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 ( KPMG LLP , Philadelphia, PA , Auditor Firm ID: 185 ) ​ 116 Balance Sheets ​ 117 Statements of Operations and Comprehensive Loss ​ 118 Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) ​ 119 Statements of Cash Flows ​ 120 Notes to Financial Statements ​ 121 ​ ​ ​ 115 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, 2021 and 2020, 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, 2021 and 2020, 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. ​ Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. ​ /s/ KPMG LLP We have served as the Company’s auditor since 2019. Philadelphia, Pennsylvania March 3, 2022 ​ 116 Table of Contents Passage Bio, Inc. Balance Sheets ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, (in thousands, except share data) 2021 2020 Assets ​ ​ Current assets: ​ ​ Cash and cash equivalents ​ $ 128,965 ​ $ 135,002 Marketable securities ​ ​ 186,808 ​ ​ 169,815 Prepaid expenses and other current assets ​ 1,726 ​ 1,405 Prepaid research and development ​ 7,567 ​ 10,961 Total current assets ​ 325,066 ​ 317,183 Property and equipment, net ​ 23,806 ​ 2,795 Other assets ​ 6,204 ​ 8,029 Total assets ​ $ 355,076 ​ $ 328,007 Liabilities and stockholders’ equity ​ ​ ​ Current liabilities: ​ ​ ​ Accounts payable ​ $ 9,448 ​ $ 5,265 Accrued expenses and other current liabilities ​ 20,050 ​ 15,910 Total current liabilities ​ 29,498 ​ 21,175 Deferred rent ​ 6,921 ​ 2,077 Other liabilities ​ - ​ 41 Total liabilities ​ 36,419 ​ 23,293 ​ ​ ​ ​ ​ ​ ​ Commitments and Contingencies (note 8) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stockholders’ equity: ​ ​ ​ Common stock, $ 0.0001 par value: 300,000,000 shares authorized; 54,244,996 shares issued and 54,244,996 shares outstanding at December 31, 2021 and 45,917,084 shares issued and 45,614,807 shares outstanding at December 31, 2020 ​ 5 ​ 4 Additional paid‑in capital ​ 675,346 ​ 475,617 Accumulated other comprehensive income (loss) ​ ​ ( 413 ) ​ ​ ( 12 ) Accumulated deficit ​ ( 356,281 ) ​ ( 170,895 ) Total stockholders’ equity ​ 318,657 ​ 304,714 Total liabilities and stockholders’ equity ​ $ 355,076 ​ $ 328,007 ​ See accompanying notes to financial statements. ​ 117 Table of Contents Passage Bio, Inc. Statements of Operations and Comprehensive Loss ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, (in thousands, except share and per share data) ​ 2021 2020 Operating expenses: ​ ​ ​ Research and development ​ $ 117,673 ​ $ 81,788 Acquired in‑process research and development ​ 8,000 ​ 1,000 General and administrative ​ 60,056 ​ 30,114 Loss from operations ​ ( 185,729 ) ​ ( 112,902 ) Interest income, net ​ 343 ​ 670 Net loss ​ $ ( 185,386 ) ​ $ ( 112,232 ) Per share information: ​ ​ Net loss per share of common stock, basic and diluted ​ $ ( 3.48 ) ​ $ ( 2.91 ) Weighted average common shares outstanding, basic and diluted ​ 53,343,959 ​ 38,615,967 Comprehensive loss: ​ ​ ​ ​ ​ ​ Net loss ​ $ ( 185,386 ) ​ $ ( 112,232 ) Unrealized gain (loss) on marketable securities ​ ​ ( 401 ) ​ ​ ( 12 ) Comprehensive loss ​ $ ( 185,787 ) ​ $ ( 112,244 ) ​ See accompanying notes to financial statements. ​ ​ 118 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) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated other ​ ​ ​ ​ ​ ​ ​ ​ Series A ‑ 1 ​ Series A ‑ 2 ​ ​ Series B ​ ​ Common stock ​ Additional ​ comprehensive ​ Accumulated ​ ​ ​ (in thousands, except share data) Shares Amount Shares Amount ​ ​ Shares Amount Shares Amount ​ paid ‑ in capital ​ income (loss) deficit Total Balance at January 1, 2020 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 Issuance of shares in connection with 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 gain (loss) on marketable securities ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 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 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stockholders’ equity ​ ​ Common stock ​ Additional ​ ​ Accumulated other ​ ​ Accumulated ​ ​ ​ (in thousands, except share data) Shares Amount paid ‑ in capital ​ comprehensive income (loss) ​ deficit ​ Total Balance at January 1, 2021 45,614,807 ​ $ 4 $ 475,617 ​ $ ( 12 ) ​ $ ( 170,895 ) ​ $ 304,714 Vesting of early exercise option awards 302,277 ​ — 45 ​ — ​ — ​ 45 Exercise of stock options and vesting of restricted stock units 186,787 ​ — 301 ​ — ​ — ​ 301 Issuance of shares in connection with employee stock purchase plan ​ 91,125 ​ ​ — ​ 887 ​ ​ — ​ ​ — ​ ​ 887 Sale