Contract analysis

I. Purpose and Scope of Letter Calderwood & Harkness LLP ("C&H" or the "Firm") serves as outside tax counsel to Penterra Pharmaceuticals Corp. ("PPC" or the "Company") in connection with the defense of an ongoing examination by the Internal Revenue Service, Large Business & International Division (Exam Team ID: LB&I-NE-TP-2022-00641) of PPC's federal income tax returns (Forms 1120) for tax years ended December 31, 20

II. Background — PPC's International IP Structure A. Corporate Structure Overview PPC is a corporation organized under the laws of the State of Delaware, publicly traded on the Nasdaq Global Select Market under the ticker symbol "PPCA," and headquartered at 2200 Independence Boulevard, Princeton Junction, New Jersey 08550. PPC is a specialty pharmaceutical and biotechnology company focused on the research, developmen

1. Penterra Pharmaceuticals Corp. ("PPC") — A Delaware corporation; the ultimate parent entity and U.S. taxpayer.

2. Penterra Holdings Luxembourg S.à r.l. ("PHL") — A société à responsabilité limitée organized under the laws of the Grand Duchy of Luxembourg, with its registered office at 14, rue Aldringen, L-1118 Luxembourg, Luxembourg (Registre de Commerce et des Sociétés No. B 168452). PHL is wholly owned (100%) by PPC and has elected, or is otherwise treated, as a disregarded entity for U.S. federal income tax purposes pursua

3. Penterra Biopharma International DAC ("PBI") — A Designated Activity Company organized under the laws of Ireland, with its registered office at 4th Floor, Claremont House, Sandyford Business Park, Dublin D18 K7T4, Ireland (Irish Tax Reference: 3218764T). PBI is wholly owned (100%) by PHL and, through PHL, is an indirect wholly owned subsidiary of PPC. PBI serves as the intellectual property holding company and pri

4. Penterra Manufacturing Ireland Ltd. ("PMI") — An Irish private limited company (Companies Registration Office No. 512347), located at Unit 7, Ringaskiddy Industrial Estate, Co. Cork T12 PX29, Ireland. PMI is wholly owned by PBI and operates as a contract manufacturer under a cost-plus arrangement with PBI, pursuant to which PMI receives a markup of 8% on its fully loaded costs. As of December 31, 2020, PMI employe

III. Status of IRS Examination The IRS Large Business & International Division opened its examination of PPC's federal income tax returns for the Exam Years on May 16, 2022, through the issuance of IRS Letter 2205-A. The examination is being conducted out of the IRS's Northeast Area office and is focused principally on PPC's international transfer pricing arrangements, with particular attention to the CSA, the Legacy

IV. Identification of Uncertain Tax Positions A. Overview of Positions at Issue Based on our review of the examination activity to date and our assessment of the legal and economic merits of PPC's transfer pricing positions, we have identified three principal uncertain tax positions related to PPC's Irish IP-holding structure for purposes of the intercompany transfer pricing rules under IRC § 482: Position 1: Cost-Sh

1. CSA Cost-Sharing Percentages. Whether the cost-sharing percentages of 38.2% to 42.7% allocated to PBI understate the U.S.-source share of reasonably anticipated benefits from shared intangible development activities. The IRS may contend that PPC's RAB methodology underweights the value of PPC's U.S.-based R&D capabilities, personnel, and infrastructure, and that a higher cost-sharing percentage should be allocated

2. Legacy IP Royalty Rate. Whether the 4.5% royalty rate on non-Americas net sales of legacy compounds is below arm's length. Based on our experience and the nature of the IDRs issued to date, we anticipate that the IRS may propose a significantly higher royalty rate, potentially based on the IRS's own selection of comparable uncontrolled transactions ("CUTs") that may include agreements with higher royalty rates but

3. PCT Valuation. Whether the $312 million PCT payment adequately compensated PPC for the pre-existing intellectual property contributed to the CSA. The IRS may argue for a significantly higher PCT value based on alternative discount rate assumptions and revenue growth projections in a discounted cash flow analysis.

