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CALDERWOOD & HARKNESS LLP Counselors at Law

600 Lexington Avenue, 30th Floor New York, New York 10022 Telephone: (212) 558-4000 Facsimile: (212) 558-3588 www.calderwoodharkness.com

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT

MEMORANDUM

TO: Optiwave Semiconductor Corp.

Attention: David Shih, General Counsel & Corporate Secretary

Priya Nandakumar, Chief Financial Officer Rachel Fontaine, Treasurer

FROM: Leonard Cross, Partner — Tax, Calderwood & Harkness LLP

CC: Jennifer Kwon, Responsible Partner, Capital Markets, Calderwood & Harkness LLP Claire Dempsey, Lead Associate, Capital Markets, Calderwood & Harkness LLP

DATE: May 29, 2023

RE: U.S. Federal Income Tax Treatment of the 2.75% Convertible Senior Notes due 2028 and the Capped Call Transactions

C&H Matter No.: 1014-00001

Billing Code: 48710-001

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I. Executive Summary

This memorandum sets forth the analysis and conclusions of Calderwood & Harkness LLP ("C&H" or "we") regarding the expected United States federal income tax treatment of (a) the $287,500,000 aggregate principal amount of 2.75% Convertible Senior Notes due 2028 (the "Notes") issued by Optiwave Semiconductor Corp. ("OWS" or the "Company"), a Delaware corporation (EIN 82-4917263), whose common stock is listed on The Nasdaq Global Select Market under the ticker symbol "OWS," and (b) the concurrent capped call transactions (the "Capped Call Transactions") entered into by OWS with Ridgepoint Capital Markets LLC ("Ridgepoint") and Northvane Financial Products LP ("Northvane," and together with Ridgepoint, the "Capped Call Counterparties"). This memorandum has been prepared at the request of the Company's legal and finance teams in connection with the Company's offering and sale of the Notes pursuant to a Rule 144A offering and the simultaneous execution of the Capped Call Transactions.

Our principal conclusions, each of which is discussed in greater detail in the sections that follow, are as follows:

Classification of the Notes. The Notes are expected to be treated as "variable rate debt instruments" ("VRDIs") under Treasury Regulation § 1.1275-5 for U.S. federal income tax purposes. Although the conversion feature of the Notes technically constitutes a contingent payment, the applicable Treasury Regulations provide that a conversion feature of the type embedded in the Notes does not cause the Notes to be classified as "contingent payment debt instruments" ("CPDIs") under Treasury Regulation § 1.1275-4. The alternative characterization of the Notes as CPDIs is discussed in detail herein but is not expected to apply.

Characterization of the Capped Call Transactions. The Capped Call Transactions are expected to be treated as separate prepaid forward contracts on OWS common stock for U.S. federal income tax purposes, and are not expected to be integrated with the Notes for tax purposes. In the alternative, even if the Capped Call Transactions were integrated with the Notes, such integration would not alter the VRDI treatment of the Notes. The Capped Call Transactions are separately documented under 2002 ISDA Master Agreements and related Confirmations with counterparties that are distinct from the holders of the Notes, and have independent economic substance.

Section 1032 — No Gain or Loss on Issuance. OWS should not recognize gain or loss on the issuance of the Notes or on the entry into and settlement of the Capped Call Transactions under Section 1032 of the Internal Revenue Code of 1986, as amended (the "Code"). Section 1032 shields a corporation from the recognition of gain or loss on transactions in its own stock, including the issuance of debt instruments that are convertible into the corporation's stock and the entry into forward contracts and options referencing the corporation's own equity.

Section 1259 — No Constructive Sale. The Capped Call Transactions should not give rise to a constructive sale of OWS common stock under Section 1259 of the Code. OWS, as the issuer of its own common stock, does not hold an "appreciated financial position" in its own equity for purposes of Section 1259, and the structure of the Capped Call Transactions (as purchased options) does not implicate the constructive sale rules.

Interest Deductibility. OWS should be entitled to deduct the 2.75% per annum stated interest on the Notes as it accrues, subject to the limitations imposed by Section 163(j) of the Code on business interest expense. No original issue discount ("OID") arises on the Notes because they were issued at par.

Important Caveats. This memorandum addresses only the U.S. federal income tax consequences of the Notes and the Capped Call Transactions. We do not address state, local, or foreign income tax consequences, and the Company is encouraged to consult with its state and local tax advisors, particularly with respect to California income tax matters. This analysis does not constitute a formal tax opinion letter delivered pursuant to Treasury Department Circular 230. Rather, it represents a reasoned memorandum of counsel's views provided for the Company's internal use. No ruling has been sought or will be sought from the Internal Revenue Service (the "IRS") with respect to any of the matters discussed herein, and no assurance can be given that the IRS would agree with the conclusions expressed in this memorandum.

In preparing this memorandum, we have reviewed and relied upon the following principal documents:

(i) the Final Offering Memorandum dated May 24, 2023, relating to the offering and sale of the Notes (the "Offering Memorandum");

(ii) the Indenture, dated as of May 30, 2023 (the "Indenture"), between OWS and Broadmere Trust Company, N.A., as trustee (the "Trustee");

(iii) the 2002 ISDA Master Agreements and related Confirmations, each dated as of May 30, 2023, between OWS and each of Ridgepoint and Northvane (collectively, the "ISDA Documentation"); and

(iv) such other documents, instruments, certificates, and materials as we have deemed relevant or necessary for the purposes of the analysis set forth herein.

We have assumed, without independent verification, the authenticity, accuracy, and completeness of all documents and instruments reviewed, the genuineness of all signatures, and the conformity to originals of all copies examined.

II. Background and Transaction Description

A. The Notes

Issuer. Optiwave Semiconductor Corp. is a Delaware corporation and a fabless semiconductor company that designs and markets high-performance photonic and radio frequency integrated circuits for telecommunications, data center, and industrial applications. OWS is headquartered at 4800 Great America Parkway, Suite 1200, San Jose, California 95054. The Company's common stock, par value $0.001 per share, is listed and traded on The Nasdaq Global Select Market under the ticker symbol "OWS." The Company's employer identification number is 82-4917263.

Instrument and Aggregate Principal Amount. The Notes are designated as the 2.75% Convertible Senior Notes due 2028. The aggregate principal amount of the Notes is $287,500,000, consisting of a base offering of $250,000,000 aggregate principal amount plus an additional $37,500,000 aggregate principal amount issued upon the full exercise by the initial purchasers of their over-allotment option. The Notes are senior unsecured obligations of the Company, ranking equally in right of payment with all of the Company's existing and future senior unsecured indebtedness and senior in right of payment to all of the Company's existing and future subordinated indebtedness.

Offering. The Notes were offered and sold in a private placement pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), to qualified institutional buyers ("QIBs") as defined in Rule 144A. No registration statement was filed with the Securities and Exchange Commission (the "SEC") in connection with the offering, and no registration rights have been granted to holders of the Notes. The initial purchasers of the Notes were Ridgepoint Capital Markets LLC and Northvane Securities LLC (an affiliate of Northvane Financial Products LP), each acting in its capacity as initial purchaser.

