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, 2022. 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. 97 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, 2022. 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, 2022 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. 98 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 2023 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 2023 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 2023 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 2023 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 2023 Annual Meeting of Stockholders and is incorporated herein by reference . 99 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. 8-K 001-38938 February 3, 2023 3.1 4.1 Form of Common Stock Certificate. S-1 333-231700 June 7, 2019 4.1 4.2 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 . X 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 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 10.1 100 Exhibit Number Description Form File No. Exhibit Filing Date Exhibit No. Filed/Furnished Herewith 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 † License and Collaboration Agreement, dated as of January 9, 2022, by and between Acadia Pharmaceuticals Inc. and the Registrant. 10-Q 001-38938 May 10, 2022 10.1 10.14 Scientific Advisory Board Agreement by and between the Registrant and Adrian Krainer, Ph.D., dated June 1, 2022. 10-Q 001-38938 August 8, 2022 10.1 10.15 Controlled Equity Offering Sales Agreement, dated as of May 20, 2022, between the Registrant and Cantor Fitzgerald & Co.. S-3 333-265107 May 20, 2022 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. Item 16. Form 10-K Summary None. 101 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 6, 2023 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 6, 2023 Edward M. Kaye, M.D. (Principal Executive Officer) /s/ Stephen J. Tulipano Chief Financial Officer March 6, 2023 Stephen J. Tulipano (Principal Financial and Accounting Officer) /s/ Julie A. Smith Director March 6, 2023 Julie A. Smith /s/ Seth L. Harrison Director March 6, 2023 Seth L. Harrison, M.D. /s/ Adrian R. Krainer Director March 6, 2023 Adrian R. Krainer, Ph.D. /s/ Arthur A. Levin Director March 6, 2023 Arthur A. Levin, Ph.D. /s/ Arthur O. Tzianabos Director March 6, 2023 Arthur O. Tzianabos, Ph.D. /s/ Jennifer C. Burstein Director March 6, 2023 Jennifer C. Burstein /s/ Garry E. Menzel Director March 6, 2023 Garry E. Menzel 102 STOKE THERAPEUTICS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of independent registered public accounting firm 104 Consolidated balance sheets 105 Consolidated statements of operations and comprehensive loss 106 Consolidated statements of stockholders’ equity 107 Consolidated statements of cash flows 108 Notes to consolidated financial statements 109 103 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, 2022 and 2021, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2022, 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 6, 2023 104 Stoke Therapeutics, Inc. Consolidated balance sheets (in thousands, except share and per share amounts) As of December 31, 2022 2021 Assets Current assets: Cash and cash equivalents $ 113,556 $ 144,895 Marketable securities 116,039 74,915 Prepaid expenses 10,932 6,943 Other current assets 2,955 2,216 Deferred financing costs — 117 Interest receivable 588 132 Total current assets $ 244,070 $ 229,218 Restricted cash 569 569 Operating lease right-of-use assets 4,753 4,939 Property and equipment, net 6,675 4,139 Total assets $ 256,067 $ 238,865 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 766 $ 2,385 Accrued and other current liabilities 15,748 14,754 Deferred revenue - current portion 14,880 — Total current liabilities $ 31,394 $ 17,139 Deferred revenue - net of current portion 36,856 — Other long term liabilities 2,968 3,949 Total long term liabilities $ 39,824 $ 3,949 Total liabilities $ 71,218 $ 21,088 Commitments and contingencies (Note 7) Stockholders’ equity Common stock, par value of $ 0.0001 per share; 300,000,000 shares authorized, 39,439,575 and 36,902,499 shares issued and outstanding as of December 31, 2022 and 2021, respectively 4 4 Additional paid-in capital 483,170 414,024 Accumulated other comprehensive loss ( 1,175 ) ( 168 ) Accumulated deficit ( 297,150 ) ( 196,083 ) Total stockholders’ equity $ 184,849 $ 217,777 Total liabilities and stockholders’ equity $ 256,067 $ 238,865 The accompanying notes are an integral part of these consolidated financial statements. 105 Stoke Therapeutics, Inc. Consolidated statements of operations and comprehensive loss (in thousands, except share and per share amounts) Year Ended December 31, 2022 2021 Revenue $ 12,405 $ — Operating expenses: Research and development 77,837 54,168 General and administrative 38,924 31,897 Total operating expenses 116,761 86,065 Loss from operations ( 104,356 ) ( 86,065 ) Other income (expense): Interest income (expense), net 3,122 120 Other income (expense), net 167 140 Total other income (expense) 3,289 260 Net loss $ ( 101,067 ) $ ( 85,805 ) Net loss per share—basic and diluted $ ( 2.60 ) $ ( 2.34 ) Weighted average common shares outstanding—basic and diluted 38,897,442 36,739,269 Comprehensive loss: Net loss $ ( 101,067 ) $ ( 85,805 ) Other comprehensive loss: Unrealized loss on marketable securities ( 1,007 ) ( 168 ) Total other comprehensive loss $ ( 1,007 ) $ ( 168 ) Comprehensive loss $ ( 102,074 ) $ ( 85,973 ) The accompanying notes are an integral part of these consolidated financial statements. 