Income Taxes

12 Months Ended

Dec. 31, 2024

Income Taxes

Income Taxes

Note 16 - Income Taxes

The Company accounts for income taxes in accordance with ASC 740. Under the provisions of ASC 740, management is required to evaluate whether a valuation allowance should be established against its deferred tax assets. The Company currently has a full valuation allowance against our deferred tax assets. As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred tax assets. For the periods from January 1, 2024 to July 30, 2024 (Predecessor) and July 31, 2024 to December 31, 2024 (Successor), there was no material change from fiscal year ended December 31, 2023 (Predecessor) in the amount of the Company's deferred tax assets that are not considered to be more likely than not to be realized in future years.

For the periods from January 1, 2024 to July 30, 2024 (Predecessor) and July 31, 2024 to December 31, 2024 (Successor), the effective tax rate for the Company’s operations was 21.0%. The effective tax rate differed from the U.S. federal statutory rate primarily due to state income taxes, losses from the German subsidiary that is subject to different effective tax rates, stock-based compensation, fair value adjustments for convertible notes and warrant liabilities, and a change in the valuation allowance that offset the tax benefit on the current period pre-tax loss.

For the year ended December 31, 2023 (Predecessor), the effective tax rate for the Company’s operations was 21.0%. The effective tax rate differed from the U.S. federal statutory rate primarily due to state income taxes, losses from the German subsidiary that is subject to different effective tax rates, stock-based compensation and a change in the valuation allowance that offset the tax benefit on the current period pre-tax loss.

The Company is subject to U.S. federal income tax as well as income tax of foreign and state tax jurisdictions. The tax years 2019-2024 remain open to examination by the major taxing jurisdictions to which the Company is subject, except the Internal Revenue Service for which the tax years 2020-2024 remain open.

The components of pretax loss from operations for the years ended December 31, 2024 and 2023 are as follows `(dollars in thousands):

	2024				2023
	Successor		Predecessor		Predecessor
Years ended December 31,	July 31 to December 31		January 1 to July 30		January 1 to December 31
U.S.	$	(76,889)	$	—	$	(36,517)
Foreign		(22)		—		(73)
Pretax loss from operations	$	(76,911)	$	—	$	(36,590)

There was no income tax provision for the year ended December 31, 2024 and 2023. Current income taxes are based upon the year’s income taxable for federal, state and foreign tax reporting purposes. Deferred income taxes are provided for certain income and expenses which are recognized in different periods for tax and financial reporting purposes. Deferred tax assets and liabilities are computed for differences between the consolidated financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the period in which the differences are expected to affect taxable income, and include NOL carryforwards and R&D tax credit carryforwards.

The following table presents a reconciliation of income tax computed at the U.S. federal statutory tax rate to the total income tax benefit for the years ended December 31, 2024 and 2023 (dollars in thousands):

	Years Ended December 31
	2024								2023
	Successor				Predecessor				Predecessor
	July 31 to December 31				January 1 to July 30				January 1 to December 31
Years ended December 31,	Amount		Tax Rate		Amount		Tax Rate		Amount		Tax Rate
Income tax benefit at federal statutory rate	$	(16,151)	21.0	%	$	—	—	%	$	(7,684)	21.0	%
Adjustments for tax effects of:
Permanent adjustments		687	(0.9)	%		—	—	%		448	(1.2)	%
Goodwill impairment		6,368	(8.3)
Change in FV of convertible note		(627)	0.8	%		—	—	%		1,456	(4)	%
Change in FV of warrant liability		(1,421)	1.8	%		—	—	%		—	—	%
NOL true-up adjustment		—	—	%		—	—	%		2,922	(8)	%
Foreign rate differential		2	—	%		—	—	%		(11)	(0.0)	%
Change in federal valuation allowance		9,230	(12.0)	%		—	—	%		2,869	(7.8)	%
Income tax benefit	$	(1,912)	2.4	%	$	—	—	%	$	—	—	%

Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2024 and 2023 are as follows (in thousands):

