Passage BIO, Inc. 10-K

Item 8. Financial Statements and Supplementary Data PASSAGE BIO, INC. INDEX TO AUDITED FINANCIAL STATEMENTS ​ ​ ​ ​ Page ​ ​ ​ Report of Independent Registered Public Accounting Firm ​ 137 Balance Sheets ​ 138 Statements of Operations and Comprehensive Loss ​ 139 Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) ​ 140 Statements of Cash Flows ​ 141 Notes to Financial Statements ​ 142 ​ ​ ​ 136 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors Passage Bio, Inc.: Opinion on the Financial Statements ​ We have audited the accompanying balance sheets of Passage Bio, Inc. (the Company) as of December 31, 2020 and 2019, the related statements of operations and comprehensive loss, convertible preferred stock and stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Basis for Opinion ​ These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ KPMG LLP We have served as the Company’s auditor since 2019. Philadelphia, Pennsylvania March 3, 2021 ​ 137 Table of Contents Passage Bio, Inc. Balance Sheets ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, (in thousands, except share data) 2020 2019 Assets ​ ​ Current assets: ​ ​ Cash and cash equivalents ​ $ 135,002 ​ $ 158,874 Marketable securities ​ ​ 169,815 ​ ​ — Prepaid expenses ​ 1,405 ​ 156 Prepaid research and development ​ 10,961 ​ 6,745 Total current assets ​ 317,183 ​ 165,775 Property and equipment, net ​ 2,795 ​ 1,087 Other assets ​ 8,029 ​ 11,751 Total assets ​ $ 328,007 ​ $ 178,613 Liabilities, convertible preferred stock and stockholders’ equity (deficit) ​ ​ Current liabilities: ​ ​ Accounts payable ​ $ 5,265 ​ $ 629 Accrued expenses and other current liabilities ​ 15,910 ​ 3,052 Total current liabilities ​ 21,175 ​ 3,681 Deferred rent ​ 2,077 ​ 504 Other liabilities ​ 41 ​ 76 Total liabilities ​ 23,293 ​ 4,261 Convertible preferred stock, $0.0001 par value: ​ ​ Series A‑1 convertible preferred stock: 63,023,258 shares authorized, issued and outstanding at December 31, 2019 ​ — ​ 74,397 Series A‑2 convertible preferred stock: 22,209,301 shares authorized; issued and outstanding at December 31, 2019 ​ — ​ 46,311 Series B convertible preferred stock: 33,592,907 shares authorized, issued and outstanding at December 31, 2019 ​ — ​ 109,897 Total convertible preferred stock ​ — ​ 230,605 ​ ​ ​ ​ ​ ​ ​ Commitments and contingencies (note 7) ​ ​ ​ ​ ​ ​ ​ ​ ​ Stockholders’ equity (deficit): ​ ​ Common stock, $0.0001 par value: 300,000,000 shares authorized; 45,917,084 shares issued and 45,614,807 shares outstanding at December 31, 2020 and 5,194,518 shares issued and 4,293,039 shares outstanding at December 31, 2019 ​ 4 ​ — Additional paid‑in capital ​ 475,617 ​ 2,410 Accumulated other comprehensive loss ​ ​ (12) ​ ​ — Accumulated deficit ​ (170,895) ​ (58,663) Total stockholders’ equity (deficit) ​ 304,714 ​ (56,253) Total liabilities, convertible preferred stock and stockholders’ equity (deficit) ​ $ 328,007 ​ $ 178,613 ​ See accompanying notes to financial statements. ​ 138 Table of Contents Passage Bio, Inc. Statements of Operations and Comprehensive Loss ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, (in thousands, except share and per share data) ​ 2020 2019 Operating expenses: ​ ​ ​ Research and development ​ $ 81,788 ​ $ 29,738 Acquired in‑process research and development ​ 1,000 ​ 500 General and administrative ​ 30,114 ​ 6,951 Loss from operations ​ (112,902) ​ (37,189) Change in fair value of future tranche right liability ​ — ​ (9,141) Interest income, net ​ 670 ​ 696 Net loss ​ $ (112,232) ​ $ (45,634) Per share information: ​ ​ Net loss per share of common stock, basic and diluted ​ $ (2.91) ​ $ (10.77) Weighted average common shares outstanding, basic and diluted ​ 38,615,967 ​ 4,236,061 Comprehensive loss: ​ ​ ​ ​ ​ ​ Net loss ​ $ (112,232) ​ $ (45,634) Unrealized loss on available-for-sale securities ​ ​ (12) ​ ​ — Comprehensive loss ​ $ (112,244) ​ $ (45,634) ​ See accompanying notes to financial statements. ​ ​ 139 Table of Contents Passage Bio, Inc. Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) (in thousands, except share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Convertible preferred stock ​ ​ Stockholders’ equity (deficit) ​ ​ Series A ‑ 1 ​ Series A ‑ 2 ​ Series B ​ ​ Common stock ​ Additional ​ Accumulated other ​ Accumulated ​ ​ ​ ​ Shares Amount Shares Amount Shares Amount ​ Shares Amount paid ‑ in capital comprehensive loss deficit Total Balance at January 1, 2019 44,418,606 ​ $ 43,118 — ​ $ — — ​ $ — ​ 4,195,649 ​ $ — ​ $ 856 ​ $ — ​ $ (13,029) ​ $ (12,173) Vesting of early exercise option awards — ​ — — ​ — — ​ — ​ 97,390 ​ — ​ 100 ​ — ​ — ​ ​ 100 Sale of Series A-1 convertible preferred stock, net of issuance costs of $19 18,604,652 ​ 19,981 — ​ — — ​ — ​ — ​ — ​ — ​ — ​ — ​ ​ — Sale of Series A‑2 convertible preferred stock, net of issuance costs of $1,439 — ​ — 22,209,301 ​ 46,311 — ​ — ​ — ​ — ​ — ​ — ​ — ​ ​ — Sale of Series B convertible preferred stock, net of issuance costs of $102 — ​ — — ​ — 33,592,907 ​ 109,897 ​ — ​ — ​ — ​ — ​ — ​ ​ — Reclassification of future tranche right upon exercise — ​ 11,298 — ​ — — ​ — ​ — ​ — ​ — ​ — ​ — ​ ​ — Share‑based compensation expense — ​ — — ​ — — ​ — ​ — ​ — ​ 1,454 ​ — ​ — ​ ​ 1,454 Net loss — ​ — — ​ — — ​ — ​ — ​ — ​ — ​ — ​ (45,634) ​ ​ (45,634) Balance at December 31, 2019 63,023,258 ​ ​ 74,397 22,209,301 ​ ​ 46,311 33,592,907 ​ ​ 109,897 ​ 4,293,039 ​ ​ — ​ ​ 2,410 ​ ​ — ​ ​ (58,663) ​ ​ (56,253) Vesting of early exercise option awards — ​ — — ​ — — ​ — ​ 599,202 ​ — ​ 35 ​ — ​ — ​ 35 Exercise of stock options — ​ — — ​ — — ​ — ​ 99,780 ​ — ​ 208 ​ — ​ — ​ 208 Shares issued under the employee stock purchase plan — ​ — — ​ — — ​ — ​ 20,109 ​ — ​ 284 ​ — ​ — ​ 284 Conversion of convertible preferred stock upon initial public offering (63,023,258) ​ (74,397) (22,209,301) ​ (46,311) (33,592,907) ​ (109,897) ​ 26,803,777 ​ 3 ​ 230,602 ​ — ​ — ​ 230,605 Sale of common stock in initial public offering, net of issuance costs of $3,495 — ​ — — ​ — — ​ — ​ 13,798,900 ​ 1 ​ 227,498 ​ — ​ — ​ 227,499 Unrealized loss on available-for-sale investments — ​ — — ​ — — ​ — ​ — ​ — ​ — ​ (12) ​ — ​ (12) Share‑based compensation expense — ​ — — ​ — — ​ — ​ — ​ — ​ 14,580 ​ — ​ — ​ 14,580 Net loss — ​ — — ​ — — ​ — ​ — ​ — ​ — ​ — ​ (112,232) ​ (112,232) Balance at December 31, 2020 — ​ $ — — ​ $ — — ​ $ — ​ 45,614,807 ​ $ 4 ​ $ 475,617 ​ $ (12) ​ $ (170,895) ​ $ 304,714 ​ See accompanying notes to financial statements. ​ ​ 140 Table of Contents Passage Bio, Inc. Statements of Cash Flows ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ December 31, (in thousands) 2020 2019 Cash flows used in operating activities: ​ ​ Net