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 ) ​ 107 Balance Sheets ​ 108 Statements of Operations and Comprehensive Loss ​ 109 Statements of Stockholders’ Equity ​ 110 Statements of Cash Flows ​ 111 Notes to Financial Statements ​ 112 ​ ​ ​ 106 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, 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 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 6, 2023 ​ ​ 107 Table of Contents Passage Bio, Inc. Balance Sheets ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, (in thousands, except share data) 2022 2021 Assets ​ ​ Current assets: ​ ​ Cash and cash equivalents ​ $ 34,601 ​ $ 128,965 Marketable securities ​ ​ 155,009 ​ ​ 186,808 Prepaid expenses and other current assets ​ 926 ​ 1,726 Prepaid research and development ​ 6,508 ​ 7,567 Total current assets ​ 197,044 ​ 325,066 Property and equipment, net ​ 22,515 ​ 23,806 Right of use assets - operating leases ​ ​ 19,723 ​ - Other assets ​ 4,267 ​ 6,204 Total assets ​ $ 243,549 ​ $ 355,076 Liabilities and stockholders’ equity ​ ​ ​ Current liabilities: ​ ​ ​ Accounts payable ​ $ 4,065 ​ $ 9,448 Accrued expenses and other current liabilities ​ 11,011 ​ 20,050 Operating lease liabilities ​ ​ 3,275 ​ - Total current liabilities ​ 18,351 ​ 29,498 Operating lease liabilities - noncurrent ​ 23,832 ​ - Deferred rent ​ ​ - ​ ​ 6,921 Total liabilities ​ 42,183 ​ 36,419 ​ ​ ​ ​ ​ ​ ​ Commitments and Contingencies (note 10) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stockholders’ equity: ​ ​ ​ Common stock, $ 0.0001 par value: 300,000,000 shares authorized; 54,614,690 shares issued and outstanding at December 31, 2022 and 54,244,996 shares issued and outstanding at December 31, 2021 ​ 5 ​ 5 Additional paid‑in capital ​ 694,733 ​ 675,346 Accumulated other comprehensive income (loss) ​ ​ ( 966 ) ​ ​ ( 413 ) Accumulated deficit ​ ( 492,406 ) ​ ( 356,281 ) Total stockholders’ equity ​ 201,366 ​ 318,657 Total liabilities and stockholders’ equity ​ $ 243,549 ​ $ 355,076 ​ See accompanying notes to financial statements. ​ 108 Table of Contents Passage Bio, Inc. Statements of Operations and Comprehensive Loss ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, (in thousands, except share and per share data) ​ 2022 2021 Operating expenses: ​ ​ ​ Research and development ​ $ 86,053 ​ $ 117,673 Acquired in‑process research and development ​ 3,000 ​ 8,000 General and administrative ​ 49,341 ​ 60,056 Loss from operations ​ ( 138,394 ) ​ ( 185,729 ) Interest income, net ​ 2,269 ​ 343 Net loss ​ $ ( 136,125 ) ​ $ ( 185,386 ) Per share information: ​ ​ Net loss per share of common stock, basic and diluted ​ $ ( 2.50 ) ​ $ ( 3.48 ) Weighted average common shares outstanding, basic and diluted ​ 54,429,023 ​ 53,343,959 Comprehensive loss: ​ ​ ​ ​ ​ ​ Net loss ​ $ ( 136,125 ) ​ $ ( 185,386 ) Unrealized gain (loss) on marketable securities ​ ​ ( 553 ) ​ ​ ( 401 ) Comprehensive loss ​ $ ( 136,678 ) ​ $ ( 185,787 ) ​ See accompanying notes to financial statements. ​ ​ 109 Table of Contents Passage Bio, Inc. Statements of Stockholders’ Equity (in thousands, except share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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, 2022 54,244,996 ​ $ 5 $ 675,346 ​ $ ( 413 ) ​ $ ( 356,281 ) ​ $ 318,657 Exercise of stock options and vesting of restricted stock units 165,223 ​ - 129 ​ - ​ - ​ 129 Issuance of shares in connection with employee stock purchase plan ​ 204,471 ​ ​ - ​ 304 ​ ​ - ​ ​ - ​ ​ 304 Unrealized gain (loss) on marketable securities - ​ - - ​ ( 553 ) ​ - ​ ( 553 ) Share‑based compensation expense - ​ - 18,954 ​ - ​ - ​ 18,954 Net loss - ​ - - ​ - ​ ( 136,125 ) ​ ( 136,125 ) Balance at December 31, 2022 54,614,690 ​ $ 5 $ 694,733 ​ $ ( 966 ) ​ $ ( 492,406 ) ​ $ 201,366 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ See accompanying notes to financial