What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-06 compared with 2022-03-03 · 189 added, 186 removed, 423 unchanged (47% of the section changed)

5 unchanged sentences

Statements of Operations and Comprehensive Loss

Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

Statements of Stockholders’ Equity

Statements of Cash Flows

5 unchanged sentences

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).

(the Company) as of December 31, 2022 and 2021, the related statements of operations and comprehensive loss, stockholders’ equity, 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, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with U.S.

generally accepted accounting principles.

Change in Accounting Principle

As discussed in Notes 1 and 3 to the financial statements, the Company has changed its method of accounting for leases as of January 1, 2022 due to the adoption of Accounting Standards Update (ASU) No.

2016-02, Leases (Topic 842) .

Basis for Opinion

25 unchanged sentences

Property and equipment, net

Right of use assets - operating leases

Liabilities and stockholders’ equity

2 unchanged sentences

Accrued expenses and other current liabilities

Operating lease liabilities

Total current liabilities

Operating lease liabilities - noncurrent

Deferred rent

Other liabilities

Total liabilities

3 unchanged sentences

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

54,614,690 shares issued and outstanding at December 31, 2022 and 54,244,996 shares issued and outstanding at December 31, 2021

Additional paid‑in capital

22 unchanged sentences

Passage Bio, Inc.

Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

Statements of Stockholders’ Equity

(in thousands, except share data)

Convertible preferred stock

Stockholders’ equity (deficit)

Stockholders’ equity

Accumulated other

comprehensive

(in thousands, except share data)

paid ‑ in capital

income (loss)

comprehensive income (loss)

Balance at January 1, 2021

Vesting of early exercise option awards

Exercise of stock options

Exercise of stock options and vesting of restricted stock units

Issuance of shares in connection with employee stock purchase plan

Conversion of convertible preferred stock upon initial public offering

( 63,023,258 )

( 22,209,301 )

( 33,592,907 )

Sale of common stock in initial public offering, net of issuance costs of $ 3,495

Sale of common stock, net of issuance costs of $ 669

Unrealized gain (loss) on marketable securities

7 unchanged sentences

Balance at January 1, 2022

Vesting of early exercise option awards

Exercise of stock options and vesting of restricted stock units

Issuance of shares in connection with employee stock purchase plan

Sale of common stock, net of issuance costs of $ 669

Unrealized gain (loss) on marketable securities

6 unchanged sentences

Cash flows used in operating activities:

Adjustments to reconcile net loss to net cash used in operating activities:

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Acquired in‑process research and development

6 unchanged sentences

Prepaid research and development

Right of use assets and operating lease liabilities

Accounts payable

Accrued expenses and other current liabilities

Net cash used in operating activities

Cash flows used in investing activities:

Net cash provided by (used in) operating activities

Cash flows provided by (used in) investing activities:

Purchases of marketable securities

2 unchanged sentences

Purchases of property and equipment

Net cash used in investing activities

Cash flows provided by financing activities:

Net cash provided by (used in) investing activities

Cash flows provided by (used in) financing activities:

Proceeds from issuance of common stock, net of offering costs

2 unchanged sentences

Proceeds from the issuance of common stock under employee stock purchase plan

Net cash provided by financing activities

Payments for insurance premium financing

Net cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents

5 unchanged sentences

Property and equipment in accounts payable and accrued expenses and other current liabilities

Acquired in‑process research and development in accrued expenses and other current liabilities

Deferred financing costs in accrued expenses and other current liabilities

Reclassification of deferred offering costs paid in a prior period

Vesting of early exercise option awards

Right of use assets recognized upon the adoption of Topic 842

Operating lease liabilities recognized upon the adoption of Topic 842

See accompanying notes to financial statements.

2 unchanged sentences

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.

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, 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.

Under this collaboration, GTP conducts discovery and preclinical activities enabling Investigational New Drug, or IND, applications and the Company conducts all clinical development, manufacturing, regulatory strategy, and commercialization activities under the agreement.

