Contract analysis

I. Purpose and Context of the Letter This letter updates the prior legal analysis issued by Calderwood & Harkness LLP ("C&H") on September 20, 2022, regarding the uncertain tax position ("UTP") reserve maintained by Penterra Pharmaceuticals Corp. ("PPC" or the "Company") under ASC 740-10 (formerly Financial Accounting Standards Board Interpretation No. 48, "FIN 48") with respect to PPC's Irish intellectual property-h

II. Background — IRS Examination and IP Structure A. Examination Overview The IRS Large Business & International Division ("LB&I") opened an examination of PPC's federal income tax returns for TY 2017 through TY 2020 on May 16, 2022, as communicated to PPC via Letter 2205-A (Notification of Examination). The examination has been conducted under IRS Case File No. LB&I-NE-TP-2022-00641 and has been led by Supervisory R

III. Summary of the NOPA — Proposed Adjustments ($380.4M) The NOPA, dated October 12, 2023, proposes aggregate net adjustments of $380,400,000 to PPC's taxable income across TY 2017–2020 under IRC § 482. The proposed adjustments fall into two principal categories — CSA cost-sharing ratio adjustments and royalty rate adjustments — together with a correlative offset to avoid double-counting. The NOPA also proposes a su

IV. Updated Legal Analysis of PPC's Transfer Pricing Positions A. Recognition Step — More-Likely-Than-Not Threshold (ASC 740-10-25) Under ASC 740-10-25, a tax position may be recognized in the financial statements only if it is "more-likely-than-not" (i.e., a likelihood of more than 50%) that the position will be sustained upon examination by the taxing authority, including resolution of any related appeals or litiga

1. CSA Cost-Sharing Position. The IRS's proposed percentage increases of eight to twelve percentage points in PBI's cost-sharing allocation rest on the IRS's assertion that PPC's RAB projections systematically understated the value of anticipated benefits attributable to the U.S. market. Dr. Washburne's analysis for the IRS employed alternative revenue projections that assigned higher growth rates to U.S.-source reve

2. Royalty Rate Position. The IRS's proposed royalty rate of 11.0% relies on Dr. Washburne's CUT analysis, which identified a set of comparable license transactions different from those identified by Whitmore. C&H and Whitmore have reviewed the IRS's comparables and believe they are distinguishable on several critical comparability factors. In particular, several of the IRS's selected CUT transactions involve earlier

3. Economic Substance / DEMPE Position. C&H views the IRS's economic substance argument as a secondary position that supplements the IRS's primary economic-based transfer pricing adjustments. The factual record developed during the examination, including PBI's responses to the IDRs, strongly supports PBI's genuine economic substance and its performance of meaningful DEMPE functions. In particular, C&H notes the follo

4. PCT Valuation (Background Impact). As noted above, the PCT year (2012) is outside the examination years, and the IRS did not propose a direct adjustment to the PCT in the NOPA. However, the IRS's assertion that the PCT of $312,000,000 undervalued PPC's pre-existing IP by approximately $540,000,000 (the IRS valued the IP at $852,000,000) underpins the IRS's proposed adjustments to the ongoing CSA and royalty arrang

5. Penalty Position. The IRS has proposed a substantial valuation misstatement penalty of approximately $15,977,000 under IRC § 6662(e). PPC maintained contemporaneous transfer pricing documentation for all four examination years, which was originally prepared by Crestfield in compliance with the penalty-protection standards of IRC § 6662(e)(3)(B) and Treas. Reg. § 1.6662-6(d). The documentation includes detailed bes

V. Revised Reserve Recommendation A. Prior Reserve Level As discussed in Section II.C above, PPC maintained an ASC 740-10 reserve of $62,400,000 as of year-end 2022. This reserve was established based on C&H's September 20, 2022 analysis and was reflected in PPC's Form 10-K for the fiscal year ended December 31, 2022. B. Updated Analysis Based on our updated analysis in light of the NOPA and the $380,400,000 in propo