statements. ​ ​ 110 Table of Contents Passage Bio, Inc. Statements of Cash Flows ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ December 31, (in thousands) 2022 2021 Cash flows used in operating activities: ​ ​ Net loss ​ $ ( 136,125 ) ​ $ ( 185,386 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: ​ ​ ​ Acquired in‑process research and development ​ 3,000 ​ 8,000 Depreciation and amortization ​ 3,679 ​ 1,543 Share‑based compensation ​ 18,954 ​ 32,691 Amortization of premium and discount on marketable securities, net ​ ​ 773 ​ ​ 2,778 Deferred rent ​ - ​ 2,075 Changes in operating assets and liabilities: ​ ​ Prepaid expenses and other current assets, and other assets ​ 2,737 ​ 1,842 Prepaid research and development ​ 1,059 ​ 3,394 Right of use assets and operating lease liabilities ​ ​ 463 ​ ​ - Accounts payable ​ ( 5,412 ) ​ 2,201 Accrued expenses and other current liabilities ​ ( 7,338 ) ​ 3,983 Net cash provided by (used in) operating activities ​ ( 118,210 ) ​ ( 126,879 ) Cash flows provided by (used in) investing activities: ​ ​ Purchases of marketable securities ​ ( 157,835 ) ​ ( 202,546 ) Sales or maturities of marketable securities ​ 188,308 ​ 182,374 Purchases of technology licenses ​ ( 3,000 ) ​ ( 8,000 ) Purchases of property and equipment ​ ( 2,274 ) ​ ( 17,642 ) Net cash provided by (used in) investing activities ​ 25,199 ​ ( 45,814 ) Cash flows provided by (used in) financing activities: ​ ​ Proceeds from issuance of common stock, net of offering costs ​ ​ - ​ ​ 165,806 Payment of offering costs ​ ​ - ​ ​ ( 338 ) Proceeds from the exercise of stock options ​ 129 ​ 301 Proceeds from the issuance of common stock under employee stock purchase plan ​ ​ 304 ​ ​ 887 Payments for insurance premium financing ​ ​ ( 1,786 ) ​ ​ - Net cash provided by (used in) financing activities ​ ( 1,353 ) ​ 166,656 Net increase (decrease) in cash and cash equivalents ​ ( 94,364 ) ​ ( 6,037 ) Cash and cash equivalents at beginning of year ​ 128,965 ​ 135,002 Cash and cash equivalents at end of year ​ $ 34,601 ​ $ 128,965 Supplemental disclosure of non‑cash investing and financing activities: ​ ​ Unrealized gain (loss) on marketable securities ​ $ ( 553 ) ​ $ ( 401 ) Property and equipment in deferred rent ​ $ - ​ $ 2,769 Property and equipment in accounts payable and accrued expenses and other current liabilities ​ $ 114 ​ $ 2,143 Vesting of early exercise option awards ​ $ - ​ $ 45 Right of use assets recognized upon the adoption of Topic 842 ​ $ ( 20,375 ) ​ $ - Operating lease liabilities recognized upon the adoption of Topic 842 ​ $ 27,296 ​ $ - ​ See accompanying notes to financial statements. ​ ​ 111 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, 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. 2. Risks and Liquidity The Company has incurred recurring losses and negative cash flows from operations since inception and had an accumulated deficit of $ 492.4 million as of December 31, 2022. 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 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 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. 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 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 events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern 112 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) 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 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 ​ 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. Cash equivalents as of December 31, 2022 consisted of money market funds and commercial paper. Cash consists of cash deposits at banking institutions. 