106 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, 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 Unrealized loss on marketable securities — — — ( 1,007 ) — ( 1,007 ) Stock-based compensation — — 22,854 — — 22,854 Issuance of common stock upon exercise of stock options 269,288 — 494 — — 494 Issuance of common stock related to employee stock purchase plan 44,002 — 570 — — 570 Shares sold at the market 2,223,786 — 45,228 — — 45,228 Net loss — — — — ( 101,067 ) ( 101,067 ) Balance as of December 31, 2022 39,439,575 $ 4 $ 483,170 $ ( 1,175 ) $ ( 297,150 ) $ 184,849 The accompanying notes are an integral part of these consolidated financial statements. 107 Stoke Therapeutics, Inc. Consolidated statements of cash flows (in thousands) Year Ended December 31, 2022 2021 Cash flows from operating activities: Net loss $ ( 101,067 ) $ ( 85,805 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 1,546 974 Amortization and accretion of marketable securities ( 211 ) 143 Stock-based compensation 22,854 16,450 Loss on disposal of property and equipment — 29 Reduction in the carrying amount of right of use assets 1,989 1,256 Changes in assets and liabilities: Prepaid expenses and other current assets ( 5,183 ) ( 2,851 ) Accounts payable and accrued liabilities ( 3,530 ) 2,897 Deferred revenue 51,736 — Net cash used in operating activities ( 31,866 ) ( 66,907 ) Cash flows from investing activities: Purchases of property and equipment ( 3,962 ) ( 1,200 ) Purchases of marketable securities ( 201,320 ) ( 87,226 ) Sales of marketable securities 159,400 12,000 Net cash used in investing activities ( 45,882 ) ( 76,426 ) Cash flows from financing activities: Proceeds from issuance of common stock upon exercise of stock options 494 777 Proceeds from Employee Stock Purchase Plan 570 509 Proceeds from controlled equity offering sales agreement 45,344 — Other 1 ( 2 ) Net cash provided by financing activities 46,409 1,284 Net decrease in cash, cash equivalents and restricted cash ( 31,339 ) ( 142,049 ) Cash, cash equivalents and restricted cash—beginning of year 145,464 287,513 Cash, cash equivalents and restricted cash—end of year $ 114,125 $ 145,464 Supplemental Disclosure of Non-Cash Investing and Financing Activities: Right-of-use assets recognized in exchange for operating leases $ 1,802 $ 5,081 Property and equipment included in accrued expense and accounts payable $ 121 $ 1,267 The accompanying notes are an integral part of these consolidated financial statements. 108 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 “Prior Registration Statement”) with the Securities and Exchange Commission (the “SEC”). The Prior Registration Statement was declared effective by the SEC on July 20, 2020, and contained two prospectuses: a base prospectus, which covered the offering, issuance and sale by the Company of up to a maximum aggregate offering price of $ 400,000,000 of its common stock, preferred stock, debt securities, warrants to purchase common stock, preferred stock or debt securities, subscription rights to purchase 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 the Company of up to a maximum aggregate offering price of $ 150,000,000 of its common stock that may be issued and sold under a Controlled Equity Offering Sales Agreement (“Prior Sales Agreement”). On May 31, 2022, the Prior Registration Statement was deactivated upon the effectiveness of the Registration Statement (as defined below). As of such date, the Company had issued approximately 2.2 million shares of common stock in connection with the Prior Sales Agreement for net proceeds of $ 45.3 million. In May 2022, the Company filed an additional universal Shelf Registration statement on Form S-3 (the “Registration Statement”) with the SEC. The Registration Statement was declared effective by the SEC on May 31, 2022, 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 its common stock, preferred stock, debt securities, warrants to purchase common stock, preferred stock or debt securities, subscription rights to purchase 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 the Company of up to a maximum aggregate offering price of $ 150,000,000 of its 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, 2022, the Company had not issued any shares pursuant to the Sales Agreement. Since December 31, 2022, we sold approximately 4.6 million shares of our common stock and received $ 44.7 million after deducting commissions related to the Sales Agreement. We may terminate this at-the-market program at any time, pursuant to its terms. 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 these consolidated financial statements, the Company expects that its cash, cash equivalents, marketable securities and restricted cash will be sufficient to fund its operating expenses and capital expenditure requirements through at least twelve months from the issuance date of these consolidated financial statements. 