Coupon. The Notes bear interest at a rate of 2.75% per annum. Interest is payable semi-annually in arrears on June 1 and December 1 of each year, commencing December 1, 2023. Interest is computed on the basis of a 360-day year consisting of twelve 30-day months.

Maturity. The Notes will mature on June 1, 2028, unless earlier converted, redeemed, or repurchased.

Conversion Rights. The Notes are convertible into shares of OWS common stock at the option of the holders, subject to the terms and conditions set forth in the Indenture. The initial conversion rate is 10.5820 shares of OWS common stock per $1,000 principal amount of Notes, which corresponds to an initial conversion price of approximately $94.50 per share (calculated as $1,000 ÷ 10.5820). The initial conversion price represents a premium of approximately 28.8% over the reference price of $73.38 per share, which was the closing price of OWS common stock on The Nasdaq Global Select Market on May 23, 2023, the date on which pricing of the Notes was determined. The conversion rate is subject to customary anti-dilution adjustments as described in the Indenture for stock dividends, stock splits, distributions, and certain other events. The maximum number of shares of OWS common stock issuable upon conversion of all outstanding Notes (based on the initial conversion rate) is approximately 3,042,325 shares.

Net Share Settlement. The Company has elected to settle conversions of the Notes using the net share settlement method. Under this method, upon conversion, the Company will satisfy the conversion obligation by paying cash in an amount equal to the aggregate principal amount of the Notes being converted (or, if less, the conversion value attributable to the principal amount), and by delivering shares of OWS common stock in respect of the conversion value, if any, in excess of the aggregate principal amount. This settlement method is consistent with the Company's desire to limit share dilution.

Optional Redemption. The Notes are not redeemable by the Company at its option prior to June 6, 2026. On or after June 6, 2026, the Company may redeem the Notes, in whole or in part, for cash at a price equal to 100% of the principal amount of the Notes to be redeemed plus any accrued and unpaid interest thereon to, but excluding, the redemption date, provided that the last reported sale price of OWS common stock has exceeded 130% of the then-applicable conversion price (initially, $94.50 × 1.30 = $122.85 per share) for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company delivers the notice of redemption.

Fundamental Change Put Right. If a "Fundamental Change" (as defined in the Indenture) occurs, holders of the Notes will have the right to require the Company to repurchase all or any portion of their Notes at a price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest thereon to, but excluding, the Fundamental Change repurchase date. A Fundamental Change includes, among other events, a change of control, a delisting of the Company's common stock from The Nasdaq Global Select Market (or any successor exchange), or certain bankruptcy events.

Make-Whole Fundamental Change Adjustment. If a "Make-Whole Fundamental Change" (as defined in the Indenture) occurs prior to the maturity date, the conversion rate applicable to Notes that are converted in connection with such event will be increased by a number of additional shares as set forth in the make-whole table contained in the Indenture. The purpose of the make-whole adjustment is to compensate holders for the lost time value of the conversion option in the event of an early fundamental change.

Anti-Dilution Adjustments. The conversion rate is subject to standard adjustments upon the occurrence of certain events, including: (i) the issuance of stock dividends and distributions payable in shares of OWS common stock; (ii) stock splits and reverse stock splits; (iii) distributions to holders of common stock of rights, options, or warrants; (iv) distributions of assets, evidences of indebtedness, or other property; (v) certain cash dividends; and (vi) certain self-tender or exchange offers.

CUSIP and ISIN. The Notes have been assigned CUSIP number 683742AA5 and ISIN number US683742AA53.

Governing Law and Trustee. The Indenture is governed by the laws of the State of New York. Broadmere Trust Company, N.A. serves as trustee under the Indenture.

B. The Capped Call Transactions

Purpose. Concurrently with the pricing of the Notes, OWS entered into the Capped Call Transactions with the Capped Call Counterparties. The purpose of the Capped Call Transactions is to offset the potential dilution to OWS common stock upon any conversion of the Notes or, in the case of net share settlement, to offset cash payments that OWS would be required to make in excess of the aggregate principal amount of the Notes upon conversion.

Counterparties and Allocation. The Capped Call Transactions were allocated between the two Capped Call Counterparties as follows:

Ridgepoint acted in its principal capacity (and not as agent for any other party) in entering into the Capped Call Transactions. Northvane Financial Products LP is a CFTC-registered swap dealer, regulated by the Commodity Futures Trading Commission.

Economic Terms. Each Capped Call Transaction is a capped call option on OWS common stock with the following material terms:

Lower Strike Price (Capped Call Strike Price): The lower strike price is equal to the initial conversion price of the Notes, which is approximately $94.50 per share. This price is subject to adjustment in a manner corresponding to the anti-dilution adjustments applicable to the Notes under the Indenture.

Upper Strike Price (Cap Price): The upper strike price, or cap price, is $110.07 per share, which represents a premium of approximately 50.0% over the reference price of $73.38 per share (the closing price of OWS common stock on May 23, 2023). The cap price is also subject to certain adjustments.

Effective Conversion Price with Capped Calls: Taking into account the Capped Call Transactions, the effective conversion price of the Notes is increased to approximately $110.07 per share. At stock prices below the cap price, the payoff under the Capped Call Transactions offsets the dilution that would otherwise result from conversions of the Notes, such that OWS experiences no net dilution at stock prices between the conversion price and the cap price. At stock prices above the cap price, OWS will experience dilution with respect to the excess of the stock price over the cap price.

Expiration. The Capped Call Transactions expire on June 1, 2028, coinciding with the stated maturity date of the Notes. The Capped Call Transactions are subject to earlier exercise or termination upon the occurrence of certain events, including the conversion of the corresponding Notes, certain corporate transactions involving OWS, and certain nationalization, insolvency, or delisting events specified in the ISDA Documentation.

Documentation. The Capped Call Transactions are documented pursuant to separate 2002 ISDA Master Agreements and related Confirmations, each dated May 30, 2023, between OWS and the respective Capped Call Counterparty. Each ISDA Master Agreement and Confirmation is governed by the laws of the State of New York.

Regulatory Status. Northvane Financial Products LP is registered as a swap dealer with the CFTC. The Capped Call Transactions are "security-based swap agreements" for purposes of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The regulatory characterization does not affect the federal income tax analysis set forth in this memorandum.

C. Use of Proceeds

The gross proceeds from the offering of the Notes were $287,500,000. The Company applied such proceeds as follows:

Of the net proceeds, the Company intends to use approximately $75,000,000 to repay borrowings outstanding under its $300,000,000 senior secured revolving credit facility (the "Revolver") with Crestline National Bank, N.A. as administrative agent. The remaining net proceeds will be used for general corporate purposes, which may include working capital, capital expenditures, and potential acquisitions.

