into a license and collaboration agreement with Acadia Pharmaceuticals Inc. (“Acadia”) for the discovery, development and commercialization of novel RNA-based medicines for the treatment of severe and rare genetic neurodevelopmental diseases of the central nervous system (the “CNS”). The agreement focuses on the targets SYNGAP1, MECP2 (Rett syndrome), and an undisclosed neurodevelopmental target of mutual interest. In connection with each target, the Company will collaborate with Acadia to identify potential treatments for further development and commercialization as licensed products. With respect to SYNGAP1, the Company has agreed with Acadia to co-develop and co-commercialize licensed products for such target globally, and in connection therewith the Company granted to Acadia worldwide, co-exclusive (with the Company) licenses for such licensed products. With respect to MECP2 and the neurodevelopmental target, the Company granted to Acadia worldwide, exclusive licenses to develop and commercialize licensed products for such targets. Pursuant to the terms of the agreement, the Company received an upfront payment of $ 60 million from Acadia. Acadia agreed to fund the research to identify potential licensed products for MECP2 and the neurodevelopmental target, and the Company will equally fund with Acadia the research to identify potential licensed products for SYNGAP1. The Company is eligible to receive up to $ 907.5 million in potential total milestone payments based upon the achievement of certain development, regulatory, first commercial sales and sales milestone events across the programs for the three targets, assuming each milestone were achieved at least once. With respect to licensed products for MECP2 and the neurodevelopmental target, the Company is also eligible to receive tiered royalties at percentages ranging from the mid-single digits to the mid-teens on future net sales by Acadia of licensed products worldwide. Royalties payable under the agreement are subject to standard royalty reductions. For SYNGAP1 licensed products that the Company is co-developing and co-commercializing, the Company will be responsible for 50% of the development and commercialization costs and will receive 50% of the profits from global commercialization. 120 As a result of and related to the out-license of SYNGAP1, the Company is obligated to make payments to the University of Southampton under certain licensed patents and applications relating to TANGO. Since December 31, 2021, the Company sold approximately 403,000 shares of our common stock and received $ 7.5 million after deducting commissions related to the Sales Agreement. The Company has evaluated subsequent events through the issuance date of these consolidated financial statements. The Company has concluded that no events or transactions other than those described above have occurred that require disclosure in the accompanying consolidated financial statements. 121