PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED / ATTORNEY WORK PRODUCT
LEGAL DUE DILIGENCE REPORT
CALISTON BIOSCIENCES, INC.
Prepared in Connection with the Proposed Acquisition of Caliston BioSciences, Inc. by Penterra Pharmaceuticals Corp.
Prepared by:
CALDERWOOD & HARKNESS LLP 1700 Market Street, Suite 3400 Philadelphia, PA 19103
Prepared for:
The Special Committee of the Board of Directors of Penterra Pharmaceuticals Corp.
Diane Prescott, Chair James Okafor Dr. Helen Ng
July 14, 2023
This report has been prepared by Calderwood & Harkness LLP solely for the use and benefit of the Special Committee of the Board of Directors of Penterra Pharmaceuticals Corp. in connection with the Special Committee's evaluation of the proposed acquisition of Caliston BioSciences, Inc. This report is protected by the attorney-client privilege, the work product doctrine, and all other applicable privileges and protections. Distribution of this report, or any portion thereof, to any person other than the members of the Special Committee and their authorized advisors without the prior written consent of Calderwood & Harkness LLP may result in a waiver of applicable privileges. No third party may rely on this report or any conclusions expressed herein.
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I. EXECUTIVE SUMMARY
A. Purpose
This Legal Due Diligence Report (this "Report") summarizes the principal findings and observations of Calderwood & Harkness LLP ("Calderwood & Harkness" or "C&H") arising from its review of the legal due diligence materials made available in connection with the proposed acquisition (the "Proposed Transaction") of Caliston BioSciences, Inc. ("Caliston" or the "Company") by Penterra Pharmaceuticals Corp. ("Penterra"). This Report has been prepared for the exclusive use of the Special Committee of the Board of Directors of Penterra (the "Special Committee"), comprised of Diane Prescott (Chair), James Okafor, and Dr. Helen Ng, each of whom has been determined to be independent and disinterested with respect to the Proposed Transaction.
The materials reviewed by Calderwood & Harkness were made available in a virtual data room (the "Data Room") hosted on Thackeray Solutions and maintained by Whitfield Graves LLP ("Whitfield Graves"), counsel to Caliston, under the direction of Kenneth Pratt, a partner at Whitfield Graves. The initial due diligence request list was transmitted by Calderwood & Harkness on June 9, 2023. Caliston's counsel commenced population of the Data Room on June 14, 2023, with supplemental document uploads continuing through the cut-off date for purposes of this Report.
B. Scope of Review
Calderwood & Harkness reviewed approximately 1,200 documents organized across 14 categories within the Data Room, including corporate and organizational documents, capitalization records, material contracts, intellectual property filings and agreements, regulatory correspondence, employment agreements, employee benefit plan documents, tax returns and related correspondence, insurance policies, litigation files, compliance policies, and related-party transaction documentation. In addition, Calderwood & Harkness participated in supplemental management interviews coordinated by Thorngate Partners LLC ("Thorngate"), Penterra's financial advisor, under the direction of Gregory Ashford, a managing director at Thorngate. The interviews were conducted with members of Caliston's senior management team and with representatives of Whitfield Graves.
All materials were reviewed through a cut-off date of July 10, 2023. This Report does not reflect any documents or information provided after that date. Certain companion memoranda referenced herein carry later dates and reflect continuing diligence work streams that were in progress as of the date of this Report.
C. Overall Assessment
Based on our review, Caliston is a clinical-stage biopharmaceutical company incorporated in Delaware in 2017. The Company has no commercial revenue (FY2022 revenue: $0) and currently employs 94 individuals, predominantly based at its principal office in Cambridge, Massachusetts. Caliston's lead asset is CLT-4019, a selective CDK4/6 inhibitor currently in a Phase 2b clinical trial for HR+/HER2– metastatic breast cancer, with topline data expected in the fourth quarter of 2023. The Company also has two preclinical-stage kinase inhibitor candidates, CLT-5227 and CLT-6034, both at early stages of development.
Caliston's corporate records are generally well-maintained. The Company's organizational documents, stockholder agreements, board minutes, and material contracts were available for review and appeared to be in good order. No material pending or threatened litigation was identified. The Company's regulatory posture with respect to its IND and clinical trial activities appears sound, with no clinical holds, FDA enforcement actions, or significant regulatory concerns identified.
Calderwood & Harkness has identified the following key risk areas that warrant the Special Committee's attention:
(a) Single-asset concentration risk. The overwhelming majority of the Company's value is attributable to CLT-4019, which remains in Phase 2b clinical development and is subject to the binary risks inherent in clinical-stage assets, including the possibility of unfavorable topline data.
(b) IP assignment chain — Dr. Malhotra's excluded prior inventions. The original invention assignment agreement executed by Co-Founder and Chief Scientific Officer Dr. Raj Malhotra in 2017 lists certain prior inventions as excluded from the assignment. Confirmatory review is needed with Whitfield Graves to verify that the excluded inventions are not material to CLT-4019 or the Company's pipeline. Our preliminary assessment is that the excluded inventions relate to an unrelated field (neurology) and are not implicated, but definitive confirmation has not yet been obtained.
(c) Employment matters — change-of-control provisions. Certain key executive employment agreements contain accelerated vesting and severance provisions triggered by a change of control, and the potential application of Internal Revenue Code Section 280G to such payments has been flagged for further analysis.
(d) Limited remaining cash runway. Based on cash and cash equivalents of $112.6 million as of March 31, 2023, and an estimated annual cash burn rate of approximately $78.4 million, the Company's cash runway extends through approximately the first quarter of 2025. If the Proposed Transaction is significantly delayed, Caliston may require interim financing to continue operations without interruption.