of common stock, net of issuance costs of $ 669 8,050,000 ​ 1 165,805 ​ — ​ — ​ 165,806 Unrealized gain (loss) on marketable securities — ​ — — ​ ( 401 ) ​ — ​ ( 401 ) Share‑based compensation expense — ​ — 32,691 ​ — ​ — ​ 32,691 Net loss — ​ — — ​ — ​ ( 185,386 ) ​ ( 185,386 ) Balance at December 31, 2021 54,244,996 ​ $ 5 $ 675,346 ​ $ ( 413 ) ​ $ ( 356,281 ) ​ $ 318,657 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ See accompanying notes to financial statements. ​ ​ 119 Table of Contents Passage Bio, Inc. Statements of Cash Flows ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ December 31, (in thousands) 2021 2020 Cash flows used in operating activities: ​ ​ Net loss ​ $ ( 185,386 ) ​ $ ( 112,232 ) Adjustments to reconcile net loss to net cash used in operating activities: ​ ​ ​ Acquired in‑process research and development ​ 8,000 ​ 1,000 Depreciation and amortization ​ 1,543 ​ 800 Share‑based compensation ​ 32,691 ​ 14,580 Amortization of premium and discount on marketable securities, net ​ ​ 2,778 ​ ​ 633 Deferred rent ​ 2,075 ​ 259 Changes in operating assets and liabilities: ​ ​ Prepaid expenses and other current assets, and other assets ​ 1,842 ​ 1,871 Prepaid research and development ​ 3,394 ​ ( 4,216 ) Accounts payable ​ 2,201 ​ 4,588 Accrued expenses and other current liabilities ​ 3,983 ​ 12,197 Net cash used in operating activities ​ ( 126,879 ) ​ ( 80,520 ) Cash flows used in investing activities: ​ ​ Purchases of marketable securities ​ ( 202,546 ) ​ ( 266,057 ) Sales or maturities of marketable securities ​ 182,374 ​ 95,597 Purchases of technology licenses ​ ( 8,000 ) ​ ( 500 ) Purchases of property and equipment ​ ( 17,642 ) ​ ( 1,146 ) Net cash used in investing activities ​ ( 45,814 ) ​ ( 172,106 ) Cash flows provided by financing activities: ​ ​ Proceeds from issuance of common stock, net of offering costs ​ ​ 165,806 ​ ​ 228,262 Payment of offering costs ​ ​ ( 338 ) ​ ​ — Proceeds from the exercise of stock options ​ 301 ​ 284 Proceeds from the issuance of common stock under employee stock purchase plan ​ ​ 887 ​ ​ 208 Net cash provided by financing activities ​ 166,656 ​ 228,754 Net increase (decrease) in cash and cash equivalents ​ ( 6,037 ) ​ ( 23,872 ) Cash and cash equivalents at beginning of year ​ 135,002 ​ 158,874 Cash and cash equivalents at end of year ​ $ 128,965 ​ $ 135,002 Supplemental disclosure of non‑cash investing and financing activities: ​ ​ Unrealized gain (loss) on marketable securities ​ $ ( 401 ) ​ $ ( 12 ) Property and equipment in deferred rent ​ $ 2,769 ​ $ 1,314 Property and equipment in accounts payable and accrued expenses and other current liabilities ​ $ 2,143 ​ $ 48 Acquired in‑process research and development in accrued expenses and other current liabilities ​ $ - ​ $ 500 Deferred financing costs in accrued expenses and other current liabilities ​ $ - ​ ​ 161 Reclassification of deferred offering costs paid in a prior period ​ $ - ​ $ 763 Vesting of early exercise option awards ​ $ 45 ​ $ 35 ​ See accompanying notes to financial statements. ​ ​ 120 Table of Contents Passage Bio, Inc. Notes to Financial Statements 1. Nature of Operations Passage Bio, Inc., or the Company, a Delaware corporation incorporated in July 2017, is a clinical stage genetic medicines company focused on developing transformative therapies for central nervous system diseases, or CNS disorders, with limited or no approved treatment options. The Company has a strategic research collaboration with the Trustees of the University of Pennsylvania’s, or Penn, Gene Therapy Program, or 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 CNS indications. Under this collaboration, GTP conducts discovery and preclinical activities enabling Investigation New Drug, or IND, applications 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., or Catalent, 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 $ 356.3 million as of December 31, 2021. 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, or 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 $ 165.8 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 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 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. In accordance with Accounting Standards Update, or “ASU”, No. 2014-15 , Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern , the Company has evaluated whether there are certain conditions and 121 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. As of the issuance date of these financial statements, the Company expects that its cash, cash equivalents and marketable debt securities will be sufficient to fund its forecasted operating expenses and capital expenditure requirements for at least the next twelve months from the issuance date of these financial statements. 