	December 31, 2024		December 31, 2023
Deferred tax assets:	Successor		Predecessor
Net operating losses	$	30,454	$	25,786
Capitalized research costs		5,596		4,456
Research and development credit		1,604		1,604
Accrued compensation		482		392
Stock-based compensation		11		269
Operating lease liabilities		30		14
State taxes		130		—
Other		297		114
Total deferred tax assets		38,604		32,635
Less: Valuation allowance		(36,857)		(32,100)
Total deferred tax assets, net of valuation allowance		1,747		535
Deferred tax liabilities:
Right-of-use assets		(29)		(14)
Intangible assets		(2,080)		—
Unrecognized tax benefit		(521)		(521)
Total deferred tax liabilities		(2,630)		(535)
Net deferred tax liabilities	$	(883)	$	—

The Company has established a valuation allowance as of December 31, 2024 and 2023 to fully offset the net deferred tax assets of $36.9 million and $32.1 million, respectively. Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carryforward period. Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2024. Such objective evidence limits the ability to consider other subjective evidence, such as the Company’s projections for future commercialization. Management has concluded that it is more likely than not that the Company will not have sufficient foreseeable taxable income to allow for the utilization of the deferred tax assets; therefore, a full valuation allowance has been established to reduce the net deferred tax liability to $883 at December 31, 2024, and to zero net deferred tax at December 31, 2023.

As of December 31, 2024 and 2023, the Company had federal NOL carryforwards of approximately $122.3 million and $100.0 million, respectively. $19.0 million of the federal NOL carryforwards will begin to expire from 2031. Due to the enactment of the Tax Cuts and Jobs Act, federal net operating losses generated beginning in 2018 are carried forward indefinitely. Therefore, the remaining federal NOL carry forwards of $103.3 million and $81.0 million as of December 31, 2024 and 2023, respectively, have an unlimited carryover period. As of December 31, 2024 and 2023, the Company had state NOL carryforwards of $53.4 million and $53.4 million, respectively, which will begin to expire from 2031. As of December 31, 2024 and 2023, the Company had a NOL from Adagio Medical GmbH of $180.2 thousand and $249.3 thousand, respectively. The NOLs are carried forward indefinitely. As of December 31, 2024 and 2023, the Company also had net federal R&D tax credit carry-forwards of approximately $1.6 million and $1.6 million, respectively. The federal R&D tax credits will begin to expire in 2038. The Company had no state R&D credits.

The Company’s tax attribute carryforwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL and R&D credit carryforwards that can be used annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50% of the outstanding stock of a company by certain stockholders. The Company has not completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company’s formation due to the complexity and cost associated with such study, and the fact that there may be additional such ownership changes in the future. Any limitation may result in expiration of a portion of the NOL carryforwards or R&D tax credit carryforwards before utilization; however, such limitation, if any, would not have an impact on the Company’s financial statement due to the full valuation allowance.

The Company conducts intensive research and experimentation activities, generating R&D tax credits for federal purposes under Section 41 of the Code. The Company has performed a formal study validating these credits claimed in the tax returns.

The following table summarizes the changes to unrecognized tax benefits as of December 31, 2024 and 2023 (in thousands):

	2024				2023
	Successor		Predecessor		Predecessor
Years ended December 31,	July 31 to December 31		January 1 to July 30		January 1 to December 31
Balance at beginning of year	$	521	$	—	$	321
Gross increases – tax positions during the year		—		—		200
Balance at end of year	$	521	$	—	$	521

As of December 31, 2024, the Company has unrecognized tax benefits of $0.5 million of which $0.5 million will affect the effective tax rate if recognized when the Company no longer has a valuation allowance offsetting its deferred tax assets.

The Company does not anticipate that there will be a significant change in unrecognized tax benefits over the next 12 months.

The Company is subject to U.S. federal and various state tax as well as Germany tax jurisdictions. Since the Company formed in 2011, all filed tax returns are subject to examination. Generally, the tax years remain open for examination by the federal statute under a three-year statute of limitation; however, states generally keep their statutes open between three and four years. However, the Company’s tax years from inception are subject to examination by the United States and various state taxing authorities due to the carry forward of unused NOLs and R&D credits.

Enacted in December 2017, the Tax Cuts and Jobs Act of 2017 (“TCJA”) amended Section 174 to require capitalization of all research and experimental (“R&E”) costs incurred in tax years beginning after December 31, 2021. For tax years beginning on or after January 1, 2022, R&E costs must be amortized over five years if the R&E activities are performed in the U.S., or over 15 years if the activities are performed outside of the U.S., beginning with the midpoint of the tax year in which the costs were paid or incurred. During 2024, the Company capitalized $11.8 million of R&E costs. The Company plans to refine the calculation for Section 174 and make an adjustment on the tax return.