loss ​ $ (112,232) ​ $ (45,634) Adjustments to reconcile net loss to net cash used in operating activities: ​ ​ ​ Change in fair value of future tranche right liability ​ — ​ 9,141 Acquired in‑process research and development ​ 1,000 ​ 500 Depreciation and amortization ​ 800 ​ 134 Share‑based compensation ​ 14,580 ​ 1,454 Amortization of premium and discount on marketable securities, net ​ ​ 633 ​ ​ — Deferred rent ​ 259 ​ 452 Changes in operating assets and liabilities: ​ ​ Prepaid expenses and other assets ​ 1,871 ​ (10,053) Prepaid research and development ​ (4,216) ​ 1,690 Accounts payable ​ 4,588 ​ 398 Accrued expenses and other current liabilities ​ 12,197 ​ 2,022 Net cash used in operating activities ​ (80,520) ​ (39,896) Cash flows used in investing activities: ​ ​ Purchases of marketable securities ​ (266,057) ​ — Sale and maturities of marketable securities ​ ​ 95,597 ​ ​ — Purchase of technology licenses ​ (500) ​ (500) Purchases of property and equipment ​ (1,146) ​ (1,193) Net cash used in investing activities ​ (172,106) ​ (1,693) Cash flows provided by financing activities: ​ ​ Proceeds from issuance of common stock upon initial public offering, net of offering costs ​ ​ 228,262 ​ ​ — Proceeds from the sale of Series A‑1 convertible preferred stock and future tranche right, net of offering costs ​ — ​ 19,981 Proceeds from the sale of Series A‑2 convertible preferred stock, net of offering costs ​ — ​ 46,311 Proceeds from the sale of Series B convertible preferred stock, net of offering costs ​ — ​ 109,897 Deferred financing costs ​ ​ — ​ ​ (763) Proceeds from the issuance of common stock under employee stock purchase plan ​ ​ 284 ​ ​ — Proceeds from exercise of stock options ​ 208 ​ 176 Net cash provided by financing activities ​ 228,754 ​ 175,602 Net (decrease) increase in cash and cash equivalents ​ (23,872) ​ 134,013 Cash and cash equivalents at beginning of year ​ 158,874 ​ 24,861 Cash and cash equivalents at end of year ​ $ 135,002 ​ $ 158,874 Supplemental disclosure of non‑cash investing and financing activities: ​ ​ Reclassification of deferred offering costs paid in a prior period ​ $ 763 ​ $ — Deferred financing costs in accrued expenses and other current liabilities ​ $ 161 ​ $ 935 Deferred financing costs in accounts payable ​ $ — ​ $ 19 Reclassification of the future tranche right liability upon exercise ​ $ — ​ $ 11,298 Property and equipment in deferred rent ​ $ 1,314 ​ $ — Acquired in‑process research and development in accrued expenses and other current liabilities ​ $ 500 ​ $ — Unrealized loss on marketable securities ​ $ 12 ​ $ — Property and equipment in accounts payable ​ $ 48 ​ $ — Vesting of early exercise option awards ​ $ 35 ​ $ 100 See accompanying notes to financial statements. ​ ​ 141 Table of Contents Passage Bio, Inc. Notes to Financial Statements 1. Nature of Operations Passage Bio, Inc. (the Company), a Delaware corporation incorporated in July 2017, is a genetic medicines company focused on advancing transformative therapies for rare monogenic central nervous system diseases. The Company has a strategic research collaboration with the Trustees of the University of Pennsylvania’s (Penn) Gene Therapy Program (GTP) that provides the Company with access to one of the premier research institutions in the world for the discovery and preclinical development of genetic medicine product candidates and exclusive rights to certain rare, monogenic central nervous system (CNS) indications. Under this collaboration, GTP conducts discovery and investigation new drug enabling preclinical activities and the Company conducts all clinical development, regulatory strategy, and commercialization activities under the agreement. The Company also has a collaboration agreement and a development services and clinical supply agreement with Catalent Maryland, Inc. (Catalent) (formerly Paragon Bioservices, Inc.) for clinical scale manufacturing requirements. 2. Risks and Liquidity The Company has incurred recurring losses and negative cash flows from operations since inception and had an accumulated deficit of $170.9 million as of December 31, 2020. The Company anticipates incurring additional losses until such time, if ever, that it can generate significant sales of its product candidates currently in development. Substantial additional capital will be needed by the Company to fund its operations and to develop its product candidates. In March 2020, the Company closed its initial public offering (IPO) in which the Company issued and sold 13,798,900 shares of its common stock, which included shares sold pursuant to an option granted to the underwriters to purchase additional shares, at a public offering price of $18.00 per share for net proceeds of $227.5 million after deducting underwriting discounts, commissions and other offering expenses. In January 2021, the Company closed a follow-on public offering in which the Company issued and sold 8,050,000 shares of its common stock, which included shares sold pursuant to an option granted to the underwriters to purchase additional shares, at a public offering price of $22.00 per share for net proceeds of $165.9 million after deducting underwriting discounts, commissions and other offering expenses. The Company’s operations have consisted primarily of organizing the Company, securing financing, developing licensed technology, performing research, conducting preclinical studies and preparing to commence clinical trials. The Company faces risks associated with early-stage biotechnology companies whose product candidates are in development. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing, establishing manufacturing capacity and regulatory approval prior to commercialization. These efforts require significant amounts of additional capital for the Company to complete its research and development, achieve its research and development objectives, defend its intellectual property rights, and recruit and retain skilled personnel, and key members of management. 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. The Company plans to seek additional funding through public or private equity offerings, debt financings, other collaborations, strategic alliances and licensing arrangements. 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. 142 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) 3. Summary of Significant Accounting Policies Basis of Presentation The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). 