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, or GAAP. Any reference in these notes to applicable guidance is meant to refer to GAAP as found in the Accounting Standards Codification, or ASC, and ASU promulgated by the Financial Accounting Standards Board, or FASB. 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. 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. 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. 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. 122 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) Marketable securities The Company classifies its marketable securities as available-for-sale, which include certificates of deposit, commercial paper, corporate debt securities, U.S. government debt securities and non-U.S. government debt securities with original maturities of greater than three months from date of purchase. 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, net Property and equipment consists of laboratory equipment, office equipment, computer hardware and software, 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 estimates useful life on an asset by asset basis, which generally consists of three years for computer hardware and software, five years for office equipment, five years for laboratory 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 impairment expense is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. For the years ended December 31, 2021, and 2020, no impairment expenses were recognized. 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. The Company’s share-based compensation consists of restricted stock units, or RSUs, and options to purchase common stock, or options. The Company uses the Black-Scholes option pricing model to value its stock option awards. Estimating the fair value of share-based awards for stock options requires the input of assumptions, including, the expected term of the options and stock price volatility. The Company accounts for forfeitures for stock option awards as they occur. The expected term 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 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, which is considered the subjective assumption, the Company uses a composite of comparable public company data as a basis for its expected volatility to calculate the fair value of option grants. The assumptions used in estimating the fair value of share-based awards for stock options 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. Research and Development Research and development costs are expensed as incurred and consist primarily of expenses incurred with Penn, contract research organization, contract manufacturing organizations, and employee-related expenses, including salaries, benefits, and share-based compensation. 123 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) Management makes estimates of the Company’s accrued research and development expenses as of each balance sheet date in the Company’s financial statements based on an estimate of progress to completion of specific tasks using 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 and related expenses accordingly. Nonrefundable advance payments for goods and services, including fees for preclinical services, clinical services, manufacturing services 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. Acquired In-Process Research and Development Fees paid to obtain research and development technology licenses are recognized as acquired in-process research and development expense if the research and development technology licensed has not reached technological feasibility and has no alternative future use. For the years ended December 31, 2021, and 2020, all fees paid to obtain technology licenses were recognized as acquired in-process research and development expense. 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. 