Company: CERO
Filing Date: 2025-11-19
Form Type: 10-Q
Source: 0001213900-25-112619
Chunk: 26

Company: CERO THERAPEUTICS HOLDINGS, INC.
Filing Date: 2025-11-19
Form: 10-Q
Item: Item 1
Chunk 26
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 stock and
Predecessor preferred stock or reserved for issuance upon exercise of rollover (from Predecessor to Successor) options and warrants as
consideration in the Merger.

Asset Acquisition Method
of Accounting - The Merger was accounted for using the asset acquisition method in accordance with GAAP. Under this method of accounting,
PBAX was considered to be the accounting acquirer based on the terms of the Merger. Upon consummation of the Merger, the cash on hand
resulted in the equity at risk being considered insufficient for Predecessor to finance its activities without additional subordinated
financial support. Therefore, Predecessor was considered a Variable Interest Entity (“VIE”) and the primary beneficiary of
Predecessor was treated as the accounting acquirer. PBAX holds a variable interest in Predecessor and owns 100% of Predecessor’s
equity. PBAX was considered the primary beneficiary as it has the decision-making rights that gives it the power to direct the most significant
activities. Also, PBAX retained the obligation to absorb the losses and/or receive the benefits of Predecessor that could have potentially
been significant to Predecessor. The Merger was accounted for as an asset acquisition as substantially all of the fair value was concentrated
in IPR&D, an intangible asset. Predecessor’s assets (except for cash) and liabilities were measured at fair value as of the
transaction date. Consistent with authoritative guidance on the consolidation of a VIE that is not considered a business, differences
in the total purchase price and fair value of assets and liabilities are recorded as a gain or loss to the consolidated statement of operations.
The loss reflected below on the consolidation of the VIE is reflected “on the line” (defined below) in the Company’s
opening accumulated deficit.

Costs incurred in obtaining
technology licenses are charged to research and development expense as IPR&D if the technology licensed has not reached technological
feasibility and has no alternative future use. The IPR&D recorded at the Closing of $45.6 million is reflected “on the line”
in the Company’s opening accumulated deficit. To estimate the value of the acquired IPR&D, the Company used the avoided cost
method, which calculates a present value of a 45% return on research and development effort applied to research and development expenditures
over the life of the Predecessor. The determination of the fair value requires management to make a significant estimate of the return
on research and