4. Economic Substance and DEMPE Functions. Whether PBI possesses sufficient economic substance and performs adequate functions related to the Development, Enhancement, Maintenance, Protection, and Exploitation ("DEMPE") of the intellectual property to justify its role as IP owner and CSA participant. This line of challenge, if pursued, would be directed at undermining PBI's entitlement to the residual profits attribu

V. ASC 740-10 Legal Analysis — Recognition Step (More-Likely-Than-Not) A. Applicable Standard Under ASC 740-10-25-6, a tax position should be recognized in the financial statements only if it is "more likely than not" (defined as a likelihood of more than 50 percent) that the position will be sustained upon examination by the relevant taxing authority, including resolution of any related appeals or litigation process

VI. ASC 740-10 Legal Analysis — Measurement Step A. Applicable Standard For tax positions that are recognized (i.e., that meet the more-likely-than-not threshold), ASC 740-10-30-7 requires measurement at the "largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement." This measurement standard requires a cumulative probability assessment of the potential outcomes

VII. Penalty Protection Analysis IRC § 6662(e) imposes a 20% accuracy-related penalty on any underpayment of tax attributable to a substantial valuation misstatement in connection with a § 482 transfer pricing adjustment. Under IRC § 6662(h), the penalty rate increases to 40% in the case of a gross valuation misstatement (i.e., an adjustment that is 400% or more of the correct transfer price, or 25% or less of the co

VIII. TCJA Considerations The Tax Cuts and Jobs Act (Pub. L. 115-97), enacted on December 22, 2017, and effective for tax years beginning after December 31, 2017, introduced several provisions that are relevant to the measurement of PPC's uncertain tax positions for the Exam Years. Corporate Tax Rate Reduction. The TCJA reduced the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018. For

IX. Limitations and Caveats The analysis and conclusions set forth in this letter are subject to the following limitations and caveats:

1. Current Knowledge. This analysis is based on the facts known to C&H as of the date of this letter, September 20, 2022, and on the current status of the IRS examination as described in Section III above. No NOPA has been issued as of this date, and the IRS's formal positions on the transfer pricing issues have not yet been articulated in writing.

2. No Guarantees. The conclusions expressed in this letter represent C&H's best professional judgment as to the technical merits and likely outcomes of PPC's tax positions based on current law and facts. They do not constitute a guarantee or assurance that the positions will be sustained in their entirety, or that the reserve amount recommended herein will prove to be adequate or excessive in light of future developm

3. Need for Reassessment. The analysis set forth herein may require revision as the examination progresses. Specific developments that could necessitate reassessment include, but are not limited to: (a) the issuance of a NOPA by the IRS on any of the positions discussed herein; (b) the development of new factual information, whether through the IDR process, IRS summons activity, or otherwise; (c) changes in relevant

4. Periodic Updates. C&H will provide updated analysis on a periodic basis, at least quarterly, and will provide prompt supplemental analysis upon the occurrence of any material development in the examination.

5. Limited Purpose. This letter is provided solely for the purpose of supporting Crestfield & Associates LLP's assessment of PPC's ASC 740-10 reserves in connection with PPC's financial statement audit. This letter should not be relied upon for any other purpose, including but not limited to investment decisions, credit determinations, regulatory filings (other than PPC's financial statements to the extent the ASC 74

6. Scope of Legal Analysis. The opinions and conclusions expressed herein are limited to matters of U.S. federal income tax law, including the Internal Revenue Code, Treasury Regulations, and applicable administrative and judicial authorities. This letter does not address: (a) the tax laws of Ireland or any other foreign jurisdiction; (b) state or local tax law; (c) non-tax legal issues, including securities law, cor

X. Privilege and Confidentiality This letter constitutes a privileged and confidential attorney-client communication between Calderwood & Harkness LLP, as outside tax counsel, and Penterra Pharmaceuticals Corp., as client. The analysis, conclusions, and work product reflected in this letter are protected by the attorney-client privilege and the work-product doctrine. This letter is being shared with Crestfield & Asso

XI. Conclusion and Availability We trust that this analysis will be of assistance to Crestfield in its assessment of PPC's ASC 740-10 reserves for the current audit cycle. As noted above, we will provide updated analysis on a periodic basis and promptly upon the occurrence of material developments in the IRS examination. We are available to discuss this analysis with Crestfield and PPC at your convenience, whether by