III. Tax Treatment of the Notes

A. Classification of the Notes — Variable Rate Debt Instrument vs. Contingent Payment Debt Instrument

1. Overview of Applicable Regulations. The U.S. federal income tax treatment of the Notes depends, in the first instance, on the proper classification of the Notes under the Treasury Regulations governing debt instruments. Two principal regulatory regimes are potentially applicable:

Contingent Payment Debt Instruments (CPDIs). Treasury Regulation § 1.1275-4 governs the tax treatment of debt instruments that provide for one or more contingent payments. A debt instrument provides for a contingent payment if a payment is based, in whole or in part, on the occurrence of a future event that is not fixed at the time the instrument is issued. If a debt instrument is classified as a CPDI, the tax treatment for both the issuer and the holders is significantly more complex: OID is computed based on a "comparable yield" (a hypothetical yield on a comparable fixed-rate nonconvertible debt instrument), and holders are required to accrue OID at the comparable yield regardless of the actual payments received. Gain on the sale or disposition of a CPDI is generally treated as ordinary income.

Variable Rate Debt Instruments (VRDIs). Treasury Regulation § 1.1275-5 provides a safe harbor for debt instruments that bear one or more "qualified floating rates" or a single fixed rate (or a combination thereof) and meet certain other requirements. A VRDI is excluded from the CPDI rules, and its tax treatment is generally more straightforward: stated interest is treated as ordinary income to the holder and deductible by the issuer, and gain or loss on sale or disposition is generally capital in nature (assuming the instrument is held as a capital asset).

The classification of the Notes turns on whether the conversion feature — which permits holders to convert the Notes into shares of OWS common stock — constitutes a "contingent payment" that triggers CPDI treatment, or whether the conversion feature is excluded from the CPDI rules under the applicable Treasury Regulation exceptions.

Treasury Regulation § 1.1275-4(b)(9)(iv) addresses the treatment of conversion features in convertible debt instruments. Under this regulation, a holder's option to convert a debt instrument into the stock of the issuer (or a related party) is not treated as a contingent payment if the debt instrument would be a VRDI (or would otherwise be excluded from CPDI treatment) without the conversion feature, and the conversion right is not part of a larger transaction designed to achieve a result that is inconsistent with the purposes of the regulations. This provision reflects the Treasury's recognition that a conventional embedded conversion feature in a debt instrument should not, standing alone, trigger the complex CPDI regime.

2. Analysis — Fixed Rate Qualifies as Qualified Stated Interest / Single Fixed Rate. The Notes bear interest at a single fixed rate of 2.75% per annum, payable semi-annually in arrears on June 1 and December 1 of each year. The interest payments are unconditional — they do not depend on the occurrence of any future event, the financial performance of OWS, or any other contingency. The interest is payable in cash at stated intervals that do not exceed one year (the payments are semi-annual). Accordingly, the stated interest of 2.75% constitutes "qualified stated interest" within the meaning of Treasury Regulation § 1.1273-1(c).

Under Treasury Regulation § 1.1275-5(a)(3), a debt instrument that provides for a single fixed rate of interest and meets the other requirements of the VRDI regulations is treated as a VRDI. Specifically, the regulation provides that a debt instrument issued with a single fixed rate of interest for its entire term qualifies as a VRDI if such interest is unconditionally payable in cash or in property (other than debt instruments of the issuer) at least annually. The Notes satisfy this requirement: the 2.75% fixed rate is unconditionally payable in cash semi-annually, and the Notes do not provide for any floating rate, variable rate, or other rate mechanism. There are no step-up or step-down provisions, no payment-in-kind features, and no deferral mechanisms that would cause the stated interest to fail to qualify under this provision.

Furthermore, because the Notes were issued at par (i.e., the issue price of $1,000 per Note equals the stated redemption price at maturity of $1,000 per Note), there is no OID on the Notes. The absence of OID simplifies the tax analysis considerably, as there is no need to accrue discount over the term of the Notes, and the stated interest of 2.75% per annum represents the entirety of the periodic income recognized by holders and the periodic deduction claimed by OWS.

We therefore conclude that, without regard to the conversion feature, the Notes satisfy the requirements for classification as VRDIs under Treasury Regulation § 1.1275-5(a)(3).

3. Treatment of the Conversion Feature. The holders' right to convert the Notes into shares of OWS common stock at a conversion rate of 10.5820 shares per $1,000 principal amount constitutes, in economic terms, a contingent payment — the amount and timing of any payment attributable to the conversion feature depend on the future price of OWS common stock and the holders' exercise decisions. If this conversion feature were treated as a contingent payment for purposes of Treasury Regulation § 1.1275-4, the Notes would be classified as CPDIs, with materially different tax consequences for both OWS and the holders.

However, Treasury Regulation § 1.1275-4(b)(9)(iv) provides that the conversion feature of a convertible debt instrument is not treated as a contingent payment that would cause the instrument to be a CPDI if two conditions are met:

(i) The instrument would be a VRDI without the conversion feature. As demonstrated in Section III.A.2 above, the Notes, without the conversion feature, would be a five-year, fixed-rate debt instrument bearing 2.75% stated interest per annum. Such an instrument qualifies as a VRDI under Treasury Regulation § 1.1275-5(a)(3). This condition is therefore satisfied.

(ii) The conversion right is not part of a larger transaction designed to achieve a result inconsistent with the purposes of the Treasury Regulations. There is no evidence that the conversion feature of the Notes is part of a tax-avoidance scheme or a structured transaction designed to circumvent the purposes of the CPDI or VRDI regulations. The Notes were offered in a conventional Rule 144A convertible debt offering to institutional investors, and the conversion feature serves a legitimate business purpose — it provides the Company with lower-cost financing (a 2.75% coupon, compared to the estimated 5.25%–5.50% coupon that would have been required on a comparable non-convertible senior unsecured note) and provides holders with equity upside. The conversion terms are market-standard for convertible debt offerings in the semiconductor sector. This condition is therefore satisfied.

Because both conditions are met, the conversion feature does not cause the Notes to be classified as CPDIs. The Notes are expected to be treated as VRDIs for U.S. federal income tax purposes, and the conversion feature is treated as a separate option held by the noteholders rather than as a contingent payment embedded in the debt instrument.

We note, for completeness, that if the Notes were classified as CPDIs (a position we do not expect the IRS to take), the tax consequences would be significantly different. OWS would be required to determine a "comparable yield" — the yield at which OWS could issue a comparable nonconvertible fixed-rate debt instrument — and a "projected payment schedule" that includes the projected value of the contingent payments (i.e., the conversion value). OID would accrue at the comparable yield, and OWS would be entitled to deduct such OID as it accrues (subject to Section 163(j)). Holders would include OID in income at the comparable yield and, upon conversion, would be required to recognize gain or loss based on the difference between the value of the stock received and the holder's adjusted tax basis in the Notes. Any gain recognized by a holder on the sale, exchange, or conversion of a CPDI would be treated as ordinary income to the extent of prior OID inclusions.