109 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, 2022, 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, 2022 2021 Cash and cash equivalents $ 113,556 $ 144,895 Restricted cash 569 569 $ 114,125 $ 145,464 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. 110 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. Revenue recognition The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). This standard applies to all contracts with customers, except for contracts that are within the scope of other standards. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In January 2022, the Company entered into a collaboration and licensing agreement with Acadia Pharmaceuticals, Inc. (“Acadia”) which is within the scope of ASC 606 (see Note 8). In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under this agreement, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. As part of the accounting for this arrangement, the Company must use its judgment to determine: (a) the number of performance obligations based on the determination under step (ii) above; (b) the transaction price under step (iii) above; (c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above; and (d) the contract term and pattern of satisfaction of the performance obligations under step (v) above. The Company uses judgment to determine whether milestones or other variable consideration, except for royalties, should be included in the transaction price as described. The transaction price is allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. Amounts due to the Company for satisfying the revenue recognition criteria or that are contractually due based upon the terms of the collaboration agreements are recorded as accounts receivable in the Company’s consolidated balance sheets. Amounts received prior to satisfying the revenue recognition criteria are recorded as deferred revenue in the Company’s consolidated balance sheets. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current deferred revenue. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion. Upfront license fees The licenses of the Company’s intellectual property granted to Acadia was not determined to be distinct from the other promises or performance obligations identified in the arrangement. Accordingly, such licenses are therefore combined with other promises in the arrangement. The Company exercises judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. 111 Customer options If an arrangement is determined to contain customer options that allow the customer to acquire additional goods or services, the goods and services underlying the customer options are not considered to be performance obligations at the outset of the arrangement, as they are contingent upon option exercise. The Company evaluates the customer options for material rights or options to acquire additional goods or services for free or at a discount. If the customer options are determined to represent a material right, the material right is recognized as a separate performance obligation at the outset of the arrangement. No such material rights were identified in the arrangement with Acadia. If such material rights were identified, then the Company would allocate the transaction price to material rights based on the relative standalone selling price, which is determined based on the identified discount and the probability that the customer will exercise the option. Amounts allocated to a material right are not recognized or begin to be recognized as revenue until, at the earliest, the option is exercised. Research and development services The promises under the Company’s collaboration agreement with Acadia includes research and development services to be performed by the Company for or on behalf of the customer. Payments or reimbursements resulting from the Company’s research and development efforts are recognized as the services are performed and presented on a gross basis because the Company is the principal for such efforts. Milestone payments At the inception of the Acadia arrangement that includes development milestone payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The Company evaluates factors such as the scientific, clinical, regulatory, commercial and other risks that must be overcome to achieve the particular milestone in making this assessment. There is judgment involved in determining whether it is probable that a significant revenue reversal would not occur. At the end of each subsequent reporting period, the Company reevaluates the probability of achievement of all milestones subject to constraint and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment. The development milestones in the Acadia arrangement are not considered probable of achievement at the outset of the arrangement. 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 112 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, 2022 and 2021. 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. 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, 2022 and 2021, 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. 