Through this collaboration, the Company has assembled a portfolio of genetic medicine product candidates, including two lead clinical product candidates:

PBGM01 for the treatment of GM1 gangliosidosis, or GM1, and PBFT02 for the treatment of frontotemporal dementia, or FTD.

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.

3 unchanged sentences

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.

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 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 conducting preclinical studies, developing licensed technology, conducting clinical trials and manufacturing clinical supply to support 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.

Product candidates currently under development will require significant additional research and development efforts and 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.

3 unchanged sentences

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.

If the Company is unable to obtain funding or prospects of funding are unfavorable, the Company could be required to further delay, reduce or eliminate research and development programs, product portfolio expansion or future commercialization efforts, which could adversely affect its business prospects.

In March 2022 and November 2022, the Company reduced its workforce and prioritized research and development programs to reduce operating expenses and to extend its cash runway.

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

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 events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern

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.

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.

1 unchanged sentence

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.

The accompanying financial statements have been prepared in accordance with generally accepted accounting principles 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 Accounting Standards Updates promulgated by the Financial Accounting Standards Board, or FASB.

Use of Estimates

13 unchanged sentences

The Company considers all highly-liquid investments that have maturities of three months or less when acquired to be cash equivalents.

Cash equivalents as of December 31, 2022 consisted of money market funds and commercial paper.

Cash consists of cash deposits at banking institutions.

Passage Bio, Inc.

1 unchanged sentence

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.

The Company classifies its marketable securities as available-for-sale, which include commercial paper, certificates of deposit, corporate debt securities, and United States, or 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 income (loss) within stockholders’ equity.

Gains or losses on marketable securities sold are recognized as a component of other income, net in the statement of operations and comprehensive loss on the specific identification method.

All marketable securities are available for use, as needed, to fund operations and therefore, the Company classifies all marketable securities as current assets within the balance sheet.

Property and Equipment, net

9 unchanged sentences

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 measures share-based awards at 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 stock option awards.

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.

Estimating the fair value of stock option awards requires the input of assumptions, including, the expected term of stock options and stock price volatility.

The Company accounts for forfeitures for stock option awards as they occur.

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.

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.

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, 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.

For stock price volatility, 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 selection of comparable public company data requires the application of management’s judgement.

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.

The Company accounts for forfeitures for stock option awards as they occur.

Research and Development

Research and development costs are expensed as incurred and consist primarily of expenses incurred with Penn, contract research organizations, contract manufacturing organizations, internal analytical and testing activities, and employee-related expenses, including salaries, benefits, and share-based compensation.

Management makes estimates of the Company’s external accrued research and development expenses, which primarily relates to contract research organizations and contract manufacturing organizations, 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.

The Company determines the estimates by reviewing contracts, vendor agreements and change orders, and through discussions with our internal clinical personnel and external service providers as to the progress to completion of services and the agreed-upon fee to be paid for such services.

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

12 unchanged sentences

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.

Diluted loss per share of common stock includes the effect, if any, from the potential exercise or conversion of securities, such as stock options, 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

Passage Bio, Inc.

Notes to Financial Statements (cont.)

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.

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,

Stock options (including shares subject to repurchase at December 31, 2020)

Stock options

Unvested restricted stock units

Employee stock purchase plan

Recently Issued Accounting Pronouncements

Recently Adopted 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.

2016-02, Leases (Topic 842) , or ASU 2016-02, 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.

The Company adopted ASU 2016-02 on January 1, 2022 using the modified retrospective transition method and elected the following transition practical expedients:

(i) to not reassess lease identification, lease classification and initial indirect costs related to those leases entered into prior to the adoption of Topic 842;

and (ii) to not separate lease and non-lease components for the Company’s operating lease portfolio.

The Company recorded an operating lease right-of-use asset and lease liability of $ 20.4 million and $ 27.3 million respectively, related to the adoption of the Topic 842.

See note 9 for further details.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU No.

4 unchanged sentences

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.

This guidance is effective for the Company starting in fiscal year 2023.

The Company does not expect that the adoption of ASU 2016-13 will have a material impact on its financial statements.

Passage Bio, Inc.