113 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 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 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, 2022, and 2021, no impairment expenses were recognized. Share-based compensation 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 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 employment termination behavior for its stock option grants. The simplified method is the midpoint between the vesting period and the contractual term of the option. For stock price volatility, the Company uses 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. 114 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) 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. 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, 2022, and 2021, 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 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 115 Table of Contents 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, ​ ​ 2022 2021 Stock options ​ 11,411,390 9,416,998 Unvested restricted stock units ​ 1,229,166 ​ 290,500 Employee stock purchase plan ​ 26,680 ​ 33,753 ​ ​ 12,667,236 9,741,251 ​ Recently Adopted Accounting Pronouncements In February 2016, the FASB issued ASU No. 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. 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 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. ​ 116 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, 2022: ​ ​ ​ ​ Cash accounts in banking institutions ​ $ 7,532 ​ $ - ​ $ - ​ $ 7,532 Money market funds ​ ​ 24,578 ​ ​ - ​ ​ - ​ ​ 24,578 Commercial paper ​ ​ 2,491 ​ ​ - ​ ​ - ​ ​ 2,491 Total ​ $ 34,601 ​ $ - ​ $ - ​ $ 34,601 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2021: ​ ​ ​ ​ Cash accounts in banking institutions ​ $ 44,549 ​ $ - ​ $ - ​ $ 44,549 Money market funds ​ ​ 84,416 ​ ​ - ​ ​ - ​ ​ 84,416 Commercial paper ​ ​ - ​ ​ - ​ ​ - ​ ​ - Total ​ $ 128,965 ​ $ - ​ $ - ​ $ 128,965 ​ 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, 2022: ​ ​ ​ ​ Certificates of deposit ​ $ 28,197 ​ $ 6 ​ $ ( 92 ) ​ $ 28,111 Commercial paper ​ ​ 58,572 ​ ​ 12 ​ ​ ( 72 ) ​ ​ 58,512 Corporate debt securities ​ ​ 67,206 ​ ​ 1 ​ ​ ( 786 ) ​ ​ 66,421 U.S. government securities ​ ​ 2,000 ​ ​ - ​ ​ ( 35 ) ​ ​ 1,965 Total ​ $ 155,975 ​ $ 19 ​ $ ( 985 ) ​ $ 155,009 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 ​ S ​ ​ The contractual maturities of our marketable securities as of December 31, 2022, are as follows: ​ ​ ​ ​ ​ ​ ​ ​ (in thousands) ​ Amortized Cost ​ Fair Value Due within one year ​ $ 144,583 ​ $ 143,779 Due after one year through five years ​ ​ 11,392 ​ ​ 11,230 Total ​ $ 155,975 ​ $ 155,009 ​ ​ ​ ​ 117 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). 118 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, 2022: ​ ​ ​ Assets ​ ​ ​ Cash equivalents: ​ ​ ​ ​ ​ ​ ​ ​ ​ Money market funds ​ $ 24,578 ​ $ - ​ $ - Commercial paper ​ ​ - ​ ​ 2,491 ​ ​ - Total cash equivalents ​ ​ 24,578 ​ ​ 2,491 ​ ​ - ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Marketable securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ Certificates of deposit ​ ​ - ​ ​ 28,111 ​ ​ - Commercial paper ​ ​ - ​ ​ 58,512 ​ ​ - Corporate debt securities ​ ​ - ​ ​ 66,421 ​ ​ - U.S. government securities ​ ​ - ​ ​ 1,965 ​ ​ - Total marketable securities ​ ​ - ​ ​ 155,009 ​ ​ - ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total financial assets ​ $ 24,578 ​ $ 157,500 ​ $ - ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ Assets ​ ​ ​ Cash equivalents: ​ ​ ​ ​ ​ ​ ​ ​ ​ Money market funds ​ $ 84,416 ​ $ - ​ $ - Commercial paper ​ ​ - ​ ​ - ​ ​ - Total 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 ​ $ - ​ ​ ​ ​ ​ ​ 119 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, 2022 ​ December 31, 2021 Laboratory equipment $ 9,972 ​ $ 8,916 Office equipment ​ 601 ​ ​ 621 Computer hardware and software ​ 1,090 ​ ​ 1,028 Furniture and fixtures ​ 1,208 ​ ​ 1,487 Leasehold improvements ​ 13,506 ​ ​ 13,409 Construction in progress ​ 1,291 ​ ​ 822 Total property and equipment ​ 27,668 ​ ​ 26,283 Accumulated depreciation and amortization ​ ( 5,153 ) ​ ​ ( 2,477 ) ​ $ 22,515 ​ $ 23,806 ​ ​ ​ ​ Depreciation expense was $ 3.7 million and $ 1.5 million for the years ended December 31, 2022 and 2021, respectively. ​ ​ 7. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ (in thousands) December 31, 2022 December 31, 2021 Professional fees ​ $ 602 ​ $ 877 Compensation and related benefits ​ 8,446 ​ 10,014 Research and development ​ 1,878 ​ 8,498 Property and equipment ​ ​ 85 ​ ​ 161 Other ​ - ​ 500 ​ ​ $ 11,011 ​ $ 20,050 ​ ​ 8. Severance 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. 9. Leases 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. 2016- 120 Table of Contents 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: ​ ​ ​ ​ ​ ​ ​ Year Ended ($ in thousands) ​ December 31, 2022 Operating lease cost ​ $ 3,316 Cash paid for amounts included in the measurement of operating cash flows from operating leases ​ $ 2,853 Weighted-average discount rate ​ ​ 9.7 % Weighted-average remaining lease term (years) ​ ​ 12.2 ​ ​ ​ ​ 121 Table of Contents 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) ​ 2023 ​ $ 3,455 2024 ​ 3,553 2025 ​ 3,654 2026 ​ 3,757 2027 ​ 3,864 Thereafter ​ 29,679 Total undiscounted lease payments ​ ​ 47,962 Less: imputed interest ​ ​ ( 20,855 ) Total lease liabilities ​ $ 27,107 ​ ​ 10. 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, 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 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 $ 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. ​ 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, currently for TLE. 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. 122 Table of Contents 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. 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. 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 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. 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. 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. 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, 2022 and 2021, the Company paid amounts in excess of the minimum commitment. Employment Agreements 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. 123 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) 11. Common Stock 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. ​ 12. Share-Based Compensation 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 the Inducement Plan. The total number of shares authorized under the Incentive Plan as of December 31, 2022 was 10,370,926 . 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 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 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. ​ ​ 124 Table of Contents 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. 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) ​ 2022 2021 Research and development ​ $ 8,278 ​ $ 15,432 General and administrative ​ 10,676 ​ 17,259 ​ ​ $ 18,954 ​ $ 32,691 ​ 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. 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, 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ ​ Weighted ​ average ​ ​ ​ ​ ​ average ​ remaining ​ ​ ​ Number of ​ exercise price ​ contractual ​ ​ ​ shares ​ per share ​ term (years) ​ Outstanding at January 1, 2022 9,416,998 $ 13.72 8.6 ​ Granted 6,609,441 ​ ​ 3.09 ​ Exercised ( 126,056 ) ​ ​ 1.02 ​ Forfeited ( 4,488,993 ) ​ ​ 10.41 ​ Outstanding at December 31, 2022 11,411,390 ​ $ 9.01 7.1 ​ Vested and Exercisable at December 31, 2022 6,074,955 ​ $ 11.55 5.3 ​ Vested or expected to vest at December 31, 2022 11,411,390 ​ $ 9.01 7.1 ​ ​ 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, 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. 