113 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 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 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. 114 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, 2022 Level 1 Level 2 Level 3 Total Cash equivalents: Money market funds $ 111,927 $ — $ — $ 111,927 Total $ 111,927 $ — $ — $ 111,927 Marketable Securities: Corporate bonds $ — $ 34,527 $ — $ 34,527 Commercial paper $ — $ 7,978 $ — $ 7,978 US Government debt securities $ — $ 73,534 $ — $ 73,534 Total $ — $ 116,039 $ — $ 116,039 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 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 31, 2022 and December 31, 2021. 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. 115 4. Marketable Securities The following table summarizes the Company’s marketable securities as of December 31, 2022 (in thousands): December 31, 2022 Amortized Cost Unrealized Gains Unrealized Loss Fair Value Marketable securities: Corporate bonds $ 34,662 $ — $ ( 135 ) $ 34,527 Commercial paper $ 8,019 $ — $ ( 41 ) $ 7,978 US Government debt securities $ 74,533 $ — $ ( 999 ) $ 73,534 Total $ 117,214 $ — $ ( 1,175 ) $ 116,039 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 The weighted average maturity of the Company’s marketable securities as of December 31, 2022 ranges from approximately 0.184 years to 0.489 years. The Company did no t record an allowance for credit losses as of December 31, 2022 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, 2022 2021 Laboratory equipment $ 7,903 $ 4,670 Furniture and fixtures 312 153 Leasehold improvements 1,867 263 Office equipment 353 108 Construction in progress 447 1,606 10,882 6,800 Less accumulated depreciation ( 4,207 ) ( 2,661 ) $ 6,675 $ 4,139 Depreciation expense was $ 1.5 million and $ 1.0 million for the years ended December 31, 2022 and 2021, respectively. 116 6. Accrued and other current liabilities Accrued and other current liabilities consisted of the following: As of December 31, 2022 2021 Accrued employee compensation costs $ 5,754 $ 5,383 Accrued professional 525 523 Accrued research and development costs 6,601 6,801 Current portion of operating lease liabilities 2,359 1,507 Other current liabilities 509 540 $ 15,748 $ 14,754 7. Commitments and contingencies Operating lease 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. 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 did 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. 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 on April 1, 2022 and ending on December 31, 2024 . In December 2021, the Company recognized a right-of-use asset and operating lease liability of $ 3.5 million for the 23,000 square feet. On April 1, 2022, the Company recognized a right-of-use asset and operating lease liability of $ 1.8 million for the 15,000 square feet. 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 . In 2021, 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. 117 Future minimum lease payments under non-cancellable leases as of December 31, 2022, are as follows (in thousands): 2023 $ 2,532 2024 2,608 2025 173 Total lease payments $ 5,313 Less imputed interest ( 237 ) Present value of lease liabilities $ 5,076 Lease balances as of December 31, 2022 and December 31, 2021 are as follows (in thousands): As of December 31, 2022 2021 Operating right-of-use assets $ 4,753 $ 4,939 Current portion of operating lease liabilities $ 2,359 $ 1,507 Non-current portion of operating lease liabilities 2,717 3,532 Total operating lease liabilities $ 5,076 $ 5,039 The weighted average remaining lease term and weighted average discount rate of our operating leases as of December 31, 2022 are as follows: Weighted average remaining lease term in years 2.1 Weighted average discount rate 4.69 % In accordance with Topic 842, lease expense incurred under operating leases was approximately $ 2.2 million for the year ended December 31, 2022, and $ 1.4 million for the year ended December 31, 2021. 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 Cold Spring Harbor Laboratory (“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 and a renewal agreement in June 2022, the parties entered into subsequent scientific board agreements on substantially the same terms. The Company recognized expense of $ 0.02 million for the year ended December 31, 2022 and $ 0.05 million for the year ended December 31, 2021 for such scientific advisory services. The term of the renewal agreement is 12 months. 118 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, it 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, 2022 and 2021. In February 2023, the Company delivered a notice of termination of the CSHL Agreement to CSHL, and the Company expects the CSHL Agreement to be terminated within 90 days of such notice. The Company does not expect the termination of the CSHL Agreement to have a significant impact on the intellectual property underlying any of its current product candidates, including STK-001 and STK-002, or its continued development of the TANGO platform. In April 2016, the Company entered into an exclusive, worldwide license agreement with the University of Southampton (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. As of December 31, 2022, the Company had paid $ 0.7 million under the Southampton Agreement as a result of entering into the Acadia Pharmaceuticals Inc. license and collaboration agreement in January 2022 (see Note 8). Additionally, certain licenses under the Southampton Agreement require the Company to reimburse the University of Southampton for certain past and ongoing patent related expenses. For the year ended December 31, 2022 these expenses were $ 0.02 million compared to $ 0.12 million for the year ended December 31, 2021. 