We do not expect CPDI treatment to apply, and our analysis throughout this memorandum proceeds on the assumption that the Notes are properly classified as VRDIs.

4. Effect of Make-Whole Adjustments and Anti-Dilution Adjustments. The Indenture provides for an increase in the conversion rate upon the occurrence of a Make-Whole Fundamental Change, pursuant to a customary make-whole table. In addition, the conversion rate is subject to standard anti-dilution adjustments for stock dividends, stock splits, distributions, and other customary corporate events.

Under Treasury Regulation § 1.1275-4(b)(9)(iv), adjustments to the conversion ratio that are based on changes in the stock price, corporate events, or fundamental changes are generally not treated as separate contingent payments that would convert the instrument into a CPDI, provided that the adjustments are of a customary nature. The make-whole adjustment in the Indenture is a standard feature of convertible debt instruments and is designed to compensate holders for the lost time value of the conversion option in the event of an early fundamental change — it is not an additional payment or a mechanism designed to circumvent the CPDI regulations.

Similarly, the anti-dilution adjustments are formulaic provisions that adjust the conversion rate to prevent dilution to holders from corporate events such as stock splits and dividends. These adjustments are universally present in convertible debt instruments and are not treated as contingent payments under the applicable regulations.

We note that certain types of anti-dilution adjustments may give rise to deemed distributions to holders under Section 305 of the Code (discussed briefly below in the context of holder-level consequences), but such adjustments do not alter the classification of the Notes as VRDIs.

Conclusion: The make-whole fundamental change adjustment and the anti-dilution adjustments do not alter the VRDI classification of the Notes.

5. Effect of the Optional Redemption Feature. OWS's right to redeem the Notes on or after June 6, 2026, for cash at 100% of the principal amount plus accrued and unpaid interest, subject to the satisfaction of a trading price condition ($122.85 per share for at least 20 of 30 consecutive trading days), is an issuer call option. Under Treasury Regulation § 1.1272-1(c), an issuer call option embedded in a debt instrument does not create contingent payment treatment. The redemption price is fixed at par plus accrued interest — there is no contingent component to the redemption payment itself. The trading price trigger is a condition to the exercise of the call, not a variable that affects the redemption price. Accordingly, the optional redemption feature is treated for tax purposes simply as a call option that may shorten the term of the Notes.

Under the OID regulations, when a debt instrument includes an issuer call option, the yield and maturity of the instrument are determined by reference to the payment schedule that minimizes the yield on the instrument (taking into account the call premium, if any). In this case, because the Notes were issued at par and are redeemable at par (plus accrued interest), the presence of the call option does not create OID regardless of whether the Notes are assumed to be held to maturity or redeemed at the earliest call date.

Conclusion: The optional redemption feature has no impact on the VRDI classification of the Notes and does not create OID.

6. Effect of the Fundamental Change Put. Holders of the Notes have the right to require OWS to repurchase the Notes at 100% of the principal amount plus accrued and unpaid interest upon the occurrence of a Fundamental Change. This is a holder put option that is triggered by the occurrence of specific events defined in the Indenture.

Under the Treasury Regulations, a holder's put right at par (plus accrued interest) does not produce OID or contingent payment issues. The put price is not contingent — it is fixed at 100% of the principal amount. The triggering events are corporate events (change of control, delisting, bankruptcy) that are standard in convertible debt instruments and are not designed to create a contingent payment structure.

Moreover, under Treasury Regulation § 1.1272-1(c), a holder put option is taken into account in determining the yield and maturity of a debt instrument only if, based on all the facts and circumstances as of the issue date, it is reasonably certain that the option will be exercised. Here, it is not reasonably certain as of the issue date that a Fundamental Change will occur during the term of the Notes, and therefore the put option is not assumed to be exercised for purposes of computing yield and OID.

Conclusion: The Fundamental Change put right has no impact on the VRDI classification of the Notes and does not create OID or contingent payment treatment.

B. Tax Consequences for OWS as Issuer

1. Interest Deductions. OWS may deduct the stated interest of 2.75% per annum on the Notes as it accrues, in accordance with its regular method of accounting (which is the accrual method). The total annual interest expense on the full $287,500,000 aggregate principal amount is $7,906,250 (calculated as $287,500,000 × 0.0275). This interest is payable semi-annually, with each semi-annual payment equal to $3,953,125.

Because the Notes were issued at par, there is no OID on the Notes, and OWS has no OID deduction. The stated interest of 2.75% represents the entirety of the periodic interest deduction available to OWS with respect to the Notes.

The deductibility of the interest expense is subject to the limitations imposed by Section 163(j) of the Code, which limits a taxpayer's deduction for "business interest expense" in any taxable year to the sum of (i) the taxpayer's "business interest income" for the year, (ii) 30% of the taxpayer's "adjusted taxable income" for the year (which, for taxable years beginning after December 31, 2021, is computed without adding back depreciation, amortization, or depletion — i.e., using an EBIT, rather than EBITDA, measure), and (iii) the taxpayer's floor plan financing interest for the year.

Based on publicly available financial information, OWS reported adjusted EBITDA of approximately $198,700,000 for the fiscal year ended December 31, 2022. While the Section 163(j) limitation is computed on the basis of adjusted taxable income (which may differ from adjusted EBITDA), the Company's earnings capacity appears to be substantially in excess of the anticipated annual interest expense on the Notes. We note, however, that the Section 163(j) limitation must be recalculated on an annual basis, and the Company's ability to fully deduct its interest expense in any given year will depend on its taxable income and other financial metrics for that year. Any disallowed business interest expense may generally be carried forward indefinitely to future taxable years.

2. Issuance — Section 1032. Under Section 1032(a) of the Code, no gain or loss is recognized by a corporation on the receipt of money or other property in exchange for stock (including treasury stock) of such corporation. This provision also applies to the issuance of debt instruments that are convertible into the issuer's stock, because the issuance of such instruments is treated as a transaction in the corporation's own stock (or rights to acquire its stock).

The issuance of the Notes by OWS in exchange for $287,500,000 in cash proceeds falls squarely within the scope of Section 1032. The Notes are convertible into shares of OWS common stock, and OWS received cash consideration in exchange for the Notes. Accordingly, OWS does not recognize any gain or loss upon the issuance of the Notes. This conclusion applies regardless of the ultimate tax classification of the Notes (whether as VRDIs, CPDIs, or otherwise).

Conclusion: OWS recognizes no gain or loss on the issuance of the Notes under Section 1032.

3. Conversion of Notes — Section 1032. Upon conversion of the Notes by a holder, OWS will deliver either (a) shares of OWS common stock (in a full physical settlement) or (b) cash in respect of the principal amount and shares of OWS common stock in respect of the conversion value in excess of the principal amount (in a net share settlement). In either case, the delivery of OWS common stock to the converting holder is a transaction in OWS's own stock, and Section 1032 applies to shield OWS from gain or loss recognition.