125 Table of Contents 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ 2022 ​ 2021 Expected volatility ​ 92.5 % ​ 99.0 % Risk‑free interest rate ​ 2.8 % ​ 0.9 % Expected term ​ 5.9 years ​ 6.0 years Expected dividend yield ​ - ​ ​ - ​ ​ Restricted Stock Units 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 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted average ​ ​ Number of shares ​ grant date fair value Unvested balance at January 1, 2022 ​ 290,500 $ 14.78 Granted ​ 1,171,500 $ 1.97 Vested ​ ​ ( 39,167 ) ​ ​ 15.06 Forfeited ​ ( 193,667 ) $ 11.87 Unvested balance at December 31, 2022 ​ 1,229,166 $ 2.98 ​ 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. ​ Employee Stock Purchase Plan The Company’s 2020 Employee Stock Purchase Plan, or the ESPP, became effective on February 28, 2020. 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 126 Table of Contents 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 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. the purchase date) represents an option and , therefore, the ESPP is a compensatory plan under this guidance. Accordingly, share-based compensation expense is determined based on the option’s grant-date fair value as estimated by applying the Black Scholes option-pricing model and is recognized over the withholding period. The Company recognized share-based compensation expense of $ 0.2 million and $ 0.4 million during the years ended December 31, 2022 and 2021, respectively, related to the ESPP. 13. 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) 2022 2021 Deferred tax assets: ​ ​ Net operating loss carryforwards ​ $ 64,547 ​ $ 42,351 Research and development credits ​ 32,068 ​ 22,244 Collaboration and license agreement ​ 4,504 ​ 3,976 Capitalized research and development ​ ​ 65,012 ​ ​ 51,806 Share-based compensation ​ 11,312 ​ 11,245 Accrued expenses and other ​ 1,922 ​ 4,654 Operating lease liabilities ​ ​ 8,900 ​ ​ - Total gross deferred tax assets before valuation allowance ​ 188,265 ​ 136,276 Valuation allowance ​ ( 179,843 ) ​ ( 135,053 ) Net deferred tax assets ​ ​ 8,422 ​ ​ 1,223 Deferred tax liabilities: ​ ​ ​ ​ ​ ​ Right of use assets - operating leases (deferred rent for December 31, 2021) ​ ​ ( 7,609 ) ​ ​ ( 876 ) Depreciation ​ ​ ( 813 ) ​ ​ ( 347 ) Total deferred tax liabilities ​ ( 8,422 ) ​ ( 1,223 ) 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. 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, 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. 127 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) A reconciliation of the federal income tax rate to the Company’s effective tax rate is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended ​ ​ December 31, ​ 2022 2021 ​ Federal tax benefit at statutory rate 21.0 % 21.0 % State tax, net of federal benefit 7.5 11.9 ​ Permanent differences ( 2.5 ) ( 1.1 ) ​ Research and development and orphan tax credits 6.9 7.1 ​ Change in valuation allowance ( 32.9 ) ( 38.9 ) ​ ​ - % - % ​ The following table summarizes carryforwards of federal, state and local net operating losses, or NOL, and research and development and orphan drug tax credits: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, (in thousands) 2022 2021 Federal ​ $ 199,233 ​ $ 126,551 State ​ 199,230 ​ 126,547 Local ​ 180,859 ​ 116,301 Research tax credits ​ 32,068 ​ 22,244 ​ 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. 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 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. As of December 31, 2022, 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 2019 and after remain subject to examination by the taxing jurisdictions. The NOL and tax credit carryforwards remain subject to review until utilized. 128 Table of Contents Passage Bio, Inc. Notes to Financial Statements (cont.) 14. Subsequent Events None. ​ 129 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.