Contract analysis

I. Executive Summary This memorandum has been prepared by Calderwood & Harkness LLP ("C&H") at the request of the Special Committee of the Board of Directors of Penterra Pharmaceuticals Corp. ("Penterra" or the "Company") in connection with Penterra's proposed acquisition of one hundred percent (100%) of the outstanding equity of Caliston BioSciences, Inc. ("Caliston"), referred to internally as "Project Coriander."

II. Proposed Transaction Structure — Summary The proposed acquisition of Caliston by Penterra is structured as a one-step merger of Caliston with and into Penterra, pursuant to which Caliston will cease to exist as a separate legal entity and Penterra will be the surviving corporation. The merger will be effected under Section 251 of the Delaware General Corporation Law ("DGCL"), which governs the statutory merger of

1. Cash Consideration: Six Hundred Ninety-Three Million Seven Hundred Fifty Thousand Dollars ($693,750,000), representing approximately seventy-five percent (75%) of the aggregate equity value. The cash component is expected to be funded from (a) approximately Four Hundred Million Dollars ($400,000,000) of cash on hand on Penterra's balance sheet, and (b) a draw of approximately Two Hundred Ninety-Three Million Seven

2. Stock Consideration: Two Hundred Thirty-One Million Two Hundred Fifty Thousand Dollars ($231,250,000) in newly issued shares of Penterra common stock, representing approximately twenty-five percent (25%) of the aggregate equity value. The per-share value of Penterra stock is based on the thirty-day VWAP of $39.17 per share as of June 1, 2023, implying the issuance of approximately 5,903,497 shares.

3. Contingent Value Rights (CVRs): Up to One Hundred Twenty-Five Million Dollars ($125,000,000) in aggregate milestone payments payable to former Caliston stockholders upon FDA approval of CLT-4019 on or before December 31, 2026. The CVRs will be administered by Columnar Trust Services, Inc., as trustee, pursuant to a Contingent Value Rights Agreement to be executed at closing. As currently contemplated, the CVRs wil

III. Federal Income Tax Analysis — Taxable vs. Tax-Free Reorganization The central tax question presented by the proposed transaction is whether the merger can qualify as a tax-free reorganization under Section 368 of the Code, such that Caliston stockholders would be entitled to defer recognition of gain on the portion of their Caliston shares exchanged for Penterra stock. As detailed below, the proposed considerati

IV. Contingent Value Rights — Tax Treatment A. Overview of CVR Structure As described in Section II.B above, the merger consideration includes CVRs providing for an aggregate contingent payment of up to One Hundred Twenty-Five Million Dollars ($125,000,000) to former Caliston stockholders, payable upon FDA approval of CLT-4019 on or before December 31, 2026. The CVRs will be issued pursuant to a Contingent Value Righ

Section 453 of the Code generally provides for installment sale treatment of gains from the sale of property where at least one payment is received after the close of the taxable year in which the sale occurs. However, several considerations are relevant here: Exclusion for Publicly Traded Stock. Section 453(f)(3) provides that installment sale treatment is not available for sales of stock traded on an established se

V. Section 280G — Parachute Payment Analysis for Caliston Employees A. Overview of Section 280G Sections 280G and 4999 of the Code impose significant tax penalties on certain compensation payments that are contingent on a change in ownership or control of a corporation. Specifically: • Section 280G disallows the corporate income tax deduction for "excess parachute payments." An "excess parachute payment" is the porti

Section 280G(b)(5)(B) of the Code provides an important exception for privately held corporations. Under this provision, the parachute payment rules of Section 280G do not apply if both of the following conditions are met: (i) The payment is approved by a vote of the persons who owned, immediately before the change of control, more than seventy-five percent (75%) of the outstanding stock of the corporation entitled t

VI. State Income Tax Considerations A. Caliston Stockholder State Tax In addition to federal income tax, Caliston stockholders will be subject to state income tax on the gain recognized in the merger, to the extent such gain is subject to tax in the stockholder's state of residence (for individuals) or the state or states in which the stockholder has nexus (for entities). Massachusetts. Individual Caliston stockholde

VII. Structuring Observations and Recommendations Based on the analysis set forth above, we offer the following observations and recommendations for the Special Committee's consideration: A. Taxable Structure — Cost-Benefit Summary The taxable treatment of the proposed merger has both advantages and disadvantages relative to a potential tax-free reorganization structure: Advantages of Taxable Treatment: • Purchase pr

1. Merger Agreement Covenant. Include a covenant in the merger agreement requiring Caliston to use commercially reasonable efforts to obtain a stockholder vote satisfying Section 280G(b)(5)(B) of the Code prior to the closing of the merger. The covenant should specify that Caliston will prepare and distribute the required disclosure materials to its stockholders and solicit the required votes for each disqualified in

2. Quantification of Exposure. Promptly review all Caliston employment agreements, offer letters, change-of-control severance plans, equity award agreements (including stock option agreements and restricted stock unit agreements), and any other arrangements that could give rise to parachute payments. Quantify the potential parachute payment exposure for each disqualified individual, including Dr. Sorensen, Dr. Malhot

3. Gross-Up Provisions. Identify any gross-up provisions in existing Caliston employment agreements or plans that would obligate Caliston or Penterra to reimburse affected employees for the Section 4999 excise tax. Consider negotiating the elimination of gross-up provisions and replacing them with "best net" or "cutback" provisions, which would reduce the aggregate cost to Penterra while potentially leaving the affec

VIII. Summary of Key Tax Conclusions For the convenience of the Special Committee, the principal tax conclusions of this memorandum are summarized below:

1. Fully Taxable Transaction. The proposed merger is a fully taxable transaction for Caliston stockholders. The 75% cash / 25% stock consideration mix falls well below the 40% continuity of interest threshold required for tax-free reorganization treatment under Section 368 of the Code. Each Caliston stockholder will recognize gain or loss upon the exchange of Caliston shares for the merger consideration.

2. CVR Treatment. The CVRs should be treated under the closed transaction method, based on the fixed maximum of $125,000,000. The fair market value of the CVRs at closing should be formally determined by a qualified independent valuation firm and included in the amount realized by each Caliston stockholder.

3. Section 280G Exposure. Section 280G parachute payment exposure exists for Caliston disqualified individuals, including Dr. Sorensen, Dr. Malhotra, and Dr. Whitmore, among others. The private company stockholder vote exception under Section 280G(b)(5)(B) should be pursued as a mitigation strategy, and a covenant to that effect should be included in the merger agreement.

4. State Income Tax Implications. State income tax consequences are material for high-gain individual stockholders. Dr. Hale faces a combined federal and New Jersey effective tax rate of approximately 34.55% on his implied gain of $221,625,000. Massachusetts residents face a combined state rate of up to 9% on gains above $1,000,000 due to the recently enacted surtax. Partnership investors should consult their own adv

5. Penterra Benefits from Step-Up. Penterra will benefit from a stepped-up cost basis in Caliston's assets, including significant Section 197 intangible assets (IPR&D and goodwill), amortizable on a straight-line basis over fifteen (15) years. The amortization deductions will partially offset the premium paid in the transaction over the amortization period.

6. Proxy Statement Disclosure. These conclusions should be reflected in the tax disclosure section of the proxy statement to be prepared in connection with the merger. The proxy statement should advise Caliston stockholders that the transaction is taxable, describe the treatment of the CVRs, and recommend that each stockholde