Contract analysis

I. Executive Summary and Purpose This memorandum has been prepared for use by the Calderwood & Harkness LLP ("C&H") deal team advising Optiwave Semiconductor Corp. ("OWS" or the "Company"), a Delaware corporation listed on the Nasdaq Global Select Market under the ticker symbol "OWS" and headquartered at 4800 Great America Parkway, Suite 1200, San Jose, California 95054, in connection with the Company's proposed Rule

1. Notes — Accounting Treatment. Under Accounting Standards Codification ("ASC") Topic 470-20, Debt — Debt with Conversion and Other Options, as simplified by Accounting Standards Update ("ASU") 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Ow

2. Capped Call Transactions — Accounting Treatment. The Capped Call Transactions should be classified in stockholders' equity under ASC 815-40, Derivatives and Hedging — Contracts in Entity's Own Equity. Their aggregate cost of $28,750,000 ($17,250,000 to Ridgepoint and $11,500,000 to Northvane) should be recorded as a reduction to additional paid-in capital ("APIC"). The Capped Call Transactions are not subsequently

3. Diluted EPS. Under ASU 2020-06, OWS is required to use the if-converted method for diluted earnings per share ("EPS") calculations for the Notes. Critically, the Capped Call Transactions do not reduce dilution for GAAP EPS purposes because they are equity-classified instruments; the anti-dilutive economic benefit of the Capped Call Transactions is not recognized in diluted EPS under U.S. GAAP.

4. Notes — Tax Treatment. For U.S. federal income tax purposes, the Notes are expected to be treated as "variable rate debt instruments" under Treasury Regulation Section 1.1275-5, with OWS entitled to deduct stated interest of 2.75% per annum on an accrual basis. Issuance costs are amortizable over the term of the Notes.

5. Capped Call Transactions — Tax Treatment. The Capped Call Transactions are expected to be characterized as separate prepaid forward contracts on OWS common stock, governed by Section 1032 of the Internal Revenue Code of 1986, as amended (the "Code"). Under this characterization, the $28,750,000 aggregate premium is non-deductible, consistent with the GAAP treatment. OWS does not intend to elect integration of the

II. Background — Transaction Overview A. The Notes The material terms of the Notes, as reflected in the draft Preliminary Offering Memorandum and draft Indenture, are summarized below: Issuer. Optiwave Semiconductor Corp., a Delaware corporation. Instrument. 2.75% Convertible Senior Notes due 2028. Maturity Date. June 1, 2028, unless earlier converted, redeemed, or repurchased. Interest Rate and Payment Dates. The No

III. Accounting Treatment of the Convertible Notes A. Applicable Accounting Standards — ASC 470-20 and ASU 2020-06 The accounting treatment of convertible debt instruments is governed by ASC Topic 470-20, Debt — Debt with Conversion and Other Options. Historically, ASC 470-20 required issuers of certain categories of convertible debt instruments to bifurcate the proceeds received into a liability component and an equ

IV. Accounting Treatment of the Capped Call Transactions A. Classification Analysis Under ASC 815-40 The Capped Call Transactions are freestanding financial instruments that are not embedded in the Notes. They are entered into under separate ISDA documentation with the Capped Call Counterparties and have independent legal existence from the Indenture. Accordingly, the Capped Call Transactions must be analyzed indepen

V. U.S. Federal Income Tax Treatment A. Tax Treatment of the Convertible Notes

1. Characterization as Debt For U.S. federal income tax purposes, OWS intends to treat the Notes as indebtedness and not as equity of the Company. The characterization of an instrument as debt or equity for tax purposes is a facts-and-circumstances determination guided by longstanding judicial and administrative authority, including the factors identified in Fin Hay Realty Co. v. United States, 398 F.2d 694 (3d Cir.

2. Original Issue discount (OID) Analysis The OID analysis for the Notes involves consideration of two distinct issues: (a) whether the Notes are issued at a discount to their stated redemption price at maturity, and (b) whether the conversion feature causes the Notes to be classified as "contingent payment debt instruments" ("CPDIs") under Treasury Regulation Section 1.1275-4. Issuance at Par. The Notes are expected

3. Deductibility of Interest Assuming the Notes are properly classified as indebtedness for U.S. federal income tax purposes (as discussed above), OWS should be entitled to deduct interest payments on the Notes as ordinary and necessary business expenses under Section 163(a) of the Code.

Section 163(j) Limitation. The deductibility of OWS's business interest expense is subject to the limitation under Section 163(j) of the Code, as amended by the Tax Cuts and Jobs Act of 2017. Under Section 163(j), a taxpayer's business interest expense deduction for any taxable year is limited to the sum of (i) the taxpayer's business interest income, (ii) 30% of the taxpayer's adjusted taxable income ("ATI"), and (i

1. Characterization. The Capped Call Transactions may be characterized for U.S. federal income tax purposes under one of two principal approaches: (a) Integrated with the Notes. Under the integration rules of Treasury Regulation Section 1.1275-6, a qualifying debt instrument and a financial instrument that together are the economic equivalent of a different debt instrument may be integrated and treated as a single "s

Section 1032(a) of the Code provides that "[n]o gain or loss shall be recognized to a corporation on the receipt of money or other property in exchange for stock (including treasury stock) of such corporation." The scope of Section 1032 has been interpreted broadly by the IRS and the courts to encompass not only direct issuances of stock but also forward contracts, options, and other transactions in which a corporati