124 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, ​ ​ 2021 2020 Stock options (including shares subject to repurchase at December 31, 2020) ​ 9,416,998 6,928,111 Unvested restricted stock units ​ 290,500 ​ — Employee stock purchase plan ​ 33,753 ​ 4,044 ​ ​ 9,741,251 6,932,155 ​ 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 twelve 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 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. The Company will utilize the practical expedients available under ASU No. 2016-02, including, electing the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs. In addition, the Company will apply the accounting policy election to not separate lease and non-lease components and the accounting policy election to not apply the recognition requirement under ASU No. 2016-02 to leases with a term of twelve months or less. The Company will not have a material cumulative adjustment to the statement of operations and comprehensive loss on January 1, 2022. The Company expects a material adjustment to the balance sheet in connection with the recognition of right-of-use assets and lease liabilities on January 1, 2022, with right-of-use assets approximating $ 17.0 million to $ 24.0 million and lease liabilities approximating $ 24.0 million to $ 31.0 million, subject to finalization of the Company’s incremental borrowing rate. The difference between right-of-use assets and lease liabilities relates to adjustments to unamortized balances of deferred rent and lease incentives existing as of December 31, 2021. ​ In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments , or 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. ​ 125 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cost or ​ ​ ​ ​ ​ ​ ​ ​ ​ (in thousands) Amortized cost Unrealized gains Unrealized losses Fair value December 31, 2021: ​ ​ ​ ​ Cash accounts in banking institutions ​ $ 44,549 ​ $ - ​ $ - ​ $ 44,549 Money market funds ​ ​ 84,416 ​ ​ - ​ ​ - ​ ​ 84,416 Total ​ $ 128,965 ​ $ - ​ $ - ​ $ 128,965 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 ​ 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, 2021: ​ ​ ​ ​ Certificates of deposit ​ $ 5,296 ​ $ - ​ $ - ​ $ 5,296 Commercial paper ​ ​ 26,503 ​ ​ 4 ​ ​ ( 4 ) ​ ​ 26,503 Corporate debt securities ​ ​ 145,577 ​ ​ 10 ​ ​ ( 418 ) ​ ​ 145,169 U.S. government securities ​ ​ 1,996 ​ ​ - ​ ​ ( 8 ) ​ ​ 1,988 Non-U.S. government securities ​ ​ 7,849 ​ ​ 4 ​ ​ ( 1 ) ​ ​ 7,852 Total ​ $ 187,221 ​ $ 18 ​ $ ( 431 ) ​ $ 186,808 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 ​ S ​ ​ The contractual maturities of our marketable securities as of December 31, 2021, are as follows: ​ ​ ​ ​ ​ ​ ​ (in thousands) ​ Amortized Cost ​ Fair Value Due within one year ​ $ 103,012 ​ $ 102,963 Due after one year through five years ​ ​ 84,209 ​ ​ 83,845 Total ​ $ 187,221 ​ $ 186,808 ​ ​ 126 Table of Contents ​ 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). 127 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. Included within cash and cash equivalents on the balance sheet, but excluded from the fair value hierarchy table, are cash deposits held at financial institutions: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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, 2021: ​ ​ ​ Assets ​ ​ ​ Cash and cash equivalents: ​ ​ ​ ​ ​ ​ ​ ​ ​ Money market funds ​ $ 84,416 ​ $ - ​ $ - Total cash and cash equivalents ​ ​ 84,416 ​ ​ - ​ ​ - ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Marketable securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ Certificates of deposit ​ ​ - ​ ​ 5,296 ​ ​ - Commercial paper ​ ​ - ​ ​ 26,503 ​ ​ - Corporate debt securities ​ ​ - ​ ​ 145,169 ​ ​ - U.S. government securities ​ ​ - ​ ​ 1,988 ​ ​ - Non-U.S. government securities ​ ​ - ​ ​ 7,852 ​ ​ - Total marketable securities ​ ​ - ​ ​ 186,808 ​ ​ - ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total financial assets ​ $ 84,416 ​ $ 186,808 ​ $ - ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2020: ​ ​ ​ ​ ​ ​ ​ ​ ​ Assets ​ ​ ​ Cash and cash equivalents: ​ ​ ​ ​ ​ ​ ​ ​ ​ Money market funds ​ $ 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 ​ $ - ​ ​ ​ ​ ​ ​ 128 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) 6. Property and Equipment, net Property and Equipment, net, consist of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (in thousands) ​ December 31, 2021 ​ December 31, 2020 Laboratory equipment $ 8,916 ​ $ - Office equipment ​ 621 ​ ​ 80 Computer hardware and software ​ 1,028 ​ ​ 425 Furniture and fixtures ​ 1,487 ​ ​ 272 Leasehold improvements ​ 13,409 ​ ​ 1,638 Construction in progress ​ 822 ​ ​ 1,314 Total property and equipment ​ 26,283 ​ ​ 3,729 Accumulated depreciation and amortization ​ ( 2,477 ) ​ ​ ( 934 ) ​ $ 23,806 ​ $ 2,795 ​ ​ 7. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ (in thousands) December 31, 2021 December 31, 2020 Professional fees ​ $ 877 ​ $ 720 Compensation and related benefits ​ 10,014 ​ 5,183 Research and development ​ 8,498 ​ 9,466 Property and equipment ​ ​ 161 ​ ​ - Other ​ 500 ​ 541 ​ ​ $ 20,050 ​ $ 15,910 ​ ​ 8. Commitments and Contingencies Amended and Restated Research, Collaboration and License Arrangement with Penn The Company has a research, collaboration and licensing agreement with Penn, as amended, or the Penn Agreement, for research and development collaborations and exclusive license rights to patents for certain products and technologies. 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 through August 3, 2026 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 for the discovery research is $ 5.0 million annually, paid in quarterly increments of $ 1.3 million through August 3, 2026. As a result of an Amendment in August 2021, the Penn Agreement includes an exploratory research program focused on discovering targets and novel gene therapy candidates for large CNS diseases, initially focused on AD and TLE, and can be expanded to other large CNS diseases upon mutual agreement. The initial term of the exploratory research program is until August 2024, which term can be extended by mutual agreement. During such term, the Company will have an exclusive right of first negotiation to include additional targets to the exploratory research program within the agreed upon large CNS indications. Under the exploratory research program, the Company will have the right to further develop and commercialize any gene therapy product candidates specific for those selected targets within AD and TLE (and any future large CNS diseases that are mutually agreed upon) that may arise from the exploratory research programs on 129 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) substantially the same terms of the current Penn Agreement. The Company made an upfront payment of $ 5.0 million in connection with the amendment to the Penn Agreement in August 2021; will reimburse Penn for expenses incurred in the exploratory research program; will pay an aggregate of $ 39.0 million in development milestones for each product candidate for which the Company has exercised its option in large CNS indications, initially AD and TLE and such other mutually agreed upon large CNS indications (in lieu of the milestones set forth in the existing Penn Agreement), in addition to the royalties and commercial milestones for products set forth under the existing Penn Agreement; and will pay Penn a tiered transaction fee ranging from 1 - 2 % of the net proceeds upon certain change of control events. ​ Under the Penn Agreement, the Company has eight remaining options available to commence additional licensed programs for CNS indications and has until August 3, 2026, to exercise these options. 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. ​ The Penn Agreement requires that the Company make payments of up to (i) $ 16.5 million per product candidate for rare, monogenic disorders in the aggregate and (ii) $ 39.0 million per product candidate in the aggregate arising from the exploratory program for large CNS indications, initially AD and TLE and such other mutually agreed upon large CNS indications. Each payment will be due 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 the licensed product in excess of defined thresholds. Upon successful commercialization of a product using the licensed technology, the Company is obligated to 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 is obligated to pay to Penn a percentage of sublicensing income, ranging from the mid-single digits to low double digits, for sublicenses under the Penn Agreement. The agreement will expire on a licensed product-by-licensed product and country-by-country basis upon the later of (i) the expiration of the last valid claim of the licensed patent rights that covers the exploitation of such licensed product in such country, and (ii) the expiration of the royalty period. ​ Under the Penn Agreement, the Company incurred research and development expenses of $ 17.8 million and $ 32.4 million during the years ended December 2021 and 2020, respectively. During the year ended December 31, 2021, the Company paid Penn $ 1.5 million related to the achievement of a development milestone, $ 1.5 million related to option exercises under the Penn Agreement, and a $ 5.0 million payment related to the August 2021 amendment, which were recognized as in-process research and development expense. ​ Catalent Agreements In June 2019, the Company entered into a collaboration agreement, or the Collaboration Agreement, with Catalent. As part of the Collaboration Agreement, the Company paid Catalent an upfront fee for the commissioning, qualification, validation and equipping of a clean room suite, or 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, or 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 Collaboration Agreement. The Collaboration Agreement continues to be in effect pursuant to its terms. 