D. Caveat
This Report is based on the documents and information made available to Calderwood & Harkness in the Data Room and through supplemental management interviews. Calderwood & Harkness has not independently verified the accuracy or completeness of all information provided. Certain information has been accepted on the basis of representations and certifications made by Caliston's management and counsel. This Report should not be construed as an opinion of Calderwood & Harkness as to the value, commercial viability, or scientific merit of Caliston's product candidates, nor as an opinion as to any matter of foreign law. Except as expressly stated herein, no representations or warranties are made with respect to the matters discussed in this Report.
II. CORPORATE ORGANIZATION AND GOOD STANDING
A. Formation and Jurisdiction
Caliston BioSciences, Inc. was incorporated in the State of Delaware on September 12, 2017. The Company's full legal name is Caliston BioSciences, Inc. The Company's federal Employer Identification Number (EIN) is 84-4219063. The Company's registered agent in the State of Delaware is Pemberton Industries, located at 251 Little Falls Drive, Wilmington, Delaware 19808. The Company's fiscal year ends on December 31.
We reviewed the original Certificate of Incorporation filed with the Delaware Secretary of State, together with all subsequent amendments through and including the Restated Certificate of Incorporation filed in connection with the Series C financing in October 2021. The Company was formed as a Delaware corporation and has remained a Delaware corporation since its inception. No conversion, domestication, or reincorporation transactions were identified.
B. Principal Office
The Company's principal office is located at 88 Harbor Point Road, Cambridge, Massachusetts 02142. This facility serves as the Company's sole office location, housing its corporate, research, and clinical development functions. The Company does not maintain any additional office locations, laboratory facilities, or manufacturing sites. As discussed in Section IV.D below, the Company operates at this location under an operating lease.
C. Good Standing
Calderwood & Harkness reviewed a Certificate of Good Standing issued by the Delaware Secretary of State, dated June 22, 2023, confirming that Caliston BioSciences, Inc. is a corporation in good standing under the laws of the State of Delaware. Additionally, the Company is qualified to do business as a foreign corporation in the Commonwealth of Massachusetts. We reviewed a Certificate of Good Standing issued by the Massachusetts Secretary of the Commonwealth, dated June 28, 2023, confirming the Company's good standing in Massachusetts.
Based on information provided by Caliston's management, the Company is not qualified to do business in any other state or jurisdiction, and we have not identified any facts suggesting that qualification in any additional jurisdiction is required. Given that the Company's operations, employees, and physical presence are concentrated in Massachusetts, this appears consistent with our understanding of the Company's activities.
D. Organizational Documents
Calderwood & Harkness reviewed the following organizational documents:
(a) Restated Certificate of Incorporation (as filed with the Delaware Secretary of State on October 22, 2021), which was adopted in connection with the closing of the Series C preferred stock financing. The Restated Certificate of Incorporation sets forth the authorized capital stock of the Company (discussed in detail in Section III below) and contains standard protective provisions for holders of preferred stock, including consent rights on mergers, acquisitions, and other fundamental transactions. Specifically, the approval of a majority of the outstanding preferred stock (voting as a single class) is required for, among other things, any merger or consolidation of the Company, any sale of all or substantially all of the Company's assets, and any amendment to the Restated Certificate of Incorporation that adversely affects the rights of the preferred stock. These provisions are relevant to the mechanics of obtaining stockholder approval for the Proposed Transaction.
(b) Amended and Restated Bylaws (as adopted by the Board of Directors on October 22, 2021, and last amended on March 15, 2022). The Bylaws contain standard provisions governing the composition and operations of the Board of Directors, including the number of directors, election and removal procedures, quorum requirements, and voting thresholds. The Bylaws also include customary indemnification provisions for directors and officers, providing for mandatory indemnification to the fullest extent permitted by Delaware law, advancement of expenses, and the authority of the Company to maintain directors and officers liability insurance.
We did not identify any subsidiaries of Caliston. The Company operates as a single legal entity with no subsidiary corporations, limited liability companies, partnerships, or joint ventures. No intercompany agreements or subsidiary organizational documents were identified in the Data Room. Caliston's management confirmed during the management interview process that the Company has not formed or acquired any subsidiaries since its inception.
E. Board of Directors
As of the date of this Report, the Board of Directors of Caliston is comprised of five (5) members, as follows:
1. Dr. Nadia Sorensen — Co-Founder and Chief Executive Officer of Caliston. Dr. Sorensen has served as CEO and as a member of the Board since the Company's founding in 2017. She holds an approximately 14.2% equity interest in the Company on a fully-diluted basis.
2. Dr. Evan Whitmore — Head of Clinical Development. Dr. Whitmore joined Caliston in 2019 and has served on the Board since 2020. The Special Committee should note that Dr. Whitmore is the spouse of Angela Whitmore, who serves as Executive Vice President, Commercial Operations of Penterra and as a member of Penterra's Board of Directors. Ms. Whitmore has been recused from all Special Committee proceedings and all Penterra board deliberations regarding the Proposed Transaction, as documented in the Related-Party Relationships Summary Memorandum dated June 20, 2023.
3. Ava Lindström — Managing Partner, Ridgeline Ventures, LP. Ms. Lindström was designated to the Board by Ridgeline Ventures, LP pursuant to the investor rights provisions of the Series C stockholder agreements. Ridgeline Ventures served as the lead investor in the Series C round and holds an approximately 22.3% equity interest in the Company.
4. Tomás Reyes — Managing Partner, Meridian Life Sciences Fund III, LP. Mr. Reyes was designated to the Board by Meridian Life Sciences Fund III, LP pursuant to the investor rights provisions of the Series B stockholder agreements. Meridian III served as the lead investor in the Series B round and holds an approximately 18.7% equity interest in the Company.
5. One additional independent director — Identified in the Data Room as an independent director who does not hold an institutional investor designation right. This individual was appointed to the Board in 2020 and serves on the Audit Committee and Compensation Committee of the Board.