With respect to the cash component of a net share settlement, the payment of cash equal to the principal amount of the Notes being converted is treated as a retirement of the debt instrument at its face amount. Because the Notes were issued at par, and the cash payment upon conversion is equal to the principal amount ($1,000 per Note), the Notes are retired at their adjusted issue price, and no gain or loss is recognized by OWS.

In the event that Notes are retired for an amount in excess of their adjusted issue price (for example, if OWS were required to make a make-whole premium payment in cash), the excess would generally be deductible by OWS as a premium on the retirement of debt under Treasury Regulation § 1.163-4. Conversely, if the Notes were retired for an amount less than their adjusted issue price, OWS would recognize cancellation of debt income under Section 61(a)(12) of the Code. However, because the Notes are settled at principal amount in cash (with equity appreciation delivered in shares), neither of these scenarios is expected to arise in the ordinary course.

Conclusion: OWS recognizes no gain or loss upon the conversion of the Notes under Section 1032 (with respect to shares delivered) and recognizes no gain or loss on the cash component of a net share settlement (to the extent the cash payment equals the principal amount of the Notes).

4. Redemption. If OWS exercises its optional redemption right (available on or after June 6, 2026, subject to the trading price condition), it will pay cash equal to 100% of the principal amount of the redeemed Notes plus any accrued and unpaid interest to the redemption date. The accrued and unpaid interest will be deductible by OWS as an ordinary interest expense. The retirement of the Notes at par does not give rise to any gain, loss, or cancellation of debt income, because the redemption price equals the adjusted issue price of the Notes.

Conclusion: No gain or loss is recognized by OWS upon the optional redemption of the Notes at par plus accrued interest.

C. Tax Consequences for U.S. Holders of the Notes

The following is a brief summary of the expected U.S. federal income tax consequences for holders of the Notes who are U.S. persons for tax purposes and who hold the Notes as capital assets. This summary is provided for completeness and context; the primary focus of this memorandum is on the tax consequences for OWS as issuer.

1. Interest Income. A U.S. holder will include the stated interest of 2.75% per annum in gross income as ordinary income in accordance with the holder's regular method of accounting for federal income tax purposes (i.e., cash or accrual method). Because the Notes do not have OID, no OID inclusions are required.

2. Conversion. A U.S. holder who converts Notes into shares of OWS common stock should generally not recognize gain or loss upon conversion. This treatment is based on the application of the recapitalization rules under Sections 368(a)(1)(E) and 354 of the Code, which provide that an exchange of securities of a corporation for stock of the same corporation in a recapitalization is a tax-free exchange, provided the requirements of those sections are satisfied. Under this analysis, the holder's adjusted tax basis in the common stock received upon conversion will equal the holder's adjusted tax basis in the Notes surrendered (reduced by any basis allocable to a fractional share for which cash is received), and the holding period for the common stock will include the period during which the holder held the Notes.

Cash received in lieu of a fractional share of common stock upon conversion is treated as received in exchange for such fractional share, and the holder will recognize gain or loss equal to the difference between the cash received and the portion of the holder's adjusted tax basis in the Notes allocable to such fractional share.

Under the net share settlement method, a holder will receive cash in respect of the principal amount of the Notes converted and shares of OWS common stock in respect of the conversion value in excess of the principal amount. The cash received for the principal amount is treated as a payment in retirement of debt. The holder will recognize gain or loss on the cash component equal to the difference between the cash received and the holder's adjusted tax basis allocable to the principal component of the Notes. Any gain or loss on the cash component will be capital gain or loss (assuming the Notes are held as capital assets) and will be long-term capital gain or loss if the Notes have been held for more than one year at the time of conversion. The shares of common stock received in excess of the principal amount should generally be received tax-free under the recapitalization provisions, with a basis equal to their fair market value at the time of receipt.

3. Sale or Disposition. Upon a sale or other taxable disposition of the Notes, a U.S. holder will recognize gain or loss equal to the difference between the amount realized on the sale or disposition (excluding amounts attributable to accrued and unpaid interest, which are taxed as ordinary income) and the holder's adjusted tax basis in the Notes. Such gain or loss will be capital gain or loss if the Notes are held as capital assets, and will be long-term capital gain or loss if the Notes have been held for more than one year.

4. Make-Whole Payments / Increased Conversion Rate. An increase in the conversion rate of the Notes pursuant to a make-whole fundamental change may, depending on the circumstances, be treated as additional consideration received by the holder in connection with the conversion. The tax treatment of the increased conversion rate depends on whether the increase is treated as a payment of additional interest (in which case it would be ordinary income) or as a separate payment in respect of the conversion right (in which case it may be treated as a component of the conversion exchange). The treatment of make-whole adjustments under the Code is not entirely settled, and the IRS could take the position that the value of the additional shares received by reason of the make-whole adjustment is taxable to the holder as a separate payment. Holders should consult their own tax advisors regarding the tax treatment of any make-whole adjustment.

In addition, we note that certain anti-dilution adjustments (or the failure to make anti-dilution adjustments) may give rise to a deemed distribution to holders of the Notes under Section 305(c) of the Code. Such deemed distributions would be taxable as dividends to the extent of OWS's current and accumulated earnings and profits, and as a return of capital (or capital gain) thereafter. This analysis depends on the specific facts and circumstances of any adjustment (or failure to adjust) and is beyond the scope of this memorandum.

IV. Tax Treatment of the Capped Call Transactions

A. Characterization of the Capped Call Transactions

1. Overview. In connection with the offering of the Notes, OWS purchased capped call options from the Capped Call Counterparties — Ridgepoint (60% allocation) and Northvane (40% allocation). The total premium paid by OWS for the Capped Call Transactions was $28,750,000 ($17,250,000 to Ridgepoint and $11,500,000 to Northvane).

Each Capped Call Transaction entitles OWS to receive, upon exercise or settlement, shares of OWS common stock (or, at OWS's election or as otherwise provided in the ISDA Documentation, cash in lieu thereof) having a value equal to the appreciation in OWS common stock between the lower strike price (approximately $94.50 per share, equal to the initial conversion price of the Notes) and the upper strike price ($110.07 per share, the cap price). The economic effect of the Capped Call Transactions is to provide OWS with a hedge against the dilution that would otherwise result from the conversion of the Notes at stock prices between the conversion price and the cap price.

Economically, each Capped Call Transaction is equivalent to a "bull call spread" — a combination of a purchased call option with a strike price of approximately $94.50 per share and a written (sold) call option with a strike price of $110.07 per share. The purchased call provides OWS with upside participation above $94.50, while the written call caps OWS's participation at $110.07. The net effect is that OWS benefits from stock price appreciation between $94.50 and $110.07 — precisely the range in which the conversion feature of the Notes would otherwise cause dilution.