130 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 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. For the years ended December 31, 2021 and 2020, the Company paid amounts in excess of the minimum commitment. Operating Leases The Company leased office space in Philadelphia, Pennsylvania under a noncancelable lease, as amended. The lease was classified as an operating lease and the Company recognized rent expense on a straight-line basis over the lease term. The lease was terminated in February 2021. In April 2020, the Company entered into a new lease agreement, or 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 commenced in February 2021 and expires in December 2031. The Company has an option to extend the term of the New Lease Agreement by up to two five-year terms. The landlord provided the Company with a tenant improvement allowance of up to $ 2.8 million, for which the related expenditures were paid directly by the landlord. The expenditures were recorded as leasehold improvements with a corresponding amount recorded as a lease liability incentive within deferred rent in the balance sheet. In December 2020, the Company entered into a lease agreement for laboratory space, or Laboratory Lease Agreement, in Hopewell, New Jersey. The laboratory is initially focused on state-of-the-art analytical capabilities, assay development and validation, and clinical product testing to support both viral vector manufacturing and clinical development. The Laboratory Lease Agreement commenced in March 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 landlord provided the Company with a tenant improvement allowance of $ 1.3 million in connection with the Laboratory Lease Agreement, for which the related expenditures were paid by the Company and will be reimbursed by the landlord. As of December 31, 2021, $ 1.3 million of leasehold improvements related to the tenant improvement allowance was recorded as a lease liability incentive within deferred rent and the remaining receivable from the landlord of $ 0.3 million was recorded within prepaid expenses and other current assets. As of December 31, 2021, the Company received $ 1.0 million of reimbursement from the landlord related to the tenant improvement allowance, which is reflected as an operating inflow in the statement of cash flows. ​ 131 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) The future minimum lease payments under the Company’s lease arrangements as of December 31, 2021 are as follows: ​ ​ ​ ​ ​ (in thousands) ​ 2022 ​ $ 2,884 2023 ​ 3,453 2024 ​ 3,550 2025 ​ 3,651 2026 ​ 3,754 Thereafter ​ 33,534 ​ ​ $ 50,826 ​ The Company recognized rent expense of $ 3.4 million and $ 0.6 million during the years ended December 31, 2021 and 2020, respectively, related to its operating leases. 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., or 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 clinical 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 requested 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. ​ 9. 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. 132 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) 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 $ 165.8 million after deducting underwriting discounts, commissions and other offering expenses. On March 5, 2021, the Company entered into a Sales Agreement, or the Sales Agreement, with Cowen and Company, LLC, or Cowen, pursuant to which the Company may, but are not obligated to, offer and sell, from time to time, shares of the Company’s common stock with an aggregate offering price up to $ 125.0 million through Cowen, as sales agent. No sales of common stock have been made pursuant to this Sales Agreement to date. ​ 10. Share-Based Compensation Equity Incentive Plans The Company has three equity incentive plans: the 2018 Equity Incentive Plan, as amended, or the 2018 Plan, the 2020 Equity Incentive Plan, or the Incentive Plan, and the 2021 Equity Inducement Plan, or the Inducement Plan. New awards can only be granted under the Incentive Plan and Inducement Plan. The total number of shares authorized under the Incentive Plan as of December 31, 2021 was 7,658,677 . Of this amount, 3,637,509 shares were available for future grants as of December 31, 2021. 