PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION

From: Leonard Cross To: Deborah Staines Cc: Marcus Whitfield ; Sylvia Hartwell ; Garrett Simmons Date: November 25, 2023 Subject: SEC Disclosure Considerations — IRS Transfer Pricing Examination (TY 2017–2020)

Deborah,

I am writing to flag several SEC disclosure considerations that will need to be addressed in connection with Penterra Pharmaceuticals Corp.'s ("PPC") upcoming Form 10-K for the fiscal year ending December 31, 2023. As you know, the IRS issued a Notice of Proposed Adjustment ("NOPA") on October 12, 2023, proposing net adjustments of $380.4 million across tax years 2017–2020, followed by the 30-Day Letter dated November 8, 2023. Our team is actively preparing PPC's formal Protest, which will be filed by the extended deadline of December 22, 2023.

I want to be clear at the outset that Calderwood & Harkness is not serving as PPC's securities counsel on this matter, and the observations below are offered from a tax-controversy perspective to help you and your securities team make informed disclosure decisions as you approach year-end. We strongly recommend that PPC's securities counsel be engaged to handle the actual drafting of any disclosure language, in coordination with our team and Crestfield & Associates.

Garrett Simmons on our team has prepared a more detailed memorandum on these issues, which is attached to this email (sec-disclosure-analysis-memo.docx). What follows is a summary of the key considerations.

**1. Contingent Liability / Loss Contingency Disclosure (ASC 450-20)**

The $380.4 million proposed adjustment represents a significant contingent liability that must be evaluated under ASC 450-20 (formerly FAS 5) for both disclosure and accrual purposes. For context, the proposed adjustment breaks down as follows:

- CSA cost-sharing ratio adjustments: $235.01 million - Legacy IP royalty rate adjustments (IRS proposing 11.0% vs. PPC's reported 4.5%): $188.04 million - Correlative offset allowed by examination: ($42.65 million) - Proposed IRC § 6662(e) substantial valuation misstatement penalty (20% of tax on adjustment): approximately $15.98 million

At the 21% corporate rate, the tax impact on the full proposed adjustment would be approximately $79.88 million, plus the $15.98 million penalty — yielding a total potential exposure of approximately $95.86 million before interest.

Our assessment is that the likelihood of the full proposed adjustment being sustained is remote. The formal Protest and anticipated Appeals proceedings are expected to result in a substantially lower resolution. That said, a contingency of this magnitude must be disclosed, and the 10-K language must be carefully crafted to acknowledge the examination without prejudicing PPC's defense position. We recommend that PPC's securities counsel coordinate with Crestfield & Associates — specifically Martin Ogilvy, the engagement partner — to draft appropriate contingent liability disclosure language.

**2. FIN 48 / ASC 740-10 Uncertain Tax Position Reserve**

PPC currently carries a FIN 48 (ASC 740-10) reserve of $62.4 million for uncertain tax positions related to the Irish IP structure. With the NOPA now issued, PPC and Crestfield will need to reassess the adequacy of that reserve for the year-end 2023 financial statements.

We have prepared an updated FIN 48 analysis (which we will provide separately as soon as it is finalized) evaluating both the "more-likely-than-not" recognition threshold and the measurement step in light of the proposed adjustments. Our view remains that PPC's transfer pricing positions are more likely than not to be sustained on the merits. This assessment is supported by:

- Contemporaneous transfer pricing documentation; - Whitmore Valuation Group's economic analyses, including CUT method interquartile range of 3.1%–6.8% for the royalty rate (with a median of 4.4%), CPM/TNMM benchmarking against 22 comparables, and a PCT DCF valuation range of $278 million–$361 million; and - Penterra BioInnovation Ireland Ltd.'s ("PBI") demonstrated economic substance.

However, the NOPA's issuance is a significant new data point, and Crestfield's auditors will appropriately need to factor it into their own assessment. I recommend that we schedule a coordination call with Martin Ogilvy and Susan Lam at Crestfield to discuss reserve adequacy well before year-end close.