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, 2022, the Company had no legal proceedings to which it was a party or to which its property was subject that, in the opinion of management, would have a material adverse effect on its business. 8. License and Collaboration Agreement with Acadia Pharmaceuticals Inc. 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 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 Stoke) 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. 119 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. The Company is provided with a co-development and co-commercialization opt out option relating to the SYNGAP1 target indication at the Company’s discretion. Such opt-out would reduce development and commercialization milestones but would provide the Company with royalties on an escalating basis attributable to net sales milestones. Acadia Agreement Accounting At the commencement of the Acadia agreement the Company identified three performance obligations consisting of pre-clinical research activities for each of the three targets, SYNGAP1, MECP2, and the undisclosed neurodevelopmental target. The exclusive or co-exclusive licenses granted to Acadia to conduct pre-clinical research activities on each of the three targets, and participation on each of the respective joint research committees were identified as promised services. However, the licenses granted to Acadia and the research activities were determined to be not distinct from each other, and therefore are considered a combined performance obligation for each of the three targets. Participation on each of the joint research committees was determined to be quantitatively and qualitatively immaterial in the context of the arrangement with Acadia. The Company is recognizing the transaction price for the pre-clinical research activities for each of the three targets over time as the research services are provided. The transfer of control to Acadia occurs over this time period, and in management’s judgment, is the best measure of progress towards satisfying the performance obligation. An input method is used that measures the cost incurred to date in satisfying each of the three research activities in relation to the estimated total projected cost of each of the research activities to fulfill the respective obligations. The cumulative effect of revisions to estimated costs and/or the transaction price to complete the research performance obligations will be recorded in the period in which changes are identified and amounts can be reasonably estimated. Payments or reimbursements resulting from the Company’s research and development efforts were recognized as the services are performed. Milestone payments that are not within the control of the Company, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. For other milestones, the Company evaluated factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the particular milestone in making this assessment. Milestones that are outside of the Company’s or Acadia’s control will not be recognized until such milestones are achieved. As to the other milestones, to date, no milestone payments have been included in the transaction price due the uncertainty as to whether these milestones will be achieved. The Company will at the end of each reporting period reevaluate the probability of achievement of all milestones subject to constraint and, if necessary, adjust its estimate of the overall transaction price for each of the research activities on the three targets. Any such adjustments will be recorded on a cumulative catch-up basis. As of December 31, 2022, the Company had $51.7 million in upfront consideration associated with the Acadia agreement relating to performance obligations that are unsatisfied or partially unsatisfied. 9. 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. 