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Income Taxes
 12 Months Ended
Dec. 31, 2023
Income Tax Disclosure [Abstract]  
Income Taxes

13. Income Taxes

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

 

 

December 31,

 

 

 

2023

 

 

2022

 

Current:

 

 

 

 

 

 

Federal

 

$

—

 

 

$

—

 

State

 

 

—

 

 

 

—

 

Foreign

 

 

—

 

 

 

—

 

Total current

 

 

—

 

 

 

—

 

Deferred:

 

 

 

 

 

 

Federal

 

 

—

 

 

 

—

 

State

 

 

—

 

 

 

—

 

Foreign

 

 

—

 

 

 

—

 

Total deferred

 

 

—

 

 

 

—

 

Provision for (benefit from) income taxes

 

$

—

 

 

$

—

 

There was no income tax expense nor benefit for the years ended December 31, 2023 and 2022.

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,

 

 

 

2023

 

 

2022

 

Federal statutory income tax rate

 

 

21.0

%

 

 

21.0

%

Tax credits

 

 

—

 

 

 

(2.5

)%

State income taxes

 

 

(8.3

)%

 

 

8.5

%

Change in valuation allowance

 

 

(7.0

)%

 

 

(23.2

)%

162m limitation

 

 

—

 

 

 

(1.5

)%

Stock-based compensation

 

 

(2.7

)%

 

 

(2.3

)%

Goodwill Impairment

 

 

(2.9

)%

 

 

—

 

Other permanent differences

 

 

(0.1

)%

 

 

(0.2

)%

Provision for income taxes

 

 

(0.0

)%

 

 

(0.0

)%

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

 

 

December 31,

 

 

 

2023

 

 

2022

 

Deferred Tax Assets:

 

 

 

 

 

 

Net operating loss carryforwards

 

$

65,601

 

 

$

68,499

 

Operating lease right-of-use asset liability

 

 

4,414

 

 

 

5,641

 

Deferred revenue

 

 

—

 

 

 

—

 

Stock-based compensation

 

 

2,285

 

 

 

1,846

 

Intangible assets

 

 

704

 

 

 

1,060

 

Fixed assets

 

 

768

 

 

 

574

 

Accruals and reserves

 

 

1,074

 

 

 

1,480

 

Sec 174 Capitalized R&D

 

 

27,871

 

 

 

15,803

 

Research and development credit carryforwards

 

 

 

 

 

26

 

Tax credits

 

 

28

 

 

 

 

Gross deferred tax assets

 

 

102,745

 

 

 

94,928

 

Less: Valuation allowance

 

 

(99,069

)

 

 

(89,490

)

Deferred tax assets, net of valuation allowance

 

 

3,676

 

 

 

5,439

 

Deferred tax liabilities:

 

 

 

 

 

 

Fixed assets

 

 

—

 

 

 

—

 

Basis Difference IPR&D

 

 

—

 

 

 

—

 

Operating lease right-of-use asset

 

 

(3,676

)

 

 

(5,439

)

Net deferred tax assets

 

$

—

 

 

$

—

 

 

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. IRC Section 174, as modified by the Tax Cuts and Jobs Act of 2017, no longer permit an immediate deduction for research and development expenditures in the tax year that such costs are incurred. As a result the Company capitalized such costs in its 2023 income tax provision, resulting in an increase in deferred tax 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 $9.6 million and by $16.3 million during the years ended December 31, 2023 and 2022, respectively.

As of December 31, 2023, the Company had net operating loss carryforwards of $294.8 million, $12.1 million, and $16.1 million to reduce future taxable income, if any, for federal, state and foreign income tax purposes, respectively. Of the federal net operating loss carryforwards, $7.5 million will begin to expire in 2036 if not utilized, and $287.3 million can be carried forward indefinitely. The state carryforwards will begin to expire in 2035.

The Company also had approximately $11.3 million of federal and $6.4 million of California research and development tax credit carryforwards available to offset future taxable income as of December 31, 2023. 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. 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. If the Company has experienced an ownership change, 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. As of December 31, 2023, the ownership change analysis has not been completed, however no material tax attributes are expected to be limited for full use before their respective carryforward periods expires.

The Company files income tax returns in the United States federal jurisdiction, California, Massachusetts and Israel. The tax years 2016 to 2023 remains open to United States federal and state examination to the extent of the utilization of net operating loss and credit carryovers. Additionally, the Company is currently undergoing an audit with California’s Franchise Tax Board (FTB) regarding the apportionment of revenue for the tax year 2017 and may be obligated to make future payments to the state related to this tax year depending on the outcome of the examination. The Company is evaluating the FTB's proposal and assessing its course of action.

As of December 31, 2023, 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, 2023, the Company had unrecognized tax benefits of $17.7 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,

 

 

 

2023

 

 

2022

 

Balance at the beginning of the year

 

$

9,759

 

 

$

4,040

 

Adjustment based on tax positions related to prior year

 

 

5

 

 

 

(2

)

Adjustment based on tax positions related to current year

 

 

8,698

 

 

 

5,721

 

Balance at the end of the year

 

$

18,462

 

 

$

9,759

 

 

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, 2023.