**3. Hargrove National Bank Credit Facility Covenants**

PPC's $1.5 billion revolving credit facility with Hargrove National Bank, N.A. (Christine Bellucci, SVP, relationship manager) contains tax-indemnity and material-tax-event covenants. Deborah, I would ask that you review with your team whether the $380.4 million proposed adjustment — or the associated potential tax liability of approximately $79.88 million plus the $15.98 million penalty — triggers any notification or reporting obligations under those covenant provisions.

Our colleague Leila Nazari is preparing a separate analysis of the relevant covenant provisions, which we expect to deliver within the next week. If a notification obligation is triggered, the communication to Hargrove should be carefully coordinated to avoid unnecessary alarm. It should emphasize that PPC is vigorously contesting the proposed adjustments and that Calderwood & Harkness believes the ultimate resolution will be at a fraction of the proposed amount.

**4. Institutional Shareholder Considerations**

I also want to flag that Ridgeview Capital Management LP (Douglas Everett, Managing Partner) holds 8.3% of PPC's outstanding common stock and, as you know, actively monitors PPC's tax reserves and FIN 48 disclosures. Public disclosure of a $380.4 million IRS proposed adjustment in the 10-K could generate investor inquiries.

I recommend that PPC's investor relations team be briefed on appropriate talking points in advance of the filing. Any disclosure should be framed in the context of the examination being at an early stage — with the Protest to be filed, Appeals proceedings anticipated, and PPC believing its positions are well-supported by the economic analyses and contemporaneous documentation. It is critical that PPC avoid any public statement — whether in the filing itself, in earnings calls, or in investor communications — that could be construed as an admission or that could undermine the defense in any respect.

**5. Specific Disclosure Recommendations**

In summary, we recommend that the following disclosure areas be addressed in the 10-K:

- **Risk Factors:** Update existing risk factor language to reflect the pending IRS examination for TY 2017–2020 and the proposed adjustments, without conceding any merit to the IRS's positions. - **MD&A (Income Taxes):** Include discussion of the examination and reference the FIN 48 reserve and any adjustments thereto. - **Financial Statement Footnotes (Income Tax Footnote):** Describe the examination, the proposed adjustments in the aggregate, PPC's intention to vigorously contest the proposed adjustments, and any reserve adjustment deemed appropriate. - **Review by C&H:** All disclosure language touching on the IRS examination should be reviewed by our team before finalization to ensure consistency with the defense strategy and to guard against any inadvertent privilege waiver.

**6. Next Steps**

To keep this on track given the approaching year-end, I suggest the following action items:

1. **Coordination Call:** Schedule a call among you, Marcus Whitfield, our team (myself and Sylvia Hartwell), and Crestfield (Martin Ogilvy and Susan Lam) to coordinate on the year-end disclosure approach and reserve analysis. Early December timing would be ideal. 2. **SEC Disclosure Memorandum:** The detailed memorandum prepared by Garrett Simmons is attached for your review. We will provide the updated FIN 48 analysis as soon as it is finalized. 3. **Credit Facility Covenant Analysis:** Leila Nazari's analysis of the Hargrove covenant provisions will follow within the next week. 4. **Securities Counsel:** PPC's securities counsel should be looped in promptly to take the lead on disclosure drafting, with our team providing input on the tax-controversy aspects.

Please let me know if you would like to discuss any of the foregoing at your convenience. We are happy to arrange a call at whatever time works best for your schedule.

Best regards,

Leonard Cross Partner, Tax Department Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Direct: (215) 864-7320 lcross@calderwoodharkness.com

Matter No. 1018-00009

Attachment: sec-disclosure-analysis-memo.docx — "SEC Disclosure Considerations for IRS Examination"

---

CONFIDENTIALITY NOTICE: This email and any attachments are privileged and confidential attorney-client communications and/or attorney work product. This communication is intended solely for the use of the individual(s) to whom it is addressed. If you are not the intended recipient, you are hereby notified that any review, disclosure, copying, distribution, or use of this communication or any of its contents is strictly prohibited. If you have received this communication in error, please notify the sender immediately by reply email and permanently delete all copies of this communication and any attachments.