VI. Procedural Status and Next Steps The procedural posture of the examination as of the date of this letter, and the anticipated next steps, are as follows: C&H intends to file a comprehensive formal Protest on or before December 22, 2023, contesting all proposed adjustments for TY 2017–2020 on both factual and legal grounds. The Protest will address each of the IRS's proposed adjustments — the CSA cost-sharing rati

VII. Penalty-Protection Documentation Status As noted in Section IV.B.5 above, PPC maintained contemporaneous transfer pricing documentation for all four examination years (TY 2017–2020). This documentation was originally prepared by Crestfield in compliance with the penalty-protection standards of IRC § 6662(e)(3)(B), which provides a specific exception to the substantial valuation misstatement penalty for taxpayers

VIII. GILTI and BEAT Considerations C&H notes that for TY 2018–2020, PPC's positions with respect to Global Intangible Low-Taxed Income ("GILTI") under IRC § 951A and the Base Erosion and Anti-Abuse Tax ("BEAT") under IRC § 59A may be affected by any IRC § 482 adjustment that alters the allocation of income between PPC and PBI. Specifically, a reduction in PBI's income resulting from increased cost-sharing payments t

IX. Competent Authority / Mutual Agreement Procedure C&H is evaluating whether a request for competent authority relief under Article 25 (Mutual Agreement Procedure) of the Convention between the Government of the United States of America and the Government of Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains (the "U.S.-Ireland Income T

X. Impact on Hargrove Credit Facility Covenants C&H notes, for completeness in the context of PPC's overall financial reporting considerations, that the NOPA and any resulting tax liability may implicate certain covenants in PPC's existing credit facility. Specifically, C&H has separately analyzed the tax-indemnity provisions and material-tax-event covenants contained in PPC's $1.5 billion revolving credit facility w

XI. SEC Disclosure Considerations C&H notes that PPC should evaluate its disclosure obligations under the Securities Exchange Act of 1934 with respect to the NOPA in its upcoming Annual Report on Form 10-K for the fiscal year ending December 31, 2023. In particular, PPC should consider whether the NOPA constitutes a contingent liability that must be disclosed in the notes to the financial statements under ASC 450-20,

XII. Limitations and Caveats This letter constitutes a legal opinion provided in connection with PPC's financial reporting obligations under ASC 740-10 and does not guarantee any particular outcome of the IRS examination, IRS Appeals process, or any potential litigation. The resolution of transfer pricing disputes involves inherent uncertainty, and the ultimate outcome may differ materially from the conclusions expre

XIII. Conclusion Based on the foregoing analysis, C&H's updated conclusions are as follows:

1. Recognition. PPC's transfer pricing positions — including the CSA cost-sharing ratios, the 4.5% royalty rate for the legacy IP license, the PCT valuation, and PBI's economic substance — continue to meet the more-likely-than-not recognition threshold under ASC 740-10-25 as of November 20, 2023.

2. Measurement. The measurement analysis under ASC 740-10-30, incorporating the new information provided by the NOPA, supports maintaining the current FIN 48 reserve level. The largest amount of tax benefit that is greater than 50% likely of being realized upon settlement remains high relative to PPC's as-reported positions.

3. Reserve Adequacy. PPC's existing FIN 48 reserve of $62,400,000 remains reasonable and adequate for year-end 2023 financial reporting purposes in light of the NOPA and the IRS's proposed adjustments of $380,400,000.

4. Penalty. C&H concludes that it is more-likely-than-not that the proposed IRC § 6662(e) penalty would be abated, and no separate reserve for the penalty component is recommended.

5. Further Updates. C&H will provide further updates following the filing of the formal Protest (expected on or before December 22, 2023) and the IRS Appeals proceedings (conference anticipated in late February or early March 2024). We are available to discuss this analysis with you and your engagement team at your convenience. Please do not hesitate to contact the undersigned with any questions. Very truly yours, CA