In addition to the five voting directors, Dr. Marcus Hale, Chairman and Chief Executive Officer of Penterra, holds a non-voting board observer seat on the Caliston Board. Dr. Hale has held this observer seat since 2018, and attendance records provided in the Data Room indicate that Dr. Hale attended 14 of 16 board meetings convened since 2018. The observer seat was granted in connection with Dr. Hale's personal investment in the Company, discussed in detail in Section III and Section XIII below. Dr. Hale's observer status, combined with his substantial equity interest, is the principal relationship giving rise to the conflict of interest that necessitated the formation of the Special Committee and the application of the entire fairness standard of review under Delaware law.
F. Officers
The Company's officers, as identified in the corporate records and confirmed through the management interview process, include the following:
• Chief Executive Officer: Dr. Nadia Sorensen (Co-Founder; approximately 14.2% equity interest on a fully-diluted basis)
• Chief Scientific Officer: Dr. Raj Malhotra (Co-Founder; approximately 9.8% equity interest on a fully-diluted basis)
• Head of Clinical Development: Dr. Evan Whitmore
• Chief Financial Officer: Identified in the Data Room; employment agreement reviewed
Additional officers, including a General Counsel and a Vice President of Regulatory Affairs, were identified in the Data Room. Employment agreements and compensation arrangements for all key officers are discussed in Section IX below.
III. CAPITALIZATION
A. Authorized and Outstanding Capital Stock
Under the Restated Certificate of Incorporation, as filed in connection with the Series C financing in October 2021, the Company is authorized to issue shares of common stock and four series of preferred stock: Series Seed Preferred Stock, Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock. The specific number of authorized shares for each class and series, along with the rights, preferences, and privileges of each series, are set forth in detail in the Restated Certificate of Incorporation, which was reviewed by Calderwood & Harkness.
The preferred stock carries standard venture capital financing rights, including a liquidation preference, anti-dilution protection (weighted-average broad-based), dividend rights, conversion rights (mandatory conversion upon a qualified IPO; optional conversion at the election of the holder), and the protective provisions described in Section II.D above.
Calderwood & Harkness reviewed the fully-diluted capitalization table provided by Whitfield Graves in the Data Room, which reflects all outstanding shares of common stock and preferred stock, together with shares reserved for issuance upon exercise of outstanding stock options and any other dilutive securities. The capitalization table was current as of the most recent Data Room update, though we have requested an updated table reflecting any option exercises or grants occurring after that date. This remains an open item.
B. Equity Ownership Summary
The following table summarizes the principal equity holders of the Company on a fully-diluted basis, based on the capitalization table provided in the Data Room:
The concentration of equity ownership in Dr. Hale's hands is of particular significance. Dr. Hale, who serves as Chairman and CEO of Penterra, holds a 28.5% fully-diluted equity interest in Caliston, making him the single largest individual stockholder of the Company. His investment of $42 million was made in a personal capacity across the Seed, Series A, and Series B financing rounds. At the $925 million aggregate equity value that has been discussed in the context of the Proposed Transaction, Dr. Hale's implied proceeds would be approximately $263,625,000, representing an implied gain of approximately $221,625,000. This financial interest, combined with his board observer role and his position at Penterra, constitutes a material conflict requiring the application of the entire fairness standard under Delaware law, as discussed further in Section XIII.
C. Last Private Valuation
The most recent private financing of the Company was the Series C preferred stock round, which closed in October 2021. The Series C round was led by Ridgeline Ventures, LP. The post-money valuation of the Company as of the closing of the Series C round was $680,000,000.
Total equity capital raised by the Company across its Seed, Series A, Series B, and Series C financing rounds is approximately $347,000,000. Detailed round-by-round investment amounts, share prices, and investor participation schedules were provided in the Data Room and have been reviewed by Calderwood & Harkness.
D. Stock Option Plan
Caliston maintains an equity incentive plan (the "Equity Incentive Plan") under which the Company has granted stock options and other equity awards to employees, officers, directors, and consultants. Calderwood & Harkness reviewed the plan document, the form of stock option agreement, the form of restricted stock unit agreement, and the board resolutions authorizing grants thereunder. We also reviewed a schedule of outstanding options provided in the Data Room, including the names of optionees, grant dates, exercise prices, vesting commencement dates, vesting schedules, and option expiration dates.
The Equity Incentive Plan contains change-of-control provisions that may be triggered by the Proposed Transaction, including provisions for accelerated vesting of outstanding awards. The specific acceleration provisions applicable to key executives are discussed in Section IX below. The potential application of IRC Section 280G to change-of-control payments, including the value of accelerated equity awards, is flagged as a risk item in Section IX.C and Section XV.
E. Investor Rights Agreement / Right of First Refusal / Co-Sale Agreement / Voting Agreement
Calderwood & Harkness reviewed the suite of stockholder agreements entered into in connection with each of the Company's financing rounds. These agreements include:
(a) Investors' Rights Agreement — Provides information rights (financial statements, budgets, inspection rights) to major investors, registration rights (demand and piggyback; inapplicable for a private exit but relevant in the event of a future IPO scenario), and right of first offer on new issuances.
(b) Right of First Refusal and Co-Sale Agreement — Provides the Company and the investors with a right of first refusal on any proposed transfer of shares by founders or key holders, and co-sale (tag-along) rights permitting investors to participate pro rata in any such transfer.
(c) Voting Agreement — Provides for the election of designated investor directors and the composition of the Board, including the Ridgeline Ventures designee and the Meridian III designee described in Section II.E above.
Of particular relevance to the Proposed Transaction, the stockholder agreements contain drag-along provisions. Under the drag-along provisions, if holders of a majority of the outstanding preferred stock (voting as a single class) and holders of a majority of the outstanding common stock approve a sale of the Company (including by way of merger), all stockholders may be compelled to participate in the transaction on the same terms and conditions. Based on our review, the drag-along provisions appear sufficient to facilitate the Proposed Transaction, subject to the proper exercise of such rights in accordance with the stockholder agreements and applicable law.