9 unchanged sentences

Money market funds

Commercial paper

December 31, 2021:

12 unchanged sentences

government securities

December 31, 2021:

29 unchanged sentences

December 31, 2022:

Cash and cash equivalents:

Cash equivalents:

Money market funds

Total cash and cash equivalents

Commercial paper

Total cash equivalents

Marketable securities:

3 unchanged sentences

government securities

Total marketable securities

1 unchanged sentence

December 31, 2021:

Cash and cash equivalents:

Cash equivalents:

Money market funds

Commercial paper

Total cash and cash equivalents

Total cash equivalents

Marketable securities:

21 unchanged sentences

Accumulated depreciation and amortization

Depreciation expense was $ 3.7 million and $ 1.5 million for the years ended December 31, 2022 and 2021, respectively.

Accrued Expenses and Other Current Liabilities

7 unchanged sentences

Property and equipment

In March 2022 and November 2022, the Company announced workforce reductions and that it has prioritized certain research and development programs to reduce operating expenses and to extend its cash runway.

In connection with these announcements, the Company reduced headcount by approximately 13 % and 23 % in March 2022 and November 2022, respectively.

In accordance with ASC 420, Exit and Disposal Activities, the Company recorded severance and termination-related costs of $ 3.8 million in general and administrative expenses and $ 2.3 million in research and development expenses for the year ended December 31, 2022.

As of December 31, 2022, $ 2.1 million of severance and termination-related costs were unpaid and recognized in the balance sheet within Accrued expenses and other current liabilities.

On January 1, 2022, the Company adopted ASU No.

2016-02, Leases , using a modified retrospective approach and recorded operating lease right-of-use, or ROU, assets and operating lease liabilities of $ 20.4 million and $ 27.3 million, respectively, related to the Company’s Lease Agreement and Laboratory Lease Agreement, or collectively, the Leases, which are each defined below.

The Company elected the package of practical expedients available under ASU No.

Passage Bio, Inc.

Notes to Financial Statements (cont.)

02 and as such, did not reassess any of the Company’s existing or expired contracts or any other agreements that were previously concluded to not contain a lease for the following practical expedient guidance:

(1) whether the arrangement is or contains a lease, (2) lease classification and (3) whether previously capitalized costs continue to qualify as initial direct costs.

In addition, the Company applied 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 was not required to record a cumulative effect adjustment upon adoption as the Company did not capitalize any material initial direct costs nor were any contracts reassessed leading to changes in the terms or contractual payments of historical arrangements that would impact expense recognition, however, the Company eliminated $ 3.2 million of deferred rent liabilities and $ 3.8 million of tenant improvement allowances as of January 1, 2022 related to the Leases as these liabilities are reflected in the operating lease ROU assets.

The Company used incremental borrowing rates, or IBRs, of 9.0 % and 10.0 % to discount the operating lease liabilities for the Lease Agreement and the Laboratory Lease Agreement, respectively.

The Company’s IBRs were quoted by an unrelated third-party lender and reflect a collateralized borrowing with similar terms and amounts as the Leases.

The Company is party to a lease agreement for office space, or the Lease Agreement, in Philadelphia, Pennsylvania.

The Lease Agreement commenced in February 2021 and is expected to expire in December 2031.

The Company has an option to extend the term of the Lease Agreement by up to two five-year terms.

This option to extend was not recognized as part of the Company's measurement of the ROU asset and operating lease liability as of December 31, 2022.

The landlord provided the Company with a tenant improvement allowance of $ 2.8 million, for which the related expenditures were paid directly by the landlord.

The Company is also party to a lease agreement for laboratory space, or the 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 February 2036.

The Company has an option to extend the term of the Laboratory Lease Agreement by up to two five-year terms.

This option to extend was not recognized as part of the Company's measurement of the ROU asset and operating lease liability as of December 31, 2022.

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, 2022, $ 0.1 million of reimbursements were unpaid by the landlord and recorded within other current assets.