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 Updates (ASU) promulgated by the Financial Accounting Standards Board (FASB). Reverse stock split ​ The Company effected a one-for-4.43316 reverse stock split of its common stock on February 14, 2020. The reverse stock split combined each 4.43316 shares of the Company’s issued and outstanding common stock into one share of common stock. No fractional shares were issued in connection with the reverse stock split. Any fractional share resulting from the reverse stock split was rounded down to the nearest whole share, and in lieu of any fractional shares, the Company paid in cash to the holders of such fractional shares an amount equal to the fair value, as determined by the board of directors, of such fractional shares. All common stock, per share and related information presented in the financial statements and accompanying notes have been retroactively adjusted to reflect the reverse stock split. ​ Use of Estimates ​ The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and contingent liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions are periodically reviewed and the effects of the revisions are reflected in the accompanying financial statements in the period they are determined to be necessary. Prior to the IPO, significant areas that required management’s estimates included the fair value of the Company’s future tranche right liability and its common stock. Fair Value of Financial Instruments Management believes that the carrying amounts of the Company’s financial instruments, including cash equivalents, prepaid expenses, and accounts payable, approximate fair value due to the short-term nature of those instruments. The future tranche right liability was recorded at its estimated fair value. Concentration of credit risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, and marketable securities. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to significant risk on its cash, cash equivalents, and marketable securities. Segment Information Operating segments are defined as components of an enterprise 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 views its operations and manages its business in one segment. 143 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) Cash and cash equivalents The Company considers all highly liquid investments that have maturities of three months or less when acquired to be cash equivalents. Marketable securities The Company classifies its marketable securities as available-for-sale, which include commercial paper, certificates of deposit, corporate debt securities and U.S. government and non-U.S. government debt securities with original maturities of greater than three months. These securities are carried at fair market value, with unrealized gains and losses reported in comprehensive loss and accumulated other comprehensive loss within stockholders’ equity. Gains or losses on marketable securities sold are based on the specific identification method. Property and Equipment Property and equipment consists of computer hardware and software, office equipment, furniture and leasehold improvements and are recorded at cost. Maintenance and repairs that do not improve or extend the lives of the respective assets are expensed as incurred. Property and equipment are depreciated on a straight-line basis over their estimated useful lives. The Company uses a life of three years for computer hardware and software, five years for office equipment and seven years for furniture and fixtures. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the asset. The Company reviews long-lived assets, such as property and equipment, for impairment when events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. If circumstances require a long-lived asset to be tested for possible impairment, recoverability is measured by comparison of the carrying amount of the assets to estimated future undiscounted cash flows that the assets are expected to generate. If the carrying amount of an asset exceeds its estimated future cash flows, then an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. No impairment charges have been recorded since inception. Deferred Financing Costs The Company capitalizes costs that are directly associated with in-process equity financings until such financings are consummated, at which time such costs are recorded against the gross proceeds from the applicable financing. If a financing is abandoned, the related deferred financing costs are expensed. Financing costs are expensed immediately if the financial instrument is recorded at its estimated fair value and subject to remeasurement. The Company had $0.2 million and $1.7 million in deferred financing costs in other assets in the accompanying balance sheets at December 31, 2020 and 2019, respectively. Share-based compensation The Company measures share-based awards at their grant-date fair value and records compensation expense on a straight-line basis over the vesting period of the awards. Estimating the fair value of share-based awards requires the input of subjective assumptions, including, prior to the IPO, the estimated fair value of the Company’s common stock, and, for stock options, the expected life of the options and stock price volatility. The Company accounts for forfeitures for stock option awards as they occur. The Company uses the Black-Scholes option pricing model to value its stock option awards. The assumptions used in estimating the fair value of share-based awards represent management’s estimate and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, share-based compensation expense could be materially different for future awards. 144 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) The expected life of the stock options is estimated using the "simplified method," as the Company has limited historical information from which to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for its stock option grants. The simplified method is the midpoint between the vesting period and the contractual term of the option. For stock price volatility, the Company uses comparable public companies as a basis for its expected volatility to calculate the fair value of option grants. The risk-free rate is based on the U.S. Treasury yield curve commensurate with the expected life of the option. Research and Development Research and development costs are expensed as incurred and consist primarily of funds paid to the Penn and other contract research organizations for preclinical development, and employee-related expenses, including salaries, benefits, and travel expense reimbursement. Costs incurred in obtaining technology licenses are charged to research and development expense as acquired in-process research and development if the technology licensed has not reached technological feasibility and has no alternative future use. Management makes estimates of the Company’s accrued expenses as of each balance sheet date in the Company’s financial statements based on facts and circumstances known to the Company at that time. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly. Nonrefundable advance payments for goods and services, including fees for process development or manufacturing and distribution of clinical supplies that will be used in future research and development activities, are deferred and recognized as expense in the period that the related goods are consumed or services are performed. Income Taxes Income taxes are accounted for under the asset-and-liability method as required by FASB ASC Topic 740, Income Taxes (ASC 740). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period corresponding to the enactment date. Under ASC 740, a valuation allowance is required when it is more likely than not all or some portion of the deferred tax assets will not be realized through generating sufficient future taxable income. FASB ASC Subtopic 740-10, Accounting for Uncertainty of Income Taxes , (ASC 740-10) defines the criterion an individual tax position must meet for any part of the benefit of the tax position to be recognized in financial statements prepared in conformity with GAAP. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not such tax position will be sustained on examination by the taxing authorities, based solely on the technical merits of the respective tax position. The tax benefits recognized in the financial statements from such a tax position should be measured based on the largest benefit having a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority. In accordance with the disclosure requirements of ASC 740-10, the Company’s policy on statement of operations classification of interest and penalties related to income tax obligations is to include such items as part of total interest income, net. Net Loss Per Share Basic net loss per share of common stock is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during each period. Diluted loss per share of common stock includes the effect, if any, from the potential exercise or conversion of securities, such as convertible preferred stock, which would result in the issuance of incremental shares of common stock. For diluted net loss per share, the weighted-average number of shares of common stock is the same for basic net loss per share due to the fact that when a net loss exists, dilutive securities are not included in the calculation as the impact is anti-dilutive. 145 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) The following potentially dilutive securities have been excluded from the computation of diluted weighted-average shares of common stock outstanding, as they would be anti-dilutive: ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ 2020 2019 Series A‑1 convertible preferred stock ​ — 14,216,333 Series A‑2 convertible preferred stock ​ — 5,009,808 Series B convertible preferred stock ​ — 7,577,636 Stock options (including shares subject to repurchase) ​ 6,928,111 3,072,322 Stock options vested and exercised, but subject to settlement of nonrecourse promissory notes ​ — 406,876 Employee stock purchase plan ​ 4,044 ​ — ​ ​ 6,932,155 30,282,975 ​ Amounts in the above table reflect the common stock equivalents. Recently Issued Accounting Pronouncements In February 2016, the FASB issued ASU No. 2016-02, Leases , which requires a lessee to record a right-of-use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. As the Company has elected to use the extended transition period for complying with new or revised accounting standards as available under the Jobs Act, the standard is effective for the Company beginning January 1, 2022, with early adoption permitted. The Company is currently evaluating the expected impact that the standard could have on its financial statements and related disclosures. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which replaces the incurred loss impairment methodology under current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 was subsequently updated by ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments , to clarify that entities should include recoveries when estimating the allowance for credit losses. This guidance is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022 and must be adopted using a modified retrospective approach, with certain exceptions. The Company is currently evaluating the impact of this standard on its financial statements and related disclosures. ​ 146 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) 4. Cash, cash equivalents and marketable securities The following table provides details regarding the Company’s portfolio of cash and cash equivalents: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (in thousands) Amortized cost Unrealized gains Unrealized losses Fair value December 31, 2020: ​ ​ ​ ​ Cash accounts in banking institutions ​ $ 46,660 ​ $ — ​ $ — ​ $ 46,660 Money market funds ​ ​ 84,409 ​ ​ — ​ ​ — ​ ​ 84,409 Commercial paper ​ ​ 3,933 ​ ​ — ​ ​ — ​ ​ 3,933 Total ​ $ 135,002 ​ $ — ​ $ — ​ $ 135,002 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2019: ​ ​ ​ ​ Cash accounts in banking institutions ​ $ 3,028 ​ $ — ​ $ — ​ $ 3,028 Money market funds ​ ​ 155,846 ​ ​ — ​ ​ — ​ ​ 155,846 Total ​ $ 158,874 ​ $ — ​ $ — ​ $ 158,874 ​ The following table provides details regarding the Company’s portfolio of marketable securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (in thousands) Amortized cost Unrealized gains Unrealized losses Fair value December 31, 2020: ​ ​ ​ ​ Certificates of deposit ​ $ 6,115 ​ $ — ​ $ — ​ $ 6,115 Commercial paper ​ ​ 47,872 ​ ​ 7 ​ ​ (2) ​ ​ 47,877 Corporate debt securities ​ ​ 85,593 ​ ​ 9 ​ ​ (25) ​ ​ 85,577 U.S. government securities ​ ​ 24,345 ​ ​ 1 ​ ​ (2) ​ ​ 24,344 Non-U.S. government securities ​ ​ 5,902 ​ ​ — ​ ​ — ​ ​ 5,902 Total ​ $ 169,827 ​ $ 17 ​ $ (29) ​ $ 169,815 ​ The Company did not have marketable securities as of December 31, 2019. 5. Fair Value of Financial Instruments Fair value is the price that could be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value determination in accordance with applicable accounting guidance requires that a number of significant judgments be made. Additionally, fair value is used on a nonrecurring basis to evaluate assets for impairment or as required for disclosure purposes by applicable accounting guidance on disclosures about fair value of financial instruments. Depending on the nature of the assets and liabilities, various valuation techniques and assumptions are used when estimating fair value. The carrying amounts of certain of the Company’s financial instruments, including prepaid expense and accounts payable are shown at cost, which approximates fair value due to the short-term nature of these instruments. The Company follows the provisions of FASB ASC Topic 820, Fair Value Measurement , for financial assets and liabilities measured on a recurring basis. The guidance requires fair value measurements be classified and disclosed in one of the following three categories: Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liabilities. Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). 147 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) The following fair value hierarchy table presents information about the Company’s assets measured at fair value on a recurring basis: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair value measurement at ​ ​ reporting date using ​ ​ Quoted prices ​ ​ ​ ​ ​ ​ ​ in active Significant ​ ​ ​ ​ markets for other Significant ​ identical observable ​ unobservable ​ assets inputs ​ inputs (in thousands) (Level 1) (Level 2) (Level 3) December 31, 2020: ​ ​ ​ Assets ​ ​ ​ Cash and cash equivalents: ​ ​ ​ ​ ​ ​ ​ ​ ​ Money market fund ​ $ 84,409 ​ $ — ​ $ — Commercial paper ​ ​ — ​ ​ 3,933 ​ ​ — Total cash and cash equivalents ​ ​ 84,409 ​ ​ 3,933 ​ ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Marketable securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ Certificates of deposit ​ ​ — ​ ​ 6,115 ​ ​ — Commercial paper ​ ​ — ​ ​ 47,877 ​ ​ — Corporate debt securities ​ ​ — ​ ​ 85,577 ​ ​ — U.S. government securities ​ ​ — ​ ​ 24,344 ​ ​ — Non-U.S. government securities ​ ​ — ​ ​ 5,902 ​ ​ — Total marketable securities ​ ​ — ​ ​ 169,815 ​ ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total financial assets ​ $ 84,409 ​ $ 173,748 ​ $ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2019: ​ ​ ​ Assets ​ ​ ​ Cash and cash equivalents: ​ ​ ​ ​ ​ ​ ​ ​ ​ Money market fund ​ $ 155,846 ​ $ — ​ $ — ​ The Company evaluated the future tranche right feature within the Series A-1 convertible preferred stock issued in 2018 and determined that the future tranche right was a freestanding financial instrument that was classified as a liability and was re-measured at each reporting period until the redemption feature was exercised in connection with the sale and issuance of the Series A-2 convertible preferred stock in May 2019. 6. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, (in thousands) 2020 2019 Professional fees ​ $ 720 ​ $ 997 Compensation and related benefits ​ 5,183 ​ 1,502 Research and development ​ 9,466 ​ 507 Other ​ 541 ​ 46 ​ ​ $ 15,910 ​ $ 3,052 ​ ​ 148 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) 7. Commitments and Contingencies Amended and Restated Research, Collaboration and License Arrangement with Penn In May 2020, the Company amended and restated its research, collaboration and licensing agreement with Penn (the Penn Agreement) for research and development collaborations and exclusive license rights to patents for certain products and technologies, which superseded the Company’s existing sponsored research, collaboration and licensing agreement with Penn, dated September 18, 2018, as amended. Under the Penn Agreement, in addition to the obligation to fund certain research relating to the preclinical development of selected products, the Company will fund discovery research conducted by Penn for five years, beginning in May 2020, and will receive exclusive rights, subject to certain limitations, to technologies resulting from the discovery research for the Company’s products developed with GTP, such as novel capsids, toxicity reduction technologies and delivery and formulation improvements. This funding commitment is $5.0 million annually, with quarterly payments of $1.3 million that began in the third quarter of 2020. The Penn Agreement also increased the number of remaining options available to the Company to commence additional licensed programs for rare, monogenic CNS indications from six to eleven, and extended the option exercise window by three years. Accordingly, the window to exercise all remaining options extends to May 2025. If the Company were to exercise any of these options, it would owe Penn a non-refundable upfront fee of $0.5 million per product indication, with another $0.5 million fee owed upon a further developmental milestone. In the fourth quarter of 2020, the Company exercised one of these options and paid Penn $0.5 million and has accrued an additional $0.5 million as of December 31, 2020. The Company expensed the $1.0 million fee as acquired in-process research and development expense on the statement of operations and comprehensive loss for the year ended December 31, 2020. The Penn Agreement requires the Company to make payments of up to $16.5 million per product candidate in aggregate upon the achievement of specific development milestone events by such licensed product for a first indication, reduced development milestone payments for the second and third indications and no development milestone payments for subsequent indications. In addition, on a product-by-product basis, the Company is obligated to make up to $55.0 million in sales milestone payments on each licensed product based on annual sales of a licensed product in excess of defined thresholds. ​ Upon successful commercialization of a product using the licensed technology, the Company shall pay to Penn, on a licensed product-by-licensed product and country-by-country basis, tiered royalties (subject to customary reductions) in the mid-single digits on annual worldwide net sales of such licensed product. In addition, the Company shall pay Penn a percentage of sublicensing income, ranging from the mid-single digits to low double digits, for sublicenses under the Penn Agreement. ​ Catalent Agreements In June 2019, the Company entered into a collaboration agreement (the Catalent Collaboration Agreement) with Catalent. As part of the Catalent Collaboration Agreement, the Company paid Catalent an upfront fee for the commissioning, qualification, validation and equipping of a clean room suite (the Clean Room Suite). Subject to validation of the Clean Room Suite, which was completed in the fourth quarter of 2020, the Company will pay an annual fee for five years for the use of the Clean Room Suite and is also committed to minimum annual purchase commitments. In April 2020, the Company entered into a development services and clinical supply agreement (the Manufacturing and Supply Agreement) with Catalent to secure clinical scale manufacturing capacity for batches of active pharmaceutical ingredients for the Company’s gene therapy product candidates. The Manufacturing and Supply Agreement confirms the terms contemplated by the Catalent Collaboration Agreement. The Catalent Collaboration Agreement continues to be in effect pursuant to its terms. 