Notwithstanding the availability of the drag-along mechanism, it is anticipated that stockholder approval of the Proposed Transaction will be obtained through a written consent executed by stockholders holding a majority of the outstanding shares entitled to vote, in accordance with Section 228 of the Delaware General Corporation Law and the Company's organizational documents. This approach would eliminate the need to convene a special meeting of stockholders and would allow for a more expedient approval process.
F. Outstanding Warrants, Convertible Notes, or Other Rights
Our review of the Data Room did not identify any outstanding warrants, convertible promissory notes, simple agreements for future equity (SAFEs), or other instruments convertible into or exercisable for shares of the Company's capital stock, other than options outstanding under the Equity Incentive Plan. Caliston's management confirmed during the interview process that no such instruments are outstanding.
G. Key Risk / Open Item
Calderwood & Harkness notes one open item with respect to the capitalization review. Dr. Hale's investments across the Seed, Series A, and Series B financing rounds are documented by subscription agreements and/or stock purchase agreements executed in connection with each round. Our preliminary review indicates that the documentation is in order and that all shares held by Dr. Hale are validly issued, fully paid, and non-assessable. However, the signature page for one Series A stock purchase agreement requires confirmatory verification with Whitfield Graves. We have requested production of the original signed document or a conformed copy, and this item remains open. We do not anticipate that this will present a material issue, but confirmation should be obtained prior to signing of the definitive merger agreement.
IV. MATERIAL CONTRACTS
A. Overview
Calderwood & Harkness reviewed all contracts identified by Caliston's management as material or having an annualized value in excess of $500,000, as well as all contracts containing change-of-control, assignment, consent, or notification provisions that may be triggered by the Proposed Transaction. In total, we reviewed the material contracts described below, along with additional ancillary agreements and amendments thereto. The review was focused on identifying provisions that could create impediments to or additional requirements for consummation of the Proposed Transaction, as well as provisions that might impose material ongoing obligations on the surviving entity following the merger.
B. License Agreements
The most significant contract identified in the Data Room is the exclusive, worldwide license agreement between Caliston and Wexford University (the "Wexford License"), pursuant to which Caliston holds an exclusive license to certain foundational composition-of-matter patents underlying CLT-4019. The Wexford License was entered into in 2017 in connection with the founding of the Company. The licensed intellectual property originated from research conducted at Wexford University, and the license was negotiated by Dr. Sorensen and Dr. Malhotra in their capacities as co-founders of Caliston.
The Special Committee should be aware that Dr. Helen Ng, a member of the Special Committee, is a professor at Wexford University. However, Dr. Ng's appointment to the Special Committee post-dates the execution of the Wexford License, and there is no indication that Dr. Ng was involved in the negotiation or execution of the license. This relationship is noted for the Special Committee's awareness and has been reviewed in the context of the Related-Party Relationships Summary Memorandum prepared by Daniel Obi on June 20, 2023.
Key terms of the Wexford License include the following:
(a) Exclusivity: The license is exclusive and worldwide, granting Caliston the sole right to develop, manufacture, and commercialize products covered by the licensed patents.
(b) Field of Use: The license is limited to oncology indications. Products outside the field of oncology are not covered by the license.
(c) Royalty Obligations: Caliston is obligated to pay Wexford University royalties in the low-to-mid single-digit percentage range on net sales of licensed products. As Caliston is pre-commercial with no product revenue, no royalty payments have been made to date.
(d) Milestone Payments: The Wexford License provides for milestone payments payable upon certain regulatory approval events and upon the achievement of specified commercial sales thresholds. The specific milestone amounts were reviewed and are consistent with customary university license terms.
(e) Change-of-Control Provision: The Wexford License contains a change-of-control provision requiring Caliston to provide Wexford University with thirty (30) days' prior written notice of any change of control and granting Wexford University a consent right with respect to such change of control. The consent right is subject to a standard of reasonableness — i.e., consent is not to be unreasonably withheld, conditioned, or delayed. Compliance with this provision will be a condition to closing of the Proposed Transaction. Calderwood & Harkness recommends that the notice and consent process be initiated promptly following the Special Committee's decision to proceed with negotiations.
No other material license agreements were identified. Caliston owns (rather than licenses) the method-of-use and formulation patents relating to CLT-4019, as well as all patents and patent applications relating to its preclinical candidates.
C. Research and Development Agreements
Calderwood & Harkness reviewed the following categories of research and development agreements:
(a) Contract Research Organization (CRO) Agreements. Caliston has entered into master services agreements and associated work orders with multiple contract research organizations for the conduct of the Phase 2b clinical trial of CLT-4019. The CRO agreements are structured as services agreements under which the CROs provide clinical trial management, site monitoring, data management, biostatistical analysis, and regulatory support services. The agreements contain standard termination provisions, including termination for convenience by either party upon specified notice, and termination for material breach following a cure period. Change-of-control notification clauses were identified in each of the CRO agreements, requiring Caliston to provide written notice to the CRO upon a change of control. None of the CRO agreements require the CRO's consent to a change of control, and no unusual or problematic termination provisions were identified.
(b) Contract Manufacturing Organization (CMO) Agreement. Caliston has entered into a multi-year supply agreement with a contract manufacturing organization for the manufacture of drug substance and drug product for CLT-4019. The CMO agreement includes take-or-pay provisions under which Caliston is obligated to purchase minimum quantities of drug substance and drug product on an annual basis or to pay for such minimum quantities regardless of actual usage. The CMO agreement contains a change-of-control clause requiring Caliston to provide sixty (60) days' written notice to the CMO upon a change of control. The CMO agreement does not require the CMO's consent to a change of control, and the agreement is otherwise on standard commercial terms.
D. Facility Lease
Caliston operates under an operating lease for its principal office and laboratory space located at 88 Harbor Point Road, Cambridge, Massachusetts 02142. The lease term commenced in 2019 and runs through December 31, 2026. The lease provides for base rent, common area maintenance charges, and customary tenant obligations. The lease contains an assignment clause that requires the landlord's consent in the event of an assignment of the lease or a change of control of the tenant. The consent standard is not to be unreasonably withheld, conditioned, or delayed.