The following table summarizes the Company’s operating leases:

($ in thousands)

December 31, 2022

Operating lease cost

Cash paid for amounts included in the measurement of operating cash flows from operating leases

Weighted-average discount rate

Weighted-average remaining lease term (years)

Passage Bio, Inc.

Notes to Financial Statements (cont.)

The following table summarizes future minimum lease payments under the Company’s operating lease agreements:

(in thousands)

Total undiscounted lease payments

imputed interest

Total lease liabilities

Commitments and Contingencies

1 unchanged sentence

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.

Under the Penn Agreement, the Company has obligations to fund certain research relating to the preclinical development of selected products in research programs as well as the exploratory research program in non-rare and/or non-monogenic, or large CNS indications, currently TLE.

In addition, 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 June 2026.

The Penn Agreement includes an exploratory research program focused on discovering targets and novel gene therapy candidates for large CNS indications, currently focused on 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

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 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 TLE (and any future large CNS diseases that are mutually agreed upon) that may arise from the exploratory research programs on substantially the same terms of the current Penn Agreement.

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.

If the Company were to exercise any of these options, it would owe Penn a non-refundable upfront fee of $ 1.0 million per product indication, with $ 0.5 million due upfront and another $ 0.5 million fee owed upon a further developmental milestone.

The Company has the obligation to fund certain research relating to the preclinical development of each licensed program.

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.

Passage Bio, Inc.

Notes to Financial Statements (cont.)

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.

1 unchanged sentence

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.

In addition, the Company will pay a tiered transaction fee of 1 - 2 % of the net proceeds upon certain change of control events.

During the year ended December 31, 2022, the Company made payments under the Penn Agreement of $ 3.0 million related to the achievement of development milestones for dosing our first patients in PBFT02 for the treatment of FTD and PBKR03 for the treatment of Krabbe disease, which were recognized as in-process research and development expense .

During the year ended December 31, 2021, the Company made payments under the Penn Agreement of $ 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.

As part of the Collaboration Agreement, the Company will pay an annual fee for five years ending in 2025 for the use of the Clean Room Suite.

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.

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The Collaboration Agreement continues to be in effect pursuant to its terms.

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 Manufacturing and Supply Agreement also includes minimum annual purchase commitments.

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.

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For the years ended December 31, 2022 and 2021, 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 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.

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.

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)

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.

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.

The Company has entered into employment agreements with key personnel providing for compensation and, in certain circumstances, severance and acceleration of vesting in stock-based compensation awards, as described in the respective employment agreements.

Passage Bio, Inc.

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Share-Based Compensation

Equity Incentive Plans

Equity Incentive Plan

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.

New awards can only be granted under the Incentive Plan and the Inducement Plan.

The total number of shares authorized under the Incentive Plan as of December 31, 2022 was 10,370,926 .

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 .

Additionally, any awards previously issued under our 2018 Plan which were forfeited become available for issuance under the Incentive Plan.

As of December 31, 2022, 3,880,210 shares were available for future grants under our Incentive Plan.

The number of shares of the Company’s common stock that may be issued pursuant to rights granted under the Incentive Plan shall automatically increase on January 1st of each year, commencing on January 1, 2021 and continue 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 reserved for issuance under the Incentive Plan increased by 2,730,735 and 2,712,249 shares in January 2023 and 2022, respectively.

The Incentive 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 awarded to date under the Incentive Plan vest based on a requisite service period, 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 .

The total number of shares authorized under the Inducement Plan as of December 31, 2022 was 2,000,000 , as a result of an increase to the shares authorized for issuance in February 2022.

Of this amount, 384,167 shares were available for future grants as of December 31, 2022.

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’s stock options awarded to date under the Inducement Plan vest based on requisite service period and have a term of ten years .

The Company’s restricted stock units awarded to date under the Inducement Plan vest based on requisite service period and have a term based on each award agreement.

Passage Bio, Inc.

Notes to Financial Statements (cont.)

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.

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General and administrative

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, 2022, the Company modified certain awards and recognized $ 0.4 million related to the modifications, all of which was recognized in general & 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.

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.

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Vested or expected to vest at December 31, 2022

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 $ 2.33 and $ 12.75 for the years ended December 31, 2022 and 2021, respectively.