149 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) Under the terms of the Manufacturing and Supply Agreement, Catalent has agreed to manufacture batches of drug product for the Company’s gene therapy product candidates at the Clean Room Suite at a Catalent facility provided for in the Catalent Collaboration Agreement. The Manufacturing and Supply Agreement provides for a term of five years which period may be extended once, at the Company’s option, for an additional five year-period. The Company has the right to terminate the Manufacturing and Supply Agreement for convenience or other reasons specified in the Manufacturing and Supply Agreement upon prior written notice. If the Company terminates the Manufacturing and Supply Agreement, it will be obligated to pay an early termination fee to Catalent. Under both the Collaboration Agreement and the Manufacturing and Supply Agreement, the Company has an annual minimum commitment of $10.6 million per year owed to Catalent for five years from the validation of the Clean Room, subject to certain inflationary adjustments. The Clean Room was validated in the fourth quarter of 2020, thus commencing the annual minimum commitment. Operating Leases The Company leases office space in Philadelphia, Pennsylvania under a noncancelable lease (Existing Lease Agreement), as amended. The lease is classified as an operating lease and the Company recognizes rent expense on a straight-line basis over the lease term. In April 2020, the Company entered into a new lease agreement (New Lease Agreement) for larger office space in Philadelphia to accommodate the Company’s continued growth and serve as the new corporate headquarters. The New Lease Agreement is expected to commence in March 2021 and is expected to expire in January 2031. The Company has an option to extend the term of the New Lease Agreement by up to two five-year terms. Upon signing the New Lease Agreement, the Company amended the Existing Lease Agreement such that the Existing Lease Agreement will terminate five days after the commencement of the New Lease Agreement with no further payments due under the Existing Lease Agreement. The landlord also will provide the Company with a tenant improvement allowance of up to $2.8 million. In December 2020, the Company entered into a lease agreement for laboratory space (Laboratory Lease Agreement) in Hopewell, New Jersey. The laboratory will initially focus on state-of-the-art analytical capabilities, clinical assay development and validation, biomarker assay validation and clinical product testing to support both viral vector manufacturing and clinical development. The Laboratory Lease Agreement is expected to commence in the second quarter of 2021 and is expected to expire in 2036. The Company has an option to extend the term of the Laboratory Lease Agreement by up to two five-year terms. The future minimum lease payments under the Company’s lease arrangements as of December 31, 2020 are as follows: ​ ​ ​ ​ (in thousands) ​ 2021 ​ $ 1,174 2022 ​ 2,820 2023 ​ 3,452 2024 ​ 3,520 2025 ​ 3,651 Thereafter ​ 37,288 ​ ​ $ 51,905 ​ The Company recognized rent expense of $0.6 million and $0.2 million during the years ended December 31, 2020 and 2019, respectively, related to its operating leases. 150 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) Employment Agreements The Company has entered into employment agreements with key personnel providing for compensation and severance in certain circumstances, as described in the respective employment agreements. Patent Infringement Claim On February 18, 2020, the Company received a letter from REGENXBIO Inc. (Regenx), which stated its view that the use of the Company’s AAVhu68 capsid infringes patent claims to which Regenx has an exclusive license and which expire in 2024. Regenx also stated that it has exclusive licenses to various pending patent applications regarding the use of AAV vectors administered via instar-cisterna magna injection, and that these applications may lead to issued claims that Regenx believes may, if issued, cover the Company’s planned method of administration for the Company’s lead product candidates. The Company believes it has valid defenses to the issued claims set forth by Regenx relating to AAVhu68. Further, the prosecution of pending patent applications is highly uncertain, and it is unclear whether any patents will be issued from these pending Regenx patent applications at all, much less with claims that are relevant to the administration of the Company’s product candidates. Regenx also asked for information regarding the Company’s relationship with Dr. Wilson while he was serving as an advisor to Regenx. Regenx’s letter also offers to discuss licensing the applicable patent portfolios from them. In April 2020, the Company responded to Regenx indicating that it does not believe it requires a license to any of the specified Regenx patents or patent applications at this time, and that it found that Dr. Wilson’s relationship with the Company was consistent with his obligations to Regenx. The Company will continue to monitor the situation and, if necessary, take appropriate actions, which may include responding to further correspondence from Regenx, and engaging in discussions with Regenx regarding their claims. If any such patents were enforceable and such claims were ultimately successful, the Company might require a license to continue to use and sell any product candidates using such AAV vector. 8. Convertible Preferred Stock and Common Stock Initial Public Offering In March 2020, the Company completed its IPO in which the Company sold 13,798,900 shares of its common stock, which included shares sold pursuant to an option granted to the underwriters to purchase additional shares, at a public offering price of $18.00 per share. The Company received net proceeds of $227.5 million after deducting underwriting discounts, commissions, and other offering expenses paid by the Company. In addition, immediately prior to the initial closing of the IPO on March 3, 2020, (i) all of the Company’s outstanding shares of convertible preferred stock converted into an aggregate of 26,803,777 shares of common stock and (ii) the Company filed an amended and restated certificate of incorporation to, among other things, increase the number of authorized shares of common stock to 300.0 million. 