Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

17. Income Taxes

The components of the provision for (benefit from) income taxes are as follows (in thousands):

	Years Ended December 31,
	2021			2020
Current:
Federal	$	—		$	(2,678	)
State		—			105
Foreign		—			—
Total current		—			(2,573	)
Deferred:
Federal		(125	)		(242	)
State		—			—
Foreign		—			—
Total deferred		(125	)		(242	)
Provision for (benefit from) income taxes	$	(125	)	$	(2,815	)

Income tax benefit of $0.1 million for the year ended December 31, 2021 is primarily due to the adjustment in deferred tax liability arising from the impairment charge of $1.2 million of acquired IPR&D. In contrast, the income tax benefit of $2.8 million for the year ended December 31, 2020 was primarily due to a the recognition of a net operating loss carryback under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) which was enacted on March 27, 2020 in response to the COVID-19 pandemic.

For the rate table below the (provision for) benefit from income taxes differ from the amount expected by applying the federal statutory rate to the loss before taxes as follows:

	Year Ended December 31,
	2021			2020
Federal statutory income tax rate		21.0	%		21.0	%
Other permanent differences		(1.9	)%		(0.5	)%
State income taxes		6.9	%		6.1	%
Federal benefit from NOL carryback		0.0	%		6.7	%
Change in valuation allowance		(24.8	)%		(25.8	)%
Change in fair value of redeemable convertible preferred stock tranche liability and TRDF liability		0.0	%		(0.5	)%
Stock-based compensation		(1.0	)%		0.1	%
Provision for income taxes		0.2	%		7.1	%

The tax effects of temporary differences and carryforwards of the deferred tax assets are presented below (in thousands):

	December 31,
	2021			2020
Deferred Tax Assets:
Net operating loss carryforwards	$	67,675		$	51,796
Operating lease right-of-use asset liability		5,504			5,686
Deferred revenue		1,263			2,857
Stock-based compensation		1,726			1,750
Intangible assets		1,081			1,195
Fixed assets		196			—
Accruals and reserves		1,042			654
Research and development credit carryforwards		26			26
Gross deferred tax assets		78,513			63,964
Less: Valuation allowance		(73,163	)		(57,715	)
Deferred tax assets, net of valuation allowance		5,350			6,249
Deferred tax liabilities:
Fixed assets		—			—
Basis Difference IPR&D		—			(313	)
Operating lease right-of-use asset		(5,350	)		(6,061	)
Net deferred tax assets	$	—		$	(125	)

On September 15, 2020 Adicet Bio and resTORbio completed the Merger upon which Adicet Bio became the parent company of the consolidated group. The Merger did not create a step up in basis for tax basis of the asset as it was considered a tax-free merger. The above deferred tax table includes deferred related to resTORbio.

The Company has established a valuation allowance against its deferred tax assets due to the uncertainty surrounding the realization of such assets.

ASC 740 requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is “more likely than not.” Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carryforward period. Because of the Company’s recent history of operating losses, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not likely to be realized and, accordingly, has provided a valuation allowance.

The valuation allowance increased by $15.5 million during 2021 and $37.9 million during 2020.

As of December 31, 2021, the Company had net operating loss carryforwards of $271.6 million, $143.5 million, and $17.1 million to reduce future taxable income, if any, for federal, state and foreign income tax purposes, respectively. Of the federal net operating loss carryforwards, $7.6 million will begin to expire in 2036 if not utilized, and $264.0 million can be carried forward indefinitely. The state carryforwards will begin to expire in 2035.

The Company also had approximately $1.8 million of federal and $1.5 million of California research and development tax credit carryforwards available to offset future taxable income as of December 31, 2021. The federal credits begin to expire in 2041 and the California research credits can be carried forward indefinitely.

Utilization of the net operating loss carryforwards and research and development tax credit carryforwards may be subject to an annual limitation under Section 382 of the Internal Revenue Code of 1986, and corresponding provisions of state law, due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50% over a three-year period. The Company has not conducted a study to assess whether a change of control has occurred or whether there have been multiple changes of control since inception due to the significant complexity and cost associated with such a study. If the Company has experienced a change of control, as defined by Section 382, at any time since inception, utilization of the net operating loss carryforwards or research and development tax credit carryforwards would be subject to an annual limitation under Section 382, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the net operating loss carryforwards or research and development tax credit carryforwards before utilization. Further, until a study is completed and any limitation is known, no liability related to uncertain tax positions is recorded in the consolidated financial statements. The Company does not expect its unrecognized tax benefit balance to change materially over the next 12 months.

The Company files income tax returns in the United States federal jurisdiction, California, Massachusetts, New York and Israel. The tax years 2015 to 2021 remains open to United States federal and state examination to the extent of the utilization of net operating loss and credit carryovers.

As of December 31, 2021, the Company had unrecognized tax benefits of $0.8 million related to the transfer of certain intellectual property from its Israeli subsidiary. In addition, as of December 31, 2021, the Company had unrecognized tax benefits of $3.2 million related to the federal and state research and development credits as a result of no formal research credit study performed.

A reconciliation of the beginning and ending unrecognized tax benefit amount is as follows (in thousands):

	Year Ended December 31,
	2021		2020
Balance at the beginning of the year	$	797	$	797
Adjustment based on tax positions related to current year		3,243		—
Balance at the end of the year	$	4,040	$	797

The Company recognizes interest expense and penalties related to the above unrecognized tax benefits within income tax expense (benefit). Management determined that no accrual for interest and penalties was required as of December 31, 2021.