The aggregate intrinsic value of options exercised was $ 0.2 and $ 1.3 million and during the year ended December 31, 2022 and 2021, 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.

The aggregate intrinsic value of options outstanding as of December 31, 2022 was $ 0.1 million and the aggregate intrinsic value of options exercisable as of December 31, 2022 was de minimus.

As of December 31, 2022, the total unrecognized compensation expense related to unvested stock option awards was $ 24.1 million, which the Company expects to recognize over a weighted-average period of 2.4 years.

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.

Passage Bio, Inc.

Notes to Financial Statements (cont.)

The repurchase price is the lesser of the original exercise price or the then fair value of the Company’s common stock.

As of December 31, 2022, 113,932 options to purchase common stock are unvested, but exercisable, under early exercise provisions.

The fair value of each option was estimated on the date of grant using the weighted average assumptions in the table below:

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Expected dividend yield

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 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

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.

The Company issues restricted stock units, or 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 fair value price 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 on a straight-line basis over the vesting period of the RSUs.

The following table summarizes activity related to RSU awards during the year ended December 31, 2022:

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As of December 31, 2022, the total unrecognized expense related to all RSUs was $ 2.8 million, which the Company expects to recognize over a weighted-average period of 1.8 years.

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.

The ESPP authorizes the issuance of up to 1,435,619 shares of the Company’s common stock.

Of this amount, 1,119,914 were available for future grants as of December 31, 2022.

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 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, on January 1, 2023, the number of shares reserved for issuance under the ESPP increased by 546,147 shares, resulting in a total of 1,981,766 shares authorized for issuance.

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.

The offering periods under the ESPP have a duration of

Passage Bio, Inc.

Notes to Financial Statements (cont.)

six months, with periods ending in May and November of each calendar year.

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.

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 or purchase more than 4,000 shares of the Company’s common stock in any single offering period.

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.

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Accrued expenses and other

Gross deferred tax assets

Operating lease liabilities

Total gross deferred tax assets before valuation allowance

Valuation allowance

Net deferred tax asset

Net deferred tax assets

Deferred tax liabilities:

Right of use assets - operating leases (deferred rent for December 31, 2021)

Total deferred tax liabilities

Net deferred taxes

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.

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Accordingly, a full valuation allowance has been recorded against the Company’s net deferred tax assets as of December 31, 2022 and 2021.

The valuation allowance increased by $ 44.8 million and $ 72.1 million during the years ended December 31, 2022 and 2021, respectively.

Passage Bio, Inc.

Notes to Financial Statements (cont.)

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:

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Permanent differences

Research and development

Research and development and orphan tax credits

Change in valuation allowance

The following table summarizes carryforwards of federal, state and local net operating losses (NOL) and research and development and orphan drug tax credits:

The following table summarizes carryforwards of federal, state and local net operating losses, or NOL, and research and development and orphan drug tax credits:

(in thousands)

Research tax credits

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.

For federal income tax purposes, $ 0.3 million of NOL carryforwards expire in 2037.

The remaining federal NOL carryforwards were generated subsequent to January 1, 2018, and therefore, are able to be carried forward indefinitely.

For state income tax purposes, NOL carryforwards begin expiring in 2037, and expire through 2042.

For local income tax purposes related to the city of Philadelphia, NOL carryforwards begin expiring in 2023, and expire through 2042.

NOL carryforwards generated prior to 2023 expire after 3 years, whereas NOL carryforwards generated in 2023 expire after 20 years.

As of December 31, 2022, the Company also had federal research and development and orphan drug tax credit carryforwards of $ 32.1 million that will begin to expire in 2038, unless previously utilized.

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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.

Certain state NOL carryforwards 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.

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Tax years from 2019 and after remain subject to examination by the taxing jurisdictions.

The NOL and tax carryforwards remain subject to review until utilized.

The NOL and tax credit carryforwards remain subject to review until utilized.

Passage Bio, Inc.

Notes to Financial Statements (cont.)

Subsequent Events

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data