120 As of December 31, 2022 there were no shares available for future issuance under the 2014 Plan and 992,231 shares were available for future issuance under the 2019 Plan. During the years ended December 31, 2022 and December 31, 2021, the Company granted options to purchase 3,459,500 and 1,311,897 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, 2021 5,435,304 $ 19.77 8.0 $ 64,981 Granted 3,459,500 15.97 Exercised ( 270,376 ) 1.83 Forfeitures ( 254,450 ) 29.77 Expired ( 95,331 ) 34.72 Outstanding as of December 31, 2022 8,274,647 $ 18.28 7.6 $ 20,598 Exercisable as of December 31, 2022 4,286,461 $ 14.70 6.4 $ 18,454 (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, 2022 and 2021. The weighted average grant date fair value per share of stock options granted during the years ended December 31, 2022 and 2021 was $ 10.32 and $ 34.07 , respectively. The aggregate grant date fair value of stock options granted during the years ended December 31, 2022 and 2021 was approximately $ 35.7 million and $ 44.7 million, respectively. The aggregate intrinsic value of stock options exercised during the year ended December 31, 2022 and 2021 was approximately $ 3.5 million and $ 9.9 million, respectively. Stock-based compensation and stock options The Company recorded stock-based compensation expense of $ 22.9 million and $ 16.5 million during the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, there was $ 53.3 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, 2022. 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, 2022 2021 Research and development $ 8,901 $ 6,215 General and administrative 13,953 10,235 $ 22,854 $ 16,450 121 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, 2022 and 2021: Year ended December 31, 2022 2021 Risk-free interest rate 1.82-4.15% 0.78-1.51% Expected dividend yield 0 % 0 % Expected life 5.5-6.25 years 5.5-6.25 years Expected volatility 70-71% 70-73% 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, 2022, the Company had 959,603 shares available for issuance under the plan. The average grant date fair value per share under the plan was $ 18.39 for 2022. The total ESPP stock-based compensation expense for the year ended December 31, 2022 was $ 0.3 million and for the year ended December 31, 2021 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. 10. Net loss per share The following table summarizes the computation of basic and diluted net loss per share of the Company: Year ended December 31, 2022 2021 Numerator: Net loss $ ( 101,067 ) $ ( 85,805 ) Denominator: Weighted-average number of common shares, basic and diluted 38,897,442 36,739,269 Net loss per share, basic and diluted $ ( 2.60 ) $ ( 2.34 ) 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, 2022 2021 Outstanding options to purchase common stock 8,274,647 5,435,304 122 11. 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, 2022 2021 Expected income tax benefit at the federal statutory rate 21.0 % 21.0 % State income taxes, net of federal benefit 7.4 7.9 Non-deductible items ( 0.9 ) 0.4 Research and development credit, net 3.9 4.1 Other 0.1 0.0 Change in valuation allowance ( 31.5 ) ( 33.4 ) 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, 2022 2021 Deferred tax assets: Federal and state net operating loss carryforwards $ 57,746 $ 52,231 Research and development tax credits 12,613 7,726 R&D capitalized expenses 17,148 — Accrued compensation and stock compensation 10,274 6,055 Other 142 20 Gross deferred tax assets 97,923 66,032 Less: valuation allowance ( 97,923 ) ( 66,032 ) Net deferred tax assets $ — $ — As of December 31, 2022 and 2021, the Company had federal net operating loss carryforwards of $ 210.9 million and $ 191.1 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, 2022 and 2021, the Company had state net operating loss carry forwards of $ 212.8 million and $ 191.4 million, respectively, which may be available to reduce future taxable income and expire at various dates beginning in 2035 . In addition, at December 31, 2022 and 2021, the Company had federal research and development tax credit carryforwards of $ 9.2 million and $ 5.4 million, respectively, and state research and development tax credit carry forwards of $ 4.3 million and $ 3.0 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 $ 97.9 million and $ 66.0 million was established at December 31, 2022 and 2021, respectively. The change in the valuation allowance was an increase of $ 31.8 million and $ 28.8 million in 2022 and 2021, respectively. Effective for tax years beginning after December 31, 2021, the Tax Cuts and Jobs Act of 2017 requires companies to capitalize and amortize domestic research and development expenditures over five years for tax purposes, and foreign research and development expenditures over fifteen years for tax purposes. We will continue to monitor any potential changes or further guidance related to this provision. On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 into law which contained provisions that include a 15% corporate minimum tax effective for taxable years beginning after December 31, 2022 and a 1% excise tax on certain stock buybacks after December 31, 2022. The Company expects the impact of these provisions to be immaterial. 123 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, 2022, and 2021 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. 12. 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. The Company matches contributions up to 4 % of annual salary for those employees who are participating in the 401(k) Plan. For the year ended December 31, 2022, the Company made matching contributions of $ 0.6 million and for the year ended December 31, 2021, the Company made matching contributions of $ 0.5 million. 13. Subsequent events Since December 31, 2022, we sold approximately 4.6 million shares of our common stock and received $ 44.7 million after deducting commissions related to the Sales Agreement. 124