The Proposed Transaction, structured as a merger in which Caliston would merge with and into a wholly-owned subsidiary of Penterra (or vice versa), would likely constitute a change of control or assignment under the lease. Accordingly, landlord consent should be obtained prior to or as a condition to closing. Calderwood & Harkness recommends that the consent request be submitted in coordination with the Wexford University notice process described above.
E. Consulting Agreements
Calderwood & Harkness reviewed consulting agreements with members of Caliston's Scientific Advisory Board and with other key scientific consultants. These agreements are on standard terms, including customary confidentiality, invention assignment, and independent contractor provisions. No material issues were identified, and the consulting agreements do not contain change-of-control provisions or assignment restrictions that would be implicated by the Proposed Transaction.
F. Collaboration / Partnership Agreements
No material collaboration agreements, joint development agreements, co-promotion agreements, or partnership agreements were identified in the Data Room. Caliston is developing its pipeline candidates independently and has not entered into strategic collaborations with other pharmaceutical or biotechnology companies. This is consistent with the Company's clinical-stage status and its strategy to retain full development and commercial rights to its product candidates.
G. Contracts with Penterra or Affiliates
Our review did not identify any pre-existing contractual relationships between Caliston and Penterra or any of Penterra's subsidiaries or affiliates, other than the stockholder relationship arising from Dr. Hale's personal equity investment in Caliston. Dr. Hale's investment is documented through stock purchase agreements executed in connection with the Company's Seed, Series A, and Series B financing rounds, and his board observer rights are governed by a letter agreement entered into in connection with one of those financing rounds. There are no services agreements, supply agreements, license agreements, or other commercial arrangements between the two companies.
H. Change-of-Control Summary
Calderwood & Harkness has compiled a comprehensive summary of all contracts containing change-of-control, assignment, consent, or notification provisions that may be triggered by the Proposed Transaction. This summary is attached hereto as Exhibit C. The principal items requiring affirmative action in connection with the Proposed Transaction are as follows:
Calderwood & Harkness does not anticipate material difficulty in obtaining the requisite consents or providing the requisite notices, but recommends that the consent processes be initiated promptly and that obtaining the Wexford University consent be included as a closing condition in the definitive merger agreement.
V. INTELLECTUAL PROPERTY
A. Patent Portfolio — CLT-4019
CLT-4019 is a selective CDK4/6 inhibitor being developed by Caliston for the treatment of HR+/HER2– metastatic breast cancer. The compound represents the Company's lead clinical-stage asset and the primary driver of the Company's enterprise value. Calderwood & Harkness, in coordination with outside patent counsel, reviewed the patent portfolio associated with CLT-4019, which includes the following categories of patents and patent applications:
(a) Composition-of-Matter Patents. These patents cover the chemical compound itself and are exclusively licensed from Wexford University under the Wexford License described in Section IV.B above. The composition-of-matter patents provide the foundational intellectual property protection for CLT-4019 and are the most significant patents in the portfolio from a competitive standpoint.
(b) Method-of-Use Patents. These patents cover methods of using CLT-4019 for the treatment of specified oncology indications. The method-of-use patents are owned directly by Caliston and were developed by the Company's scientists in the course of their employment.
(c) Formulation Patents. These patents cover specific pharmaceutical formulations of CLT-4019, including dosage forms and delivery mechanisms. The formulation patents are also owned directly by Caliston.
The patent portfolio includes issued U.S. patents, pending U.S. patent applications, and corresponding Patent Cooperation Treaty (PCT) filings that provide a pathway to international patent protection. Key patents in the portfolio are expected to provide exclusivity through approximately 2038, subject to potential patent term adjustments or extensions available under applicable law. The specific expiration dates for each patent and patent application were reviewed and are summarized in Exhibit D to this Report.
A freedom-to-operate analysis was conducted by Calderwood & Harkness in coordination with outside patent counsel, and the results are summarized in a separate IP Diligence Memorandum dated July 21, 2023. The preliminary conclusion of the freedom-to-operate analysis is that no third-party patents have been identified that would be infringed by the manufacture, use, or sale of CLT-4019 in its current form. This conclusion is subject to the limitations and qualifications set forth in the IP Diligence Memorandum, including the inherent limitations of any freedom-to-operate search and the possibility that pending patent applications, which are not yet publicly available, could issue with claims that cover CLT-4019.
B. Patent Portfolio — Preclinical Candidates
Caliston's two preclinical-stage candidates, CLT-5227 and CLT-6034, are both kinase inhibitors at early stages of development. The patent protection for these candidates is at a correspondingly early stage:
(a) CLT-5227. Two provisional patent applications have been filed by Caliston with the United States Patent and Trademark Office (USPTO). The provisional applications cover the composition of matter and preliminary method-of-use claims. No non-provisional applications have been filed, and no PCT applications have been filed. As provisional applications provide a twelve-month priority period, Caliston will need to file non-provisional and/or PCT applications within the applicable deadlines to preserve patent rights.
(b) CLT-6034. One provisional patent application has been filed by Caliston with the USPTO, covering composition-of-matter claims. As with CLT-5227, timely follow-on filings will be required.
Given the early stage of development of both preclinical candidates, the patent portfolios for CLT-5227 and CLT-6034 are expectedly limited. Calderwood & Harkness recommends that Penterra's intellectual property team evaluate the prosecution strategy for these candidates as part of post-closing integration planning.
C. IP Assignment Chain
Calderwood & Harkness reviewed the invention assignment agreements executed by all founders and key scientific employees of Caliston. Under these agreements, all inventions and intellectual property conceived or developed within the scope of employment or using Company resources are assigned to Caliston. We reviewed the template invention assignment agreement, as well as individually executed agreements for the founders and senior scientific personnel.