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION

From: Leonard Cross  
To: Deborah Staines  
Cc: Marcus Whitfield  ; Sylvia Hartwell  ; Garrett Simmons  
Date: November 25, 2023
Subject: SEC Disclosure Considerations — IRS Transfer Pricing Examination (TY 2017–2020)

Deborah,

I am writing to flag several SEC disclosure considerations that will need to be addressed in connection with Penterra Pharmaceuticals Corp.'s ("PPC") upcoming Form 10-K for the fiscal year ending December 31, 2023. As you know, the IRS issued a Notice of Proposed Adjustment ("NOPA") on October 12, 2023, proposing net adjustments of $380.4 million across tax years 2017–2020, followed by the 30-Day Letter dated November 8, 2023. Our team is actively preparing PPC's formal Protest, which will be filed by the extended deadline of December 22, 2023.

I want to be clear at the outset that Calderwood & Harkness is not serving as PPC's securities counsel on this matter, and the observations below are offered from a tax-controversy perspective to help you and your securities team make informed disclosure decisions as you approach year-end. We strongly recommend that PPC's securities counsel be engaged to handle the actual drafting of any disclosure language, in coordination with our team and Crestfield & Associates.

Garrett Simmons on our team has prepared a more detailed memorandum on these issues, which is attached to this email (sec-disclosure-analysis-memo.docx). What follows is a summary of the key considerations.

**1. Contingent Liability / Loss Contingency Disclosure (ASC 450-20)**

The $380.4 million proposed adjustment represents a significant contingent liability that must be evaluated under ASC 450-20 (formerly FAS 5) for both disclosure and accrual purposes. For context, the proposed adjustment breaks down as follows:

- CSA cost-sharing ratio adjustments: $235.01 million
- Legacy IP royalty rate adjustments (IRS proposing 11.0% vs. PPC's reported 4.5%): $188.04 million
- Correlative offset allowed by examination: ($42.65 million)
- Proposed IRC § 6662(e) substantial valuation misstatement penalty (20% of tax on adjustment): approximately $15.98 million

At the 21% corporate rate, the tax impact on the full proposed adjustment would be approximately $79.88 million, plus the $15.98 million penalty — yielding a total potential exposure of approximately $95.86 million before interest.

Our assessment is that the likelihood of the full proposed adjustment being sustained is remote. The formal Protest and anticipated Appeals proceedings are expected to result in a substantially lower resolution. That said, a contingency of this magnitude must be disclosed, and the 10-K language must be carefully crafted to acknowledge the examination without prejudicing PPC's defense position. We recommend that PPC's securities counsel coordinate with Crestfield & Associates — specifically Martin Ogilvy, the engagement partner — to draft appropriate contingent liability disclosure language.

**2. FIN 48 / ASC 740-10 Uncertain Tax Position Reserve**

PPC currently carries a FIN 48 (ASC 740-10) reserve of $62.4 million for uncertain tax positions related to the Irish IP structure. With the NOPA now issued, PPC and Crestfield will need to reassess the adequacy of that reserve for the year-end 2023 financial statements.

We have prepared an updated FIN 48 analysis (which we will provide separately as soon as it is finalized) evaluating both the "more-likely-than-not" recognition threshold and the measurement step in light of the proposed adjustments. Our view remains that PPC's transfer pricing positions are more likely than not to be sustained on the merits. This assessment is supported by:

- Contemporaneous transfer pricing documentation;
- Whitmore Valuation Group's economic analyses, including CUT method interquartile range of 3.1%–6.8% for the royalty rate (with a median of 4.4%), CPM/TNMM benchmarking against 22 comparables, and a PCT DCF valuation range of $278 million–$361 million; and
- Penterra BioInnovation Ireland Ltd.'s ("PBI") demonstrated economic substance.

However, the NOPA's issuance is a significant new data point, and Crestfield's auditors will appropriately need to factor it into their own assessment. I recommend that we schedule a coordination call with Martin Ogilvy and Susan Lam at Crestfield to discuss reserve adequacy well before year-end close.

