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Business Combination

6 Months Ended

Jun. 30, 2021

3. Business Combination

On September 15, 2020, Former Adicet completed its Merger with resTORbio. Based on the Exchange Ratio of 0.1240, immediately following the Merger, resTORbio stockholders and holders of resTORbio restricted stock units and options to acquire resTORbio common stock owned approximately 25.0% of the outstanding capital stock of the combined company on a fully diluted basis, and Former Adicet stockholders, holders of options or warrants to acquire Former Adicet capital stock owned approximately 75.0% of the outstanding capital stock of the combined company on a fully diluted basis. At the closing of the Merger, all shares of Former Adicet common stock and Former Adicet redeemable convertible preferred stock then outstanding were converted to Former Adicet’s common stock under their original terms and were then exchanged for the Company’s common stock.

resTORbio’s stockholders will continue to own and hold their existing shares of the Company’s common stock (after giving effect to the 1-for-7 reverse stock split). Pursuant to the terms of the Merger, the vesting of all outstanding resTORbio stock options was accelerated in full as of immediately prior to the Effective Time. All out-of-the-money resTORbio stock options were cancelled for no consideration. All in-the-money resTORbio stock options remained outstanding after the completion of the Merger in accordance with their terms. For accounting purposes, the Company assumed 81,370 in-the-money resTORbio stock options after giving effect to reverse stock split. In addition, 91,309 unvested resTORbio restricted stock units outstanding and unsettled, after giving effect to reverse stock split, as of immediately prior to the effective time of the Merger, were accelerated in full and the holders of such restricted stock units received 54,553 shares of the Company’s common stock (after reduction by the number of shares of resTORbio common stock necessary to satisfy applicable tax withholding obligations at the maximum statutory rate). The fair value of these modified stock options and restricted stock units attributable to pre-combination services was recorded as a component of consideration transferred and the fair value of these modified stock options and restricted stock units attributable to post-combination services was recognized as stock compensation expense in the Company’s consolidated statements of operations and comprehensive loss at the close of the Merger. At the closing of the Merger, all shares of Former Adicet common stock and Former Adicet redeemable convertible preferred stock then outstanding were converted to Former Adicet’s common stock under their original terms and were then exchanged for the Company’s common stock.

In connection with the Merger, the Company entered into a Contingent Value Rights Agreement (the CVR Agreement) with Computershare Inc. and Computershare Trust Company, N.A. as joint rights agent. Per the terms of the Merger, each holder of resTORbio common stock as of immediately prior to the completion of the Merger is entitled to one contractual contingent value right, subject to and in accordance with the terms and conditions of the CVR Agreement, for each share of resTORbio common stock held by such holder as of immediately prior to the Effective Time. The CVR holders are entitled to receive net proceeds from the commercialization, if any, from a third-party commercial partner of RTB101, resTORbio’s small molecule product candidate that is a potent inhibitor of target of rapamycin complex 1 (TORC1), for a COVID-19

related indication. RTB101 relates to an exclusive license agreement resTORbio entered with Novartis International Pharmaceutical Ltd. (Novartis) (see Note 11).

The total purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed of resTORbio based on their fair values as of the completion of the Merger, with the excess allocated to goodwill. The purchase price is calculated based on the fair value of resTORbio common stock that the resTORbio stockholders owned as of the closing date of the Merger because, with no active trading market for shares of Former Adicet, the fair value of the resTORbio’s common stock represented a more reliable measure of the fair value of consideration transferred in the Merger.

The following summarizes the purchase price in the Merger (in thousands, except share and per share amounts):


Fair value of common stock shares of the combined company owned by resTORbio stockholders (1)	$	84,142
Fair value of contingent consideration liability with respect to CVR (2)		2,880
Purchase price	$	87,022

(1)

Represents the share consideration of the combined company that the resTORbio stockholders own as of the closing of the Merger calculated as follows:


Number of shares of the combined company owned by resTORbio stockholders (a)		5,207,695
Multiplied by the fair value per share of resTORbio common stock (b)	$	16.59
Acquisition date fair value of resTORbio		86,396
Estimated fair value of modified stock options and restricted stock units attributable to pre-combination services (3)		626
Less: portion of the fair value to be distributed as CVR (c)		(2,880	)
Fair value of shares of the combined company owned by resTORbio stockholders	$	84,142

Represents the number of shares of common stock of the combined company that the resTORbio stockholders owned as of the closing of the Merger. This amount is calculated as 5,207,695 shares of resTORbio common stock outstanding as of September 15, 2020.

The purchase price is based on the closing price of resTORbio common stock on September 14, 2020.

The fair value of resTORbio common stock was further adjusted to remove the estimated fair value of the CVR embedded within the closing price, as each holder of resTORbio stock will receive one contractual CVR immediately prior to the Merger.

(2)

Each holder of resTORbio common stock as of immediately prior to the completion of the Merger was entitled to one CVR issued by resTORbio, subject to and in accordance with the terms and conditions of the CVR Agreement, for each share of resTORbio common stock held by such holder as of immediately prior to the effective time of the Merger.