2. Integration Analysis — Separate Treatment vs. Integration with the Notes. The Question. A threshold question in the tax analysis of the Capped Call Transactions is whether the Capped Call Transactions should be integrated with the Notes for U.S. federal income tax purposes, or whether they should be treated as separate transactions. If the instruments are integrated, the combined instrument (Notes plus Capped Call Transactions) could be treated as a single convertible debt instrument with a higher effective conversion price of approximately $110.07 per share, which could affect the classification and tax treatment of the combined instrument. If the instruments are treated separately, each is analyzed on its own terms — the Notes as VRDIs (as discussed in Section III above) and the Capped Call Transactions as equity-linked derivative contracts.

The Integration Doctrine. Under general principles of federal income tax law, the IRS and the courts have the authority to integrate or combine nominally separate instruments or transactions that are part of a single plan or arrangement if the economic substance of the combined transaction differs materially from the separate treatment of each instrument standing alone. The integration doctrine has been applied in various contexts, including the combination of debt instruments with hedging contracts, the combination of stock with forward contracts, and the combination of puts and calls that replicate a forward sale.

However, the integration doctrine is applied on a case-by-case basis, and the IRS has generally respected the separate characterization of instruments that are separately documented, involve different counterparties, and have independent economic substance. In the specific context of convertible debt offerings with concurrent capped call transactions, the IRS has not issued definitive guidance mandating integration, and market practice overwhelmingly treats the capped call as a separate instrument.

Analysis Favoring Separate Treatment. Several factors strongly support the separate treatment of the Capped Call Transactions from the Notes:

Separate Documentation. The Capped Call Transactions are documented under 2002 ISDA Master Agreements and related Confirmations — a documentation framework entirely separate from the Indenture governing the Notes. The ISDA Documentation is a standardized derivatives framework governed by its own terms and conditions, including netting provisions, termination events, and credit support arrangements that are distinct from the terms of the Notes.

Different Counterparties. The Capped Call Counterparties (Ridgepoint and Northvane) are derivatives dealers acting in their principal capacity. They are not holders of the Notes. The holders of the Notes are qualified institutional buyers who purchased the Notes in the secondary market from the initial purchasers. There is no privity of contract between the Capped Call Counterparties (in their capacity as counterparties to the capped calls) and the noteholders, and the noteholders have no rights under the Capped Call Transactions.

Independent Economic Substance. The Capped Call Transactions have independent economic substance. OWS paid arm's-length premiums totaling $28,750,000 for the capped calls, which provide OWS with a genuine economic benefit — the ability to hedge dilution between $94.50 and $110.07 per share. The premium amount was independently negotiated between OWS and the Capped Call Counterparties based on prevailing option pricing models, implied volatilities, and other market factors. The Capped Call Transactions have their own risk profile (OWS bears the risk that the capped calls expire worthless if the stock price remains below the lower strike price) and their own settlement mechanics.

Regulatory and Market Precedent. IRS Notice 2002-36, while not directly on point (it addresses the application of the economic substance doctrine to certain tax-motivated transactions involving convertible debt), reflects the IRS's general approach to analyzing related-but-separate instruments. Case law has generally respected the separate characterization of capped call overlays entered into in connection with convertible note offerings when the capped calls are separately documented and have independent economic terms. Market practice in the convertible debt market has consistently treated capped calls as separate instruments, and the tax disclosure in offering memoranda for convertible notes universally describes the capped calls as separate transactions.

Tax Disclosure. The Offering Memorandum for the Notes describes the tax treatment of the Capped Call Transactions as separate prepaid forward contracts, consistent with the analysis in this memorandum. While the tax disclosure in an offering memorandum is not binding on the IRS, it reflects the Company's intended tax position and is consistent with the position taken by substantially all issuers of convertible debt with concurrent capped call transactions.

Analysis That Might Support Integration. We acknowledge that certain factors could, in theory, be cited in support of integration:

Concurrence. The Capped Call Transactions were entered into concurrently with, and as a condition to, the pricing and issuance of the Notes. The Offering Memorandum describes the Capped Call Transactions as being entered into "in connection with" the offering of the Notes.

Cross-References. The terms of the Capped Call Transactions directly reference the Notes' conversion price (as the lower strike price) and the Notes' maturity date (as the expiration date). The Capped Call Transactions are designed to dovetail with the Notes' conversion terms.

Combined Economic Effect. Some commentators have argued that the combined economic effect of a convertible note plus a capped call is equivalent to a convertible note with a higher effective conversion price. Under this view, the "true" conversion price of the combined instrument is $110.07 per share (the cap price), not $94.50 per share (the initial conversion price of the Notes standing alone). If the combined instrument were treated as a single convertible note, the tax analysis could differ.

Conclusion. On balance, the factors favoring separate treatment substantially outweigh the factors that might support integration. The Capped Call Transactions are separately documented, involve different counterparties from the noteholders, have independent economic substance, and are consistent with established market practice. There is no IRS guidance or case law that would mandate integration of separately documented capped call transactions with convertible notes in these circumstances. Accordingly, the Capped Call Transactions should be respected as separate transactions from the Notes for U.S. federal income tax purposes. This is the position expected to be taken by OWS on its federal income tax returns, and it is consistent with the tax treatment described in the Offering Memorandum.

We further note that even if the IRS were to integrate the Notes and the Capped Call Transactions, the combined instrument would likely still be treated as a VRDI (or, at worst, as a conventional convertible debt instrument with a higher conversion price), and the conversion feature of the combined instrument would still qualify for the exception from CPDI treatment under Treasury Regulation § 1.1275-4(b)(9)(iv). Integration would not create OID (because the combined instrument would still be treated as issued at par for the principal amount of the Notes), and the interest deductions would remain unchanged. Accordingly, while we believe separate treatment is the correct and more supportable position, integration would not produce a materially adverse tax result for OWS.

3. Treatment as Prepaid Forward Contracts. Assuming the Capped Call Transactions are respected as separate instruments (as we expect), the Capped Call Transactions are properly characterized as prepaid forward contracts (or, equivalently, purchased options) on OWS common stock. OWS paid an upfront premium ($17,250,000 to Ridgepoint; $11,500,000 to Northvane; total $28,750,000) and will receive, upon settlement, delivery of shares of OWS common stock (or cash) based on the spread between the lower strike price and the upper strike price.

Under general tax principles, the premium paid by OWS for the Capped Call Transactions is not currently deductible as a business expense. The premium is a capital expenditure — the cost of acquiring an option or forward contract — and is capitalized by OWS as its basis in the Capped Call Transactions. The premium is not an expense of the type described in Section 162 of the Code (ordinary and necessary business expenses), nor is it interest expense or any other currently deductible item.

Upon settlement or expiration of the Capped Call Transactions, the tax consequences depend on the price of OWS common stock at the time of settlement, subject to the application of Section 1032 (discussed in Section IV.B below):

Stock Price Below the Lower Strike (~$94.50 per share). If the price of OWS common stock is below the lower strike price at the expiration of the Capped Call Transactions, the capped calls expire worthless, and OWS recognizes a loss equal to the total premium paid ($28,750,000, or the applicable portion thereof). However, as discussed below, Section 1032 may apply to deny recognition of this loss (because the capped calls relate to OWS's own stock), in which case the loss would not be recognized. This is the expected treatment.

Stock Price Between the Lower Strike (~$94.50) and the Upper Strike ($110.07). If the price of OWS common stock at settlement is between the lower strike price and the upper strike price, OWS receives shares (or cash) with a value equal to the spread between the stock price and the lower strike price, multiplied by the number of shares covered by the Capped Call Transactions. Gain or loss would ordinarily be measured as the difference between the settlement value received and OWS's basis (the premium paid), but Section 1032 would apply to deny recognition of any gain or loss.

Stock Price Above the Upper Strike ($110.07). If the price of OWS common stock at settlement exceeds the upper strike price, OWS receives the maximum payout under the Capped Call Transactions — an amount equal to the difference between the upper strike price and the lower strike price ($110.07 − $94.50 = $15.57 per share), multiplied by the number of shares covered. Again, any gain would not be recognized under Section 1032.

B. Section 1032 Analysis — Capped Call Transactions

1. Issue. Section 1032 of the Code provides that a corporation does not recognize gain or loss on transactions in its own stock. The question presented is whether Section 1032 applies to OWS's purchase and settlement of the Capped Call Transactions, which are capped call options on OWS common stock.

2. Analysis. The Capped Call Transactions are derivative contracts that reference OWS common stock as the underlying asset. Upon settlement, OWS will receive (or may receive) shares of its own common stock, or cash in an amount determined by reference to the price of its own common stock. The Capped Call Transactions are therefore "transactions in the corporation's own stock" within the meaning of Section 1032.

Treasury Regulation § 1.1032-3 provides specific rules for the application of Section 1032 to a corporation's forward contracts, options, and similar transactions with respect to its own stock. Under these regulations, a corporation that enters into a "forward contract" (defined broadly to include futures contracts, forward contracts, and options) with respect to its own stock does not recognize gain or loss upon the settlement of the contract, regardless of whether the contract is settled by delivery of the corporation's stock or by cash payment.

Revenue Ruling 2003-97 confirms that Section 1032 applies to a corporation's purchase of call options on its own stock. In that ruling, the IRS held that a corporation that purchased a call option on its own stock and subsequently exercised the option (receiving its own stock) did not recognize gain or loss on the transaction under Section 1032. The ruling also addressed the premium paid for the option, concluding that the premium was treated as an equity-related cost that was not separately deductible.

Applying these authorities to the Capped Call Transactions, OWS's purchase of capped call options on its own common stock is a transaction in OWS's own stock. Upon settlement — whether OWS receives shares of its own stock or cash determined by reference to the price of its own stock — Section 1032 applies to deny recognition of gain or loss. If the capped calls expire worthless, the loss of the premium is similarly not recognized (because the expiration of an option on the corporation's own stock is a closing of the transaction in the corporation's own stock, governed by Section 1032).

Conclusion: Section 1032 applies to the Capped Call Transactions. OWS should not recognize gain or loss upon settlement, exercise, or expiration of the Capped Call Transactions, whether settled in stock or cash, to the extent the settlement relates to OWS common stock.

3. Treatment of the Capped Call Premium. The total premium of $28,750,000 paid by OWS for the Capped Call Transactions ($17,250,000 to Ridgepoint and $11,500,000 to Northvane) is treated as a cost related to a transaction in OWS's own stock under Section 1032 and the related Treasury Regulations. Because Section 1032 governs the entire transaction, the premium is treated as an equity transaction cost — a reduction to the equity accounts of OWS — rather than as a deductible expense or as an element of the cost basis of a separate asset.

For financial accounting purposes, under ASC 470-20 (as amended by ASU 2020-06, which became effective for OWS for fiscal years beginning after December 15, 2021), the cost of the Capped Call Transactions is recorded as a reduction to additional paid-in capital ("APIC") on OWS's balance sheet, net of the income tax effect. The tax treatment is consistent with the accounting treatment: the $28,750,000 premium is not deductible as a current expense, is not amortizable over the life of the capped calls, and does not create OID or affect the yield on the Notes. The premium is treated purely as an equity-related expenditure.

We emphasize that this means the $28,750,000 cost of the Capped Call Transactions will not provide OWS with any current or future tax benefit (other than as a component of OWS's equity accounts). This is a permanent difference for tax purposes — the premium is a non-deductible cost that is never recovered through deductions or recognized losses. The Company's tax team and financial reporting team should ensure that this permanent difference is properly reflected in the Company's tax provision and deferred tax calculations.

C. Constructive Sale Analysis — Section 1259

1. Issue. Section 1259 of the Code treats certain transactions as "constructive sales" of appreciated financial positions. If a constructive sale occurs, the taxpayer is treated as having sold and immediately reacquired the appreciated financial position at its fair market value, and the taxpayer recognizes gain as if the position had actually been sold. The question presented is whether OWS's entry into the Capped Call Transactions constitutes a constructive sale of OWS's interest in its own common stock.

2. Application of Section 1259. Section 1259(a) provides that a taxpayer shall recognize gain (as if the position had been sold, assigned, or otherwise terminated at its fair market value on the date of the constructive sale) if the taxpayer holds an "appreciated financial position" with respect to any stock, debt instrument, or partnership interest and enters into one of the following transactions:

(i) a short sale of the same or substantially identical property;

(ii) an offsetting notional principal contract with respect to the same or substantially identical property;

(iii) a futures or forward contract to deliver the same or substantially identical property; or

(iv) any other transaction that the Secretary may identify by regulation as having substantially the same effect as the foregoing.

Key Point: OWS Does Not Hold an "Appreciated Financial Position" in Its Own Stock. The critical threshold requirement of Section 1259 is that the taxpayer must hold an "appreciated financial position" in "property." Under Section 1259(b)(1), an "appreciated financial position" means any position with respect to any stock, debt instrument, or partnership interest if there would be gain were the position sold, assigned, or otherwise terminated at its fair market value on the date of the determination.

OWS, as the issuer of its own common stock, does not hold an "appreciated financial position" in its own common stock within the meaning of Section 1259. A corporation's own unissued shares or treasury shares do not constitute "property" of the corporation for purposes of Section 1259. A corporation's "position" in its own stock is fundamentally different from an investor's position in the stock of another entity — when a corporation issues its own stock, it is not disposing of "property" but rather creating a new equity interest. This principle is consistent with Section 1032, which provides that a corporation does not recognize gain or loss on transactions in its own stock, and reflects the fundamental tax concept that a corporation cannot realize income from dealing in its own shares.

The Capped Call Transactions Are Purchased Options, Not Short Sales or Forwards. Even if Section 1259 could theoretically apply to a corporation's transactions in its own stock (which we believe it cannot)

CALDERWOOD & HARKNESS LLP Counselors at Law
600 Lexington Avenue, 30th Floor New York, New York 10022 Telephone: (212) 558-4000 Facsimile: (212) 558-3588 www.calderwoodharkness.com
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Optiwave Semiconductor Corp.
Attention: David Shih, General Counsel & Corporate Secretary
Priya Nandakumar, Chief Financial Officer Rachel Fontaine, Treasurer
FROM: Leonard Cross, Partner — Tax, Calderwood & Harkness LLP
CC: Jennifer Kwon, Responsible Partner, Capital Markets, Calderwood & Harkness LLP Claire Dempsey, Lead Associate, Capital Markets, Calderwood & Harkness LLP
DATE: May 29, 2023
RE: U.S. Federal Income Tax Treatment of the 2.75% Convertible Senior Notes due 2028 and the Capped Call Transactions
C&H Matter No.: 1014-00001
Billing Code: 48710-001
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I. Executive Summary
This memorandum sets forth the analysis and conclusions of Calderwood & Harkness LLP ("C&H" or "we") regarding the expected United States federal income tax treatment of (a) the $287,500,000 aggregate principal amount of 2.75% Convertible Senior Notes due 2028 (the "Notes") issued by Optiwave Semiconductor Corp. ("OWS" or the "Company"), a Delaware corporation (EIN 82-4917263), whose common stock is listed on The Nasdaq Global Select Market under the ticker symbol "OWS," and (b) the concurrent capped call transactions (the "Capped Call Transactions") entered into by OWS with Ridgepoint Capital Markets LLC ("Ridgepoint") and Northvane Financial Products LP ("Northvane," and together with Ridgepoint, the "Capped Call Counterparties"). This memorandum has been prepared at the request of the Company's legal and finance teams in connection with the Company's offering and sale of the Notes pursuant to a Rule 144A offering and the simultaneous execution of the Capped Call Transactions.
Our principal conclusions, each of which is discussed in greater detail in the sections that follow, are as follows:
Classification of the Notes. The Notes are expected to be treated as "variable rate debt instruments" ("VRDIs") under Treasury Regulation § 1.1275-5 for U.S. federal income tax purposes. Although the conversion feature of the Notes technically constitutes a contingent payment, the applicable Treasury Regulations provide that a conversion feature of the type embedded in the Notes does not cause the Notes to be classified as "contingent payment debt instruments" ("CPDIs") under Treasury Regulation § 1.1275-4. The alternative characterization of the Notes as CPDIs is discussed in detail herein but is not expected to apply.
Characterization of the Capped Call Transactions. The Capped Call Transactions are expected to be treated as separate prepaid forward contracts on OWS common stock for U.S. federal income tax purposes, and are not expected to be integrated with the Notes for tax purposes. In the alternative, even if the Capped Call Transactions were integrated with the Notes, such integration would not alter the VRDI treatment of the Notes. The Capped Call Transactions are separately documented under 2002 ISDA Master Agreements and related Confirmations with counterparties that are distinct from the holders of the Notes, and have independent economic substance.
Section 1032 — No Gain or Loss on Issuance. OWS should not recognize gain or loss on the issuance of the Notes or on the entry into and settlement of the Capped Call Transactions under Section 1032 of the Internal Revenue Code of 1986, as amended (the "Code"). Section 1032 shields a corporation from the recognition of gain or loss on transactions in its own stock, including the issuance of debt instruments that are convertible into the corporation's stock and the entry into forward contracts and options referencing the corporation's own equity.
Section 1259 — No Constructive Sale. The Capped Call Transactions should not give rise to a constructive sale of OWS common stock under Section 1259 of the Code. OWS, as the issuer of its own common stock, does not hold an "appreciated financial position" in its own equity for purposes of Section 1259, and the structure of the Capped Call Transactions (as purchased options) does not implicate the constructive sale rules.
Interest Deductibility. OWS should be entitled to deduct the 2.75% per annum stated interest on the Notes as it accrues, subject to the limitations imposed by Section 163(j) of the Code on business interest expense. No original issue discount ("OID") arises on the Notes because they were issued at par.
Important Caveats. This memorandum addresses only the U.S. federal income tax consequences of the Notes and the Capped Call Transactions. We do not address state, local, or foreign income tax consequences, and the Company is encouraged to consult with its state and local tax advisors, particularly with respect to California income tax matters. This analysis does not constitute a formal tax opinion letter delivered pursuant to Treasury Department Circular 230. Rather, it represents a reasoned memorandum of counsel's views provided for the Company's internal use. No ruling has been sought or will be sought from the Internal Revenue Service (the "IRS") with respect to any of the matters discussed herein, and no assurance can be given that the IRS would agree with the conclusions expressed in this memorandum.
In preparing this memorandum, we have reviewed and relied upon the following principal documents:
(i) the Final Offering Memorandum dated May 24, 2023, relating to the offering and sale of the Notes (the "Offering Memorandum");
(ii) the Indenture, dated as of May 30, 2023 (the "Indenture"), between OWS and Broadmere Trust Company, N.A., as trustee (the "Trustee");
(iii) the 2002 ISDA Master Agreements and related Confirmations, each dated as of May 30, 2023, between OWS and each of Ridgepoint and Northvane (collectively, the "ISDA Documentation"); and
(iv) such other documents, instruments, certificates, and materials as we have deemed relevant or necessary for the purposes of the analysis set forth herein.
We have assumed, without independent verification, the authenticity, accuracy, and completeness of all documents and instruments reviewed, the genuineness of all signatures, and the conformity to originals of all copies examined.
II. Background and Transaction Description
A. The Notes
Issuer. Optiwave Semiconductor Corp. is a Delaware corporation and a fabless semiconductor company that designs and markets high-performance photonic and radio frequency integrated circuits for telecommunications, data center, and industrial applications. OWS is headquartered at 4800 Great America Parkway, Suite 1200, San Jose, California 95054. The Company's common stock, par value $0.001 per share, is listed and traded on The Nasdaq Global Select Market under the ticker symbol "OWS." The Company's employer identification number is 82-4917263.
Instrument and Aggregate Principal Amount. The Notes are designated as the 2.75% Convertible Senior Notes due 2028. The aggregate principal amount of the Notes is $287,500,000, consisting of a base offering of $250,000,000 aggregate principal amount plus an additional $37,500,000 aggregate principal amount issued upon the full exercise by the initial purchasers of their over-allotment option. The Notes are senior unsecured obligations of the Company, ranking equally in right of payment with all of the Company's existing and future senior unsecured indebtedness and senior in right of payment to all of the Company's existing and future subordinated indebtedness.
Offering. The Notes were offered and sold in a private placement pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), to qualified institutional buyers ("QIBs") as defined in Rule 144A. No registration statement was filed with the Securities and Exchange Commission (the "SEC") in connection with the offering, and no registration rights have been granted to holders of the Notes. The initial purchasers of the Notes were Ridgepoint Capital Markets LLC and Northvane Securities LLC (an affiliate of Northvane Financial Products LP), each acting in its capacity as initial purchaser.
Coupon. The Notes bear interest at a rate of 2.75% per annum. Interest is payable semi-annually