The assignments appear to be properly executed and effective, and all inventions and intellectual property developed in the scope of employment appear to be properly assigned to the Company. However, one item requires further attention:
Open Item — Dr. Raj Malhotra's Excluded Prior Inventions. Dr. Malhotra's original invention assignment agreement, executed in 2017 at the time of the Company's founding, contains a schedule listing certain prior inventions that are excluded from the scope of the assignment. This is a common feature of invention assignment agreements, as employees and founders are permitted to exclude pre-existing inventions from the assignment to their employer. However, the excluded inventions listed on Dr. Malhotra's schedule must be verified to ensure that none of them are material to CLT-4019 or to the Company's pipeline.
Our preliminary assessment, based on the descriptions provided on the schedule, is that the excluded inventions relate to an unrelated field — specifically, neurology — and are not implicated in any of the Company's current programs. However, we have not yet obtained definitive confirmation from Whitfield Graves or from Dr. Malhotra himself, and this item remains open. Calderwood & Harkness recommends that confirmatory verification be obtained, either through a supplemental representation from Caliston's counsel or through a direct interview with Dr. Malhotra, prior to signing of the definitive merger agreement.
D. Trade Secrets and Know-How
Caliston maintains standard confidentiality and intellectual property assignment agreements with all employees and contractors. Calderwood & Harkness reviewed the Company's template confidentiality and invention assignment agreement, as well as a sample of individually executed agreements. The agreements contain customary provisions regarding the protection of trade secrets and confidential information, the assignment of work product and inventions, and post-employment obligations. No material deficiencies were identified in the agreements reviewed.
The Company's trade secrets and proprietary know-how — including clinical trial data, manufacturing processes, formulation techniques, and preclinical research data — are protected primarily through the confidentiality provisions of employment agreements, consulting agreements, and data processing agreements with third-party service providers. We did not identify any instances of unauthorized disclosure or misappropriation of the Company's trade secrets.
E. Trademarks
The Company has obtained a registered trademark for "Caliston BioSciences" with the United States Patent and Trademark Office. No product-specific trademarks have been filed, which is consistent with the Company's pre-commercial stage. Product trademark selection and clearance will be a matter for post-closing brand strategy in the event the Proposed Transaction is consummated and CLT-4019 advances toward commercialization.
A complete summary of the Company's patent portfolio, including patent numbers, filing dates, expected expiration dates, and ownership status, is set forth in Exhibit D to this Report.
VI. REGULATORY STATUS
A. IND Status — CLT-4019
Caliston submitted an Investigational New Drug Application (IND) for CLT-4019 to the U.S. Food and Drug Administration (the "FDA") in March 2020. The IND is designated as IND 158429. Based on our review of the FDA correspondence in the Data Room, the IND is active and in good standing.
We did not identify any clinical holds, partial clinical holds, refusal-to-file communications, or other adverse regulatory actions by the FDA with respect to IND 158429. The Company has not received any warning letters, Form 483 observations, or other enforcement communications from the FDA relating to CLT-4019 or any other aspect of the Company's operations.
B. Clinical Trial Status
CLT-4019 is currently being evaluated in a Phase 2b clinical trial for the treatment of HR+/HER2– metastatic breast cancer. The trial is designed as a multi-center, randomized, double-blind, placebo-controlled study, and is being conducted at clinical sites in the United States. Enrollment in the trial is ongoing, and Caliston's management has indicated that topline data from the Phase 2b trial are expected in the fourth quarter of 2023.
Calderwood & Harkness reviewed the Data Safety Monitoring Board (DSMB) reports available in the Data Room through the most recent report date. The DSMB reports reviewed did not identify any safety signals requiring trial modification, suspension, or termination. The DSMB recommended continuation of the trial without modification at each of the interim reviews reflected in the reports reviewed.
The timing of the topline data readout is significant in the context of the Proposed Transaction. If the Proposed Transaction were to close prior to the availability of topline data, Penterra would be acquiring Caliston at a time when the primary value driver — the Phase 2b results for CLT-4019 — remains unknown. If the data are favorable, the acquisition could represent significant value creation for Penterra; if the data are unfavorable, the acquisition could result in a substantial write-down. This binary risk profile is common in acquisitions of clinical-stage biopharmaceutical companies and is reflected in the contingent value right (CVR) structure that we understand is being considered as part of the transaction economics.
C. FDA Correspondence
Calderwood & Harkness reviewed all FDA correspondence provided in the Data Room, including Type B meeting minutes and written communications between the Company and the FDA. No material regulatory concerns were identified. The FDA's feedback in the Type B meeting minutes reviewed was generally consistent with a standard regulatory pathway for a Phase 2b/3 development program in oncology.
A detailed analysis of the FDA correspondence and regulatory pathway considerations is set forth in the Regulatory Diligence Memorandum prepared by Calderwood & Harkness, dated July 25, 2023, which should be reviewed in conjunction with this Report.
D. Change-of-Control — Regulatory Considerations
Upon consummation of the Proposed Transaction, a transfer of the IND sponsorship from Caliston to Penterra (or the surviving entity in the merger) will be required. Under FDA regulations, a transfer of IND sponsorship is an administrative process that does not require FDA approval but does require the filing of an amendment to the IND notifying the FDA of the change in sponsor. The amendment must be filed within thirty (30) days of the effective date of the sponsor transfer.
Based on our review and experience with similar transactions, we do not anticipate any impediment to the IND transfer process. The transfer is routinely accomplished in the context of pharmaceutical acquisitions, and the FDA does not exercise discretionary authority to block or delay such transfers. Calderwood & Harkness recommends that the IND transfer amendment be prepared in advance of closing and filed promptly following the effective date of the merger.
E. Preclinical Candidates
CLT-5227 and CLT-6034 are in preclinical development, and no IND applications have been filed for either candidate. Calderwood & Harkness reviewed the available preclinical data summaries provided in the Data Room for each candidate. The review was limited to a legal assessment of the completeness of the regulatory file; the scientific evaluation of the preclinical data is outside the scope of this Report and should be assessed by Penterra's scientific and clinical development teams.