(3)

Based on the capitalization of resTORbio as of September 15, 2020, 91,309 outstanding unvested resTORbio restricted stock units were accelerated in connection with the Merger and holders of the restricted stock units were issued approximately 54,553 shares of resTORbio common stock on a net settlement basis. Similarly, in connection with the Merger, vesting of outstanding resTORbio stock options was accelerated in full and the stock options that were not in the in-the-money on the close of the Merger were canceled, resulting in approximately 81,370 surviving stock options. The acquisition date fair value of these modified resTORbio restricted stock units and resTORbio stock options attributable to the pre-combination services is included in the estimated purchase price.

The Merger was accounted for as a business combination which requires that assets acquired, and liabilities assumed be recognized at their fair value as of the acquisition date. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to value the assets acquired and liabilities assumed on the acquisition date, its estimates and assumptions are subject to refinement. Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company’s results of operations.

As of June 30, 2021, the Company identified and recorded measurement period adjustments of $0.6 million to its preliminary purchase price allocation that was disclosed in prior periods based on the facts and circumstances existing as of the acquisition date.

The following summarizes the allocation of the purchase price to the net tangible and intangible assets acquired (in thousands):


	As of December 31, 2020			Measurement Period Adjustments			As of June 30, 2021
Net assets acquired:
Cash and cash equivalents	$	63,869		$	—		$	63,869
Prepaid expenses and other current assets		3,059			615			3,674
Property and equipment		318			—			318
IPR&D		3,490			—			3,490
Restricted cash		245			—			245
Accounts payable		(1,316	)		—			(1,316	)
Accrued and other current liabilities		(2,365	)		12			(2,353	)
Other liabilities		—			—			—
Deferred tax liability		(367	)		—			(367	)
Goodwill		20,089			(627	)		19,462
Purchase price	$	87,022		$	—		$	87,022

The goodwill of $19.5 million is not tax deductible and represents the excess of the consideration paid over the fair value of assets acquired and liabilities assumed. Goodwill is mainly attributable to the enhanced value of the combined company, as reflected in the increase in market value of the resTORbio common shares following the announcement of the Merger with Former Adicet.

The fair value of acquired in-process research and development (IPR&D) is related to the research and development of RTB101 for a COVID-19 related indication. The RTB101 compound IPR&D project was valued using an income approach, specifically a projected discounted cash flow method, adjusted for the probability of technical success (PTS). The projected discounted cash flow models used to estimate the Company’s IPR&D reflect significant assumptions regarding the estimates a market participant would make in order to evaluate a drug development asset, including the following:



Estimates of potential cash flows to be generated by the project and resulting asset, which was developed utilizing estimates of total patient population, market penetration rates, demand risk adjustment factors, and product pricing;



Estimates regarding the timing of and the expected costs of goods sold, research and development expenses, selling, general and administrative expenses to advance the clinical programs to commercialization, cash flow adjustments and partner profit split;



The projected cash flows were then adjusted using PTS factors that were selected considering both the current state of clinical development and the nature of the proposed indication, (i.e., respiratory therapeutics); and



Finally, the resulting probability adjusted cash flows were discounted to a present value using a risk-adjusted discount rate, developed considering the market risk present in the forecast and the size of the asset.

This IPR&D intangible asset is not amortized, but rather is reviewed for impairment on an annual basis or more frequently if indicators of impairment are present, until the project is completed, abandoned, or transferred to a third party. The Company performed a review for impairment of IPR&D for the quarter ended June 30, 2021 and determined the probability of commercialization events was close to zero. On July 27, 2021, the Company sent Novartis a termination notice. Termination will automatically take effect as of 60 days from the date of delivery of the termination notice to Novartis, but in no event later than October 1, 2021 without any further notice or action required of either Novartis or the Company. The Company concluded that the IPR&D was fully impaired and recorded an impairment charge within research and development expenses in the consolidated statement of operations and comprehensive loss for the remaining balance of the IPR&D intangible asset as of June 30, 2021. In total, the Company recognized IPR&D impairment charges of $0.7 million and $1.2 million for the three and six months ended June 30, 2021.

The contingent consideration for the CVR was valued using an income approach, leveraging the probability adjusted discounted cash flow used in the valuation of the IPR&D and then deducting the administrative fee to be retained by the combined company and other permitted deductions in order to arrive at the net cash expected to be paid out to the CVR holders. The probability adjusted cash flow includes significant estimates and assumptions pertaining to commercialization events and cash consideration received by the Company for the grant of rights to commercialize RTB101 during the term of the CVR Agreement (as discussed above). These cash flows were then discounted to present value using the same discount rate applied in the valuation of the IPR&D.

The following tables present changes in the Company’s IPR&D and CVR since the Merger (in thousands):


	Acquisition Date Fair value as of September 15, 2020		Change in Fair value			As of December 31, 2020		Change in Fair value			As of June 30, 2021
In-process research and development	$	3,490	$	(2,300	)	$	1,190	$	(1,190	)	$	—
Contingent Value Rights	$	2,880	$	(1,900	)	$	980	$	(980	)	$	—