9. Share-Based Compensation Equity Incentive Plan The Company has two equity incentive plans: the 2018 Equity Incentive Plan, as amended (the 2018 Plan), and the 2020 Equity Incentive Plan. New awards can only be granted under the 2020 Equity Incentive Plan (the Plan). The total number of shares authorized under the Plan as of December 31, 2020 was 5,362,823. Of this amount, 3,320,729 shares were available for future grants as of December 31, 2020. The number of shares of the Company’s common stock that may be issued pursuant to rights granted under the Plan shall automatically increase on January 1st of each year, commencing on January 1, 2021 and continuing for ten years, in an amount equal to five percent of the total number of shares of the Company’s common stock outstanding on December 31st of the preceding calendar year, subject to the discretion of the board of directors or compensation committee to determine a lesser number of shares shall be added for such year. As such, 2,295,854 shares were added to the Plan in January 2021. The Plan provides for the granting of 151 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) common stock, incentive stock options, nonqualified stock options, restricted stock awards, and/or stock appreciation rights to employees, directors, and other persons, as determined by the Company’s board of directors. The Company’s stock options vest based on the terms in each award agreement, generally over four-year periods, and have a term of ten years. The Company measures share-based awards at their grant-date fair value and records compensation expense on a straight-line basis over the vesting period of the awards. The Company recorded share-based compensation expense in the following expense categories in its accompanying statements of operations for the period presented: ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 30, (in thousands) ​ 2020 2019 Research and development ​ $ 5,525 ​ $ 317 General and administrative ​ 9,055 ​ 1,137 ​ ​ $ 14,580 ​ $ 1,454 ​ During the year ended December 31, 2020, the Company modified certain awards and recognized an additional $0.7 million related to the modifications, $0.6 million of which was recognized in research and development expense and $0.1 million was recognized in general and administrative expense. The following table summarizes stock option activity for the years ended December 31, 2019 and 2020: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ Weighted ​ average ​ ​ ​ ​ average ​ remaining ​ ​ Number of ​ exercise price ​ contractual ​ ​ shares ​ per share ​ term (years) Outstanding at January 1, 2019 — $ — - Granted ​ 3,686,808 ​ ​ 4.43 ​ ​ Early exercised ​ (998,869) ​ ​ 1.02 ​ ​ Forfeited (110,220) ​ ​ 1.02 ​ Outstanding at December 31, 2019 ​ 2,577,719 $ 5.90 9.3 Granted 4,679,218 ​ ​ 15.14 Exercised (99,780) ​ ​ 2.08 Forfeited (229,046) ​ ​ 1.02 Outstanding at December 31, 2020 6,928,111 ​ $ 12.36 9.0 Vested and Exercisable at December 31, 2020 1,044,987 ​ $ 7.49 8.7 Vested or expected to vest at December 31, 2020 6,928,111 ​ $ 12.36 9.0 ​ The weighted-average grant date fair value of options granted was $11.54 and $3.26 for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, the total unrecognized compensation expense related to unvested stock option awards was $49.2 million, which the Company expects to recognize over a weighted-average period of 3.0 years. The aggregate intrinsic value of options exercised during the year ended December 31, 2020 was $2.0 million. 152 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) The fair value of each option was estimated on the date of grant using the weighted average assumptions in the table below: ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ ​ 2020 ​ 2019 ​ Expected volatility ​ 95.7 % 88.4 % Risk‑free interest rate ​ 1.2 % 2.0 % Expected term ​ 6.05 years ​ 5.75 years ​ Expected dividend yield ​ — ​ — ​ ​ The 2018 Plan provides certain holders of stock options an election to early exercise prior to vesting. The Company has the right to repurchase early exercised options without transferring any appreciation in the value of the underlying shares to the employee if the employee terminates employment before the end of the original vesting period. The repurchase price is the lesser of the original exercise price or the then fair value of the Company’s common stock. At December 31, 2020, $41,000 of proceeds from unvested early exercised options were recognized as a non-current liability in other liabilities in the accompanying balance sheet. The 2018 Plan allowed for the exercise of options to be financed with nonrecourse notes. For accounting purposes, payment of principal and interest are viewed as the exercise price of the option. Therefore, no interest income was recognized. The following table summarizes activity relating to early exercises of stock options during the years ended December 31, 2019 and 2020: ​ ​ ​ ​ Number of shares Unvested balance at January 1, 2019 — Granted and early exercised 998,869 Vested (504,266) Unvested balance at December 31, 2019 494,603 Vested (192,326) Unvested balance at December 31, 2020 302,277 Unvested and vested subject to promissory notes 901,479 ​ Nonrecourse Promissory Notes with Related Parties In February 2019, the Company’s interim chief executive officer and chief operating officer elected to early exercise 688,875 and 309,994 stock options, respectively, in exchange for cash proceeds of $0.2 million and nonrecourse promissory notes (the Notes) of $0.8 million. The Notes bore interest at 2.91% and were secured by the underlying shares of common stock that were issued. In January 2020, the Company forgave the Notes and associated interest related to the early exercise of stock options by the interim chief executive officer and chief operating officer. An aggregate of 406,897 shares that were previously not considered outstanding for accounting purposes due to being secured by the Notes became outstanding upon the forgiveness of the Notes in January 2020. Employee Stock Purchase Plan The Company’s 2020 Employee Stock Purchase Plan (the ESPP) became effective on February 28, 2020. The ESPP authorizes the issuance of up to 434,000 shares of the Company’s common stock. Of this amount, 413,891 shares were available for future grants as of December 31, 2020. The number of shares of the Company’s common stock that may be issued pursuant to rights granted under the ESPP shall automatically increase on January 1st of each year, commencing on January 1, 2021 and continuing for ten years, in an amount equal to one percent of the total number of shares of the Company’s common stock outstanding on December 31st of the preceding calendar year, subject to the discretion of the 153 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) board of directors or compensation