VII. LITIGATION
A. Pending Litigation
Caliston represented to Calderwood & Harkness, through its counsel and through officer certifications provided in the Data Room, that there is no pending litigation, arbitration, or administrative proceeding in which the Company is a party or to which any of the Company's assets are subject. Calderwood & Harkness conducted litigation searches in the jurisdictions in which the Company operates (Delaware and Massachusetts) and did not identify any pending cases involving the Company as a named party.
We also reviewed the litigation representations and warranties set forth in the officer certifications provided by Caliston's management in the Data Room. These certifications were signed by the Company's CEO and CFO and represent that, to the knowledge of the signing officers, the Company is not a party to any pending or, except as disclosed, threatened litigation, arbitration, or administrative proceeding.
B. Threatened Litigation
One instance of threatened litigation was identified. In January 2023, a former employee of the Company (a non-management-level employee) sent a demand letter to Caliston asserting a claim of wrongful termination. The claim was transmitted through counsel for the former employee.
Caliston's counsel, Whitfield Graves LLP, advised during the management interview process that the claim was assessed as being without merit and was resolved through the execution of a separation agreement and general release in February 2023. Calderwood & Harkness reviewed the separation agreement and release, which contains broad release language under which the former employee released Caliston and its officers, directors, employees, and agents from all claims arising out of or related to the former employee's employment and termination, including all claims under federal and state employment discrimination statutes, wage and hour laws, and common law theories. The agreement also contains customary confidentiality, non-disparagement, and cooperation provisions.
Based on our review, the separation agreement and release appear to contain adequate release language to resolve the former employee's claims. Calderwood & Harkness assesses this matter as immaterial to the Proposed Transaction.
C. Government Investigations
No pending or threatened government investigations, enforcement actions, subpoenas, or inquiries involving Caliston were identified in the Data Room or disclosed during the management interview process. Caliston's officer certifications confirm the absence of any such matters.
D. Conclusion
Based on the foregoing review, Calderwood & Harkness has not identified any material pending or threatened litigation, arbitration, administrative proceeding, or government investigation involving Caliston. This conclusion is based on the information made available to Calderwood & Harkness through the cut-off date and is subject to the caveat that any litigation search is limited to matters of public record and disclosed materials.
VIII. ANTITRUST AND REGULATORY APPROVALS
The Proposed Transaction will require compliance with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). A detailed analysis of the HSR Act filing requirements and the substantive antitrust considerations applicable to the Proposed Transaction has been prepared separately in the Memorandum on Antitrust / HSR Act Analysis, dated August 10, 2023, which should be reviewed in conjunction with this Report.
Based on the $925 million aggregate equity value under discussion for the Proposed Transaction, the size-of-transaction threshold under the HSR Act is exceeded. Accordingly, both Penterra and Caliston will be required to make pre-merger notification filings with the Federal Trade Commission (the "FTC") and the Antitrust Division of the U.S. Department of Justice (the "DOJ") and to observe the applicable waiting period (30 days, absent early termination or extension by Second Request) before consummating the Proposed Transaction.
Our preliminary substantive antitrust assessment is that the Proposed Transaction presents low antitrust risk. Caliston is a pre-commercial, clinical-stage company with no marketed products and no commercial revenue. Penterra operates in the oncology and immunology therapeutic areas but does not currently market a CDK4/6 inhibitor or any product that is directly competitive with CLT-4019. Given the non-overlapping product portfolios and the absence of any horizontal overlap or vertical integration concern, we do not anticipate a substantive challenge from the FTC or DOJ. Nonetheless, the HSR filing process should be initiated promptly following execution of the definitive merger agreement to avoid unnecessary delay to the closing timeline.
No other regulatory approvals (e.g., CFIUS, foreign antitrust filings, sector-specific approvals) appear to be required for the Proposed Transaction based on the information available to Calderwood & Harkness.
IX. EMPLOYMENT MATTERS
A. Employee Headcount
As of the most recent data provided in the Data Room, Caliston employs 94 individuals. The majority of the Company's employees are based at its principal office in Cambridge, Massachusetts. The employee base includes scientific researchers, clinical development personnel, regulatory affairs professionals, corporate and administrative staff, and senior management. No employees are based outside the United States.
B. Employment Agreements
Calderwood & Harkness reviewed the employment agreements for the Company's key executives, including the following:
(a) Dr. Nadia Sorensen, CEO. Dr. Sorensen's employment agreement provides for an annual base salary, an annual bonus opportunity, and an initial equity grant subject to time-based vesting. The agreement contains change-of-control provisions, including single-trigger acceleration of all unvested equity awards upon the consummation of a change of control (i.e., acceleration occurs upon the change of control itself, regardless of whether Dr. Sorensen's employment is subsequently terminated). The agreement also provides for severance payments equal to eighteen (18) months of base salary, payable upon a qualifying termination of employment (termination without cause or resignation for good reason) occurring within twelve (12) months following a change of control.
(b) Dr. Raj Malhotra, CSO. Dr. Malhotra's employment agreement is structured similarly to Dr. Sorensen's. It provides for single-trigger acceleration of all unvested equity awards upon a change of control and severance payments equal to twelve (12) months of base salary upon a qualifying termination following a change of control.
(c) Dr. Evan Whitmore, Head of Clinical Development. Dr. Whitmore's employment agreement provides for double-trigger acceleration of unvested equity awards — i.e., acceleration occurs only upon a qualifying termination of employment (termination without cause or resignation for good reason) occurring within twelve (12) months following a change of control. Dr. Whitmore's severance provisions provide for twelve (12) months of base salary upon such a qualifying termination.
The distinction between single-trigger and double-trigger acceleration is significant for purposes of the Proposed Transaction. Under the single-trigger provisions applicable to Dr. Sorensen and Dr. Malhotra, the consummation of the merger itself would trigger immediate acceleration of all unvested equity awards, regardless of their continued employment with the surviving entity. Under the double-trigger provisions applicable to Dr. Whitmore, acceleration would occur only if Dr. Whitmore's employment is terminated or constructively terminated following the change of control. The financial implications of these acceleration provisions, including the potential application of IRC Section 280G, are discussed below.