**3. Hargrove National Bank Credit Facility Covenants**

PPC's $1.5 billion revolving credit facility with Hargrove National Bank, N.A. (Christine Bellucci, SVP, relationship manager) contains tax-indemnity and material-tax-event covenants. Deborah, I would ask that you review with your team whether the $380.4 million proposed adjustment — or the associated potential tax liability of approximately $79.88 million plus the $15.98 million penalty — triggers any notification or reporting obligations under those covenant provisions.

Our colleague Leila Nazari is preparing a separate analysis of the relevant covenant provisions, which we expect to deliver within the next week. If a notification obligation is triggered, the communication to Hargrove should be carefully coordinated to avoid unnecessary alarm. It should emphasize that PPC is vigorously contesting the proposed adjustments and that Calderwood & Harkness believes the ultimate resolution will be at a fraction of the proposed amount.

**4. Institutional Shareholder Considerations**

I also want to flag that Ridgeview Capital Management LP (Douglas Everett, Managing Partner) holds 8.3% of PPC's outstanding common stock and, as you know, actively monitors PPC's tax reserves and FIN 48 disclosures. Public disclosure of a $380.4 million IRS proposed adjustment in the 10-K could generate investor inquiries.

I recommend that PPC's investor relations team be briefed on appropriate talking points in advance of the filing. Any disclosure should be framed in the context of the examination being at an early stage — with the Protest to be filed, Appeals proceedings anticipated, and PPC believing its positions are well-supported by the economic analyses and contemporaneous documentation. It is critical that PPC avoid any public statement — whether in the filing itself, in earnings calls, or in investor communications — that could be construed as an admission or that could undermine the defense in any respect.

**5. Specific Disclosure Recommendations**

In summary, we recommend that the following disclosure areas be addressed in the 10-K:

- **Risk Factors:** Update existing risk factor language to reflect the pending IRS examination for TY 2017–2020 and the proposed adjustments, without conceding any merit to the IRS's positions.
- **MD&A (Income Taxes):** Include discussion of the examination and reference the FIN 48 reserve and any adjustments thereto.
- **Financial Statement Footnotes (Income Tax Footnote):** Describe the examination, the proposed adjustments in the aggregate, PPC's intention to vigorously contest the proposed adjustments, and any reserve adjustment deemed appropriate.
- **Review by C&H:** All disclosure language touching on the IRS examination should be reviewed by our team before finalization to ensure consistency with the defense strategy and to guard against any inadvertent privilege waiver.

**6. Next Steps**

To keep this on track given the approaching year-end, I suggest the following action items:

1. **Coordination Call:** Schedule a call among you, Marcus Whitfield, our team (myself and Sylvia Hartwell), and Crestfield (Martin Ogilvy and Susan Lam) to coordinate on the year-end disclosure approach and reserve analysis. Early December timing would be ideal.
2. **SEC Disclosure Memorandum:** The detailed memorandum prepared by Garrett Simmons is attached for your review. We will provide the updated FIN 48 analysis as soon as it is finalized.
3. **Credit Facility Covenant Analysis:** Leila Nazari's analysis of the Hargrove covenant provisions will follow within the next week.
4. **Securities Counsel:** PPC's securities counsel should be looped in promptly to take the lead on disclosure drafting, with our team providing input on the tax-controversy aspects.

Please let me know if you would like to discuss any of the foregoing at your convenience. We are happy to arrange a call at whatever time works best for your schedule.

Best regards,

Leonard Cross
Partner, Tax Department
Calderwood & Harkness LLP
1735 Market Street, Suite 3100
Philadelphia, PA 19103
Direct: (215) 864-7320
lcross@calderwoodharkness.com

Matter No. 1018-00009

Attachment: sec-disclosure-analysis-memo.docx — "SEC Disclosure Considerations for IRS Examination"

---

CONFIDENTIALITY NOTICE: This email and any attachments are privileged and confidential attorney-client communications and/or attorney work product. This communication is intended solely for the use of the individual(s) to whom it is addressed. If you are not the intended recipient, you are hereby notified that any review, disclosure, copying, distribution, or use of this communication or any of its contents is strictly prohibited. If you have received this communication in error, please notify the sender immediately by reply email and permanently delete all copies of this communication and any attachments.

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION

Record

Parties

Dates

Amounts