committee to determine a lesser number of shares shall be added for such year. As such, 459,170 shares were added to the ESPP in January 2021. Under the ESPP, eligible employees can purchase the Company’s common stock through accumulated payroll deductions at such times as are established by the compensation committee. Eligible employees may purchase the Company’s common stock at 85% of the lower of the fair market value of the Company’s common stock on the first day of the offering period or on the last day of the offering period. Eligible employees may contribute up to 15% of their eligible compensation. Under the ESPP, a participant may not accrue rights to purchase more than $25,000 worth of the Company’s common stock for each calendar year in which such right is outstanding. During the year ended December 31, 2020, 20,109 shares were purchased under the ESPP. In accordance with the guidance in ASC 718-50 – Compensation – Stock Compensation , the ability to purchase shares of the Company’s common stock at 85% of the lower of the price on the first day of the offering period or the last day of the offering period (i.e. the purchase date) represents an option and , therefore, the ESPP is a compensatory plan under this guidance. Accordingly, share-based compensation expense is determined based on the option’s grant-date fair value as estimated by applying the Black Scholes option-pricing model and is recognized over the withholding period. The Company recognized share-based compensation expense of $0.2 million during the year ended December 31, 2020 related to the ESPP. 10. Income Taxes The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, (in thousands) 2020 2019 Deferred tax assets: ​ ​ Net operating loss carryforwards ​ $ 23,464 ​ $ 14,864 Research and development credits ​ 8,959 ​ 1,467 Collaboration and license agreement ​ 1,463 ​ 1,208 Capitalized research and development ​ ​ 23,150 ​ ​ — Share-based compensation ​ 4,125 ​ 10 Accrued expenses and other ​ 1,801 ​ 798 Gross deferred tax assets ​ 62,962 ​ 18,347 Less: valuation allowance ​ (62,962) ​ (18,347) Net deferred tax asset ​ ​ — ​ ​ — ​ ​ $ — ​ $ — ​ In assessing the need for a valuation allowance, management must determine that there will be sufficient taxable income to allow for the realization of deferred tax assets. Based upon the historical and anticipated future losses, management has determined that the deferred tax assets do not meet the more-likely-than-not threshold for realizability. Accordingly, a full valuation allowance has been recorded against the Company’s net deferred tax assets as of December 31, 2020 and 2019. The valuation allowance increased by $44.6 million and $13.3 million during the years ended December 31, 2020 and 2019, respectively. 154 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) A reconciliation of the federal income tax rate to the Company’s effective tax rate is as follows: ​ ​ ​ ​ ​ ​ ​ ​ Year ended ​ ​ December 31, ​ 2020 2019 ​ Federal tax benefit at statutory rate (21.0) % (21.0) % State tax, net of federal benefit (12.6) (10.2) ​ Permanent differences 0.3 4.3 ​ Research and development and orphan drug tax credits (6.5) (2.2) ​ Change in valuation allowance 39.8 29.1 ​ ​ — % — % ​ The following table summarizes carryforwards of federal, state and local net operating losses (NOL) and research and development and orphan drug tax credits: ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, (in thousands) 2020 2019 Federal ​ $ 69,317 ​ $ 43,983 State ​ 69,313 ​ 43,986 Local ​ 69,053 ​ 43,728 Research and development and orphan drug tax credits ​ 8,958 ​ 1,467 ​ The NOL carryforwards begin expiring in 2037 for federal and state income tax purposes, however; all federal NOL carryforwards generated subsequent to January 1, 2018, are able to be carried forward indefinitely. The NOL carryforwards for local income taxes related to the city of Philadelphia begin expiring in 2021. As of December 31, 2020, the Company also had federal research and development and orphan drug tax credit carryforwards of $9.0 million that will begin to expire in 2038, unless previously utilized. The NOL and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50 percent, as defined under Sections 382 and 383 of the Internal Revenue Code, respectively, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The Company has not done an analysis to determine whether or not ownership changes have occurred since inception. Certain state NOLs may also be limited, including Pennsylvania, which limits NOL utilization as a percentage of apportioned taxable income. The Company will recognize interest and penalties related to uncertain tax positions as a component of interest income, net. As of December 31, 2020, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s statement of operations. Tax years from 2017 and after remain subject to examination by the taxing jurisdictions. The NOL carryforwards remain subject to review until utilized. 11. Related-Party Transactions Penn Agreement As part of the Penn Agreement, Penn was issued shares of the Company’s common stock in 2018. Research and development expenses, including $1.0 million and $0.5 million in acquired in-process research and development associated with Penn during the years ended December 31, 2020 and 2019, were $33.4 million and $26.3 million, 155 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) respectively. The Company made $23.1 million and $23.6 million in cash payments to Penn during the years ended December 31, 2020 and 2019, respectively, and had a prepaid research and development asset of $8.4 million and $5.7 million as of December 31, 2020 and 2019, respectively, in the accompanying balance sheets. Consulting Agreement James M. Wilson, M.D., Ph.D., an employee of Penn and one of the co-founders of the Company who was issued shares of the Company’s common stock in 2018, serves as the Company’s chief scientific advisor pursuant to a consulting agreement. The Company recognized $0.1 million and $0.1 million of expense related to these services during the years ended December 31, 2020 and 2019, including $25,000 and $25,000 respectively, of share-based compensation expense. 12. Subsequent Events In January 2021, the Company closed a follow-on public offering in which the Company issued and sold 8,050,000 shares of its common stock, which included shares sold pursuant to an option granted to the underwriters to purchase additional shares, at a public offering price of $22.00 per share for net proceeds of $165.9 million after deducting underwriting discounts, commissions and other offering expenses. ​ ​ 156 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.