Employment agreements for other officers, including the CFO, were also reviewed in the Data Room. The terms of those agreements are generally consistent with the provisions described above, with double-trigger acceleration being the more common structure outside the founder-executives.
C. Section 280G Analysis
Certain change-of-control payments to key employees of Caliston — including the value of accelerated equity awards and cash severance payments — may constitute "parachute payments" within the meaning of IRC Section 280G. If the aggregate value of parachute payments to any individual equals or exceeds three times such individual's "base amount" (generally, the five-year average of annual W-2 compensation), the excess parachute payments are subject to a 20% excise tax under IRC Section 4999, payable by the recipient, and the Company (or the surviving entity) loses its tax deduction for the excess parachute payments under IRC Section 280G.
Caliston has not obtained a stockholder vote under IRC Section 280G(b)(5)(B) to approve the change-of-control payments. A Section 280G stockholder vote, if properly conducted, can exempt payments from the parachute payment rules for non-publicly traded companies. Given that Caliston is a private company, a Section 280G stockholder vote is available as a planning tool. However, such a vote must be obtained prior to the change of control, and the logistics of obtaining such a vote — including the requirement for full disclosure to stockholders and the requirement that the vote be approved by more than 75% of the voting power of the outstanding shares — should be carefully evaluated.
A detailed Section 280G analysis is being conducted and will be addressed in the Tax Structure Memorandum dated August 15, 2023. Calderwood & Harkness recommends that the Section 280G issue be discussed with the Special Committee at the earliest opportunity, as the decision regarding whether to conduct a stockholder vote will need to be made in advance of closing.
D. Employee Benefit Plans
Calderwood & Harkness reviewed the Company's employee benefit plans, including its 401(k) retirement plan, health insurance plan, dental and vision coverage, life and disability insurance, and other welfare benefits. The plans are standard for a company of Caliston's size and stage of development. We did not identify any material funding deficiencies, compliance issues, or pending regulatory actions with respect to any of the benefit plans. The 401(k) plan is maintained through a third-party plan administrator and includes standard employer matching contributions.
E. Restrictive Covenants
Caliston's standard employment agreement contains non-competition and non-solicitation provisions applicable to departing employees. Under the non-competition provisions, employees are restricted from engaging in competitive activities for a specified period following termination of employment (typically twelve months). Under the non-solicitation provisions, employees are restricted from soliciting the Company's employees, consultants, and business relationships for a similar period.
The enforceability of non-competition agreements in Massachusetts is governed by the Massachusetts Noncompetition Agreement Act (Mass. Gen. Laws ch. 149, § 24L), which became effective on October 1, 2018. The statute imposes specific requirements for the enforceability of non-compete agreements, including, among others: (i) the agreement must be supported by independent consideration (such as continued employment, where execution occurs at the commencement of employment, or a garden leave payment or other mutually agreed-upon consideration, where execution occurs during employment); (ii) the agreement must not exceed twelve months in duration; and (iii) the agreement must include a "garden leave" clause providing for the payment of at least 50% of the employee's highest annualized base salary during the restricted period, or other mutually agreed-upon consideration.
Calderwood & Harkness reviewed the Company's template employment agreement and a sample of individually executed agreements. Agreements entered into after October 1, 2018, appear to comply with the requirements of the Massachusetts Noncompetition Agreement Act, including the inclusion of garden leave pay provisions. Agreements entered into prior to that date are governed by the common law standards applicable at the time of execution.
F. Collective Bargaining
No collective bargaining agreements are in effect at Caliston, and none of the Company's employees are represented by a labor union. No petitions for union representation, unfair labor practice charges, or other labor relations matters were identified in the Data Room.
G. Immigration
Calderwood & Harkness reviewed the visa status of key personnel at Caliston. Several employees hold H-1B or other work-authorized visas that are employer-specific. Upon consummation of the Proposed Transaction and the resulting change of employer (from Caliston to Penterra as the surviving entity), H-1B transfer petitions will need to be filed with U.S. Citizenship and Immigration Services (USCIS) for affected employees. This is an administrative matter that is routinely handled in the context of corporate acquisitions, but timely filing is important to avoid any lapse in work authorization.
Calderwood & Harkness recommends that Penterra's human resources and immigration teams begin identifying affected employees and preparing transfer petitions in advance of closing, so that petitions can be filed promptly upon the effective date of the merger.
H. Related-Party Employment Relationship — Dr. Evan Whitmore
As noted in Sections II.E and IV.B above, Dr. Evan Whitmore, who serves as Caliston's Head of Clinical Development and as a member of the Caliston Board of Directors, is the spouse of Angela Whitmore. Ms. Whitmore serves as Executive Vice President, Commercial Operations of Penterra and as a member of Penterra's Board of Directors. Ms. Whitmore has been recused from the Special Committee and from all Penterra board deliberations regarding the Proposed Transaction.
This relationship has been fully documented in the Related-Party Relationships Summary Memorandum prepared by Daniel Obi, dated June 20, 2023. The memorandum analyzes the implications of the Whitmore relationship under Delaware law and Penterra's corporate governance policies and concludes that the recusal of Ms. Whitmore from all transaction-related deliberations is the appropriate course of action. Calderwood & Harkness concurs with this assessment.
X. TAX MATTERS
Calderwood & Harkness reviewed the tax-related materials provided in the Data Room, including federal and state income tax returns, correspondence with taxing authorities, and information relating to the Company's net operating loss carryforwards. The following principal observations are noted:
(a) Tax Filings. Caliston has filed all required federal and state income tax returns for all open tax years. The Company is current on all filing obligations. No pending audits, assessments, deficiency notices, or other open matters with the Internal Revenue Service or any state taxing authority were identified in the Data Room or disclosed during the management interview process.