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 a result, the number of shares authorized for issuance under the Incentive Plan increased by 2,712,249 and 2,295,854 shares in January 2022 and 2021, respectively. The Plan provides for the granting of 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 under the Incentive Plan vest based on the terms in each award agreement, generally over four-year periods, and have a term of ten years . The Inducement Plan was approved by the Company’s board of directors in July 2021. The total number of shares authorized under the Inducement Plan was 1,000,000 . Of this amount, 12,900 shares were available for future grants as of December 31, 2021. The Inducement Plan provides for the granting of nonqualified stock options and restricted stock awards to employees hired by the Company, as determined by the Company’s board of directors. The Company’s stock options under the Inducement Plan vest based on the terms in each award agreement and have a term of ten years . The Company’s restricted stock units vest based on the terms in each award agreement and have a term based on each award agreement. 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 31, (in thousands) ​ 2021 2020 Research and development ​ $ 15,432 ​ $ 5,525 General and administrative ​ 17,259 ​ 9,055 ​ ​ $ 32,691 ​ $ 14,580 ​ 133 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) During the year ended December 31, 2020, the Company modified certain awards and recognized $ 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. During the year ended December 31, 2021, the Company modified certain awards and recognized $ 7.4 million related to the modifications, $ 6.1 million of which was recognized in research and development expense and $ 1.3 million was recognized in general and administrative expense. The terms of such modifications included, on an awards-by-award basis, acceleration of the vesting period and extensions of the post-employment period to exercise. The following table summarizes stock option activity for the year ended December 31, 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ ​ Weighted ​ average ​ ​ ​ ​ ​ average ​ remaining ​ ​ ​ Number of ​ exercise price ​ contractual ​ ​ ​ shares ​ per share ​ term (years) ​ Outstanding at January 1, 2021 6,928,111 $ 12.36 9.0 ​ Granted 3,980,889 ​ ​ 16.46 ​ Exercised ( 146,787 ) ​ ​ 2.06 ​ Forfeited ( 1,345,215 ) ​ ​ 15.97 ​ Outstanding at December 31, 2021 9,416,998 ​ $ 13.72 8.6 ​ Vested and Exercisable at December 31, 2021 3,651,983 ​ $ 12.11 8.0 ​ Vested or expected to vest at December 31, 2021 9,416,998 ​ $ 13.72 8.6 ​ ​ As of December 31, 2021, 1,308,244 options to purchase common stock are unvested, but exercisable, under early exercise provisions as described below. The weighted-average grant date fair value of options granted was $ 12.75 and $ 11.54 for the years ended December 31, 2021 and 2020, respectively. The aggregate intrinsic value of options exercised was $ 1.3 and $ 2.0 million and during the year ended December 31, 2021 and 2020, respectively. The aggregate intrinsic value of options outstanding as of December 31, 2021 was $ 1.6 million and the aggregate intrinsic value of options exercisable as of December 31, 2021 was $ 1.4 million. As of December 31, 2021, the total unrecognized compensation expense related to unvested stock option awards was $ 58.8 million, which the Company expects to recognize over a weighted-average period of 2.8 years. 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, ​ ​ 2021 ​ 2020 Expected volatility ​ 99.0 % ​ 95.7 % Risk‑free interest rate ​ 0.9 % ​ 1.2 % Expected term ​ 6.0 years ​ 6.1 years Expected dividend yield ​ — ​ ​ — ​ ​ 134 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) The 2018 Plan and 2020 Plan provide 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. There were no early exercises of options during the year ended December 31, 2021. The following table summarizes activity relating to early exercises of stock options during the year ended December 31, 2021: ​ ​ ​ ​ ​ Number of shares Unvested balance at January 1, 2021 302,277 Vested ( 302,277 ) Unvested balance at December 31, 2021 — ​ Nonrecourse Promissory Notes with Related Parties In February 2019, two of the Company’s then executive officers, 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, or 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. 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. During the year-ended December 31, 2021, the Company accelerated the vesting of each executive officer’s early exercise of stock options awards in relation to each of their separations from the Company such that all early exercised stock options were vested for accounting purposes as of December 31, 2021. Restricted Stock Units The Company issues RSUs to employees that vest over periods as determined by the board of directors. Any unvested shares are forfeited upon termination of services. The fair value of the RSUs is equal to the fair market value of the Company’s common stock on the date of grant. Compensation expense is recognized straight-line over the vesting period of the RSUs. ​ The following table summarizes activity related to RSU awards during the year ended December 31, 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted average ​ ​ Number of shares ​ grant date fair value Unvested balance at January 1, 2021 ​ — $ — Granted ​ 360,500 $ 15.54 Vested ​ ​ ( 40,000 ) ​ ​ 18.85 Forfeited ​ ( 30,000 ) $ 18.48 Unvested balance at December 31, 2021 ​ 290,500 $ 14.78 ​ As of December 31, 2021, the total unrecognized expense related to all RSUs was $ 3.5 million, which the Company expects to recognize over a weighted-average period of 3.0 years. ​ ​ ​ 135 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) Employee Stock Purchase Plan The Company’s 2020 Employee Stock Purchase Plan, or the ESPP, became effective on February 28, 2020. The total number of shares authorized under the ESPP as of December 31, 2021, was 893,170 shares of the Company’s common stock. Of this amount, 781,936 shares were available for future grants as of December 31, 2021. 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 board of directors or compensation committee to determine a lesser number of shares shall be added for such year. As a result, the number of shares authorized for issuance under the ESPP increased by 542,449 and 459,170 shares in January 2022 and 2021, respectively. 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 years ended December 31, 2021 and 2020, 91,125 and 20,109 shares, respectively, 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 $ 0.4 million and $ 0.2 million during the years ended December 31, 2021 and 2020, respectively, related to the ESPP. 11. 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) 2021 2020 Deferred tax assets: ​ ​ Net operating loss carryforwards ​ $ 42,351 ​ $ 23,464 Research and development credits ​ 22,244 ​ 8,959 Collaboration and license agreement ​ 3,976 ​ 1,463 Capitalized research and development ​ ​ 51,806 ​ ​ 23,150 Share-based compensation ​ 11,245 ​ 4,125 Accrued expenses and other ​ 3,431 ​ 1,801 Gross deferred tax assets ​ 135,053 ​ 62,962 Less: valuation allowance ​ ( 135,053 ) ​ ( 62,962 ) 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, 2021 and 136 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) 2020. The valuation allowance increased by $ 72.1 million and $ 44.6 million during the years ended December 31, 2021 and 2020, respectively. A reconciliation of the federal income tax rate to the Company’s effective tax rate is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended ​ ​ December 31, ​ 2021 2020 ​ Federal tax benefit at statutory rate 21.0 % 21.0 % State tax, net of federal benefit 11.9 12.6 ​ Permanent differences ( 1.1 ) ( 0.3 ) ​ Research and development 7.1 6.5 ​ Change in valuation allowance ( 38.9 ) ( 39.8 ) ​ ​ — % — % ​ 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) 2021 2020 Federal ​ $ 126,551 ​ $ 69,317 State ​ 126,547 ​ 69,313 Local ​ 116,301 ​ 69,053 Research tax credits ​ 22,244 ​ 8,958 ​ 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 2022. As of December 31, 2021, the Company also had federal research and development and orphan drug tax credit carryforwards of $ 22.2 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, 2021, 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 2018 and after remain subject to examination by the taxing jurisdictions. The NOL and tax carryforwards remain subject to review until utilized. 12. Subsequent Events None. ​ 137 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.