Company: PTHS
Filing Date: 2025-11-13
Form Type: 10-Q
Source: 0001753926-25-001764
Chunk: 102

Company: Pelthos Therapeutics Inc.
Filing Date: 2025-11-13
Form: 10-Q
Item: Part I, Item 1
Chunk 102
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 730-20, Research and Development Arrangements
(“ASC 730-20”), and that there has not been a substantive and genuine transfer of risk related to the Reedy Creek
Purchase Agreement. As of the LNHC Acquisition date, the Reedy Creek liability was measured at fair value. This long-term liability
is subsequently measured at amortized cost using the prospective effective interest method described in ASC 835-30, Imputation
of Interest (“ASC 835-30”). The effective interest rate is calculated by forecasting the expected cash flows to be
paid over the life of the liability relative to its fair value as of the LNHC Acquisition date. The effective interest rate is
recalculated in each reporting period as the difference between expected cash flows and actual cash flows are realized and as
there are changes to expected future cash flows. The carrying value of the Reedy Creek liability is made up of the opening balance,
which is increased by accrued interest expense, and decreased by any cash payments made to Reedy Creek during the period to arrive
at the ending balance.

See
Note 7 — “Reedy Creek Liability” in the notes to our condensed
consolidated financial statements for additional detail.

July
1, 2025 Royalty Agreements

Certain
PIPE investors were a party to the ZELSUVMI Royalty Agreement. Other PIPE investors were a party to the Channel Products Royalty
Agreement. Further, certain PIPE investors were not a party to either royalty agreement. As the PIPE investment and royalty agreements
were negotiated together, aggregate proceeds were allocated based on their relative fair value. The Company will account for royalties
due as liabilities and will accrete the financing using the effective interest method based on estimated and actual cash flows
payable to the counterparties over the estimated life of the royalty agreements.

At
the effective date of the royalty agreements, the effective annual interest rate of the financing was estimated and contains significant
assumptions that affect both the amount recorded at the effective date and the interest expense that will be recognized over the
term of the royalty agreements. The Company periodically assesses the estimated royalty payments and to the extent the amount
or timing of such payments is materially different than the original estimates, an adjustment is made to the effective interest
rate, which will be recorded prospectively to increase or decrease interest expense. There are a number of factors that could
materially affect the amount and timing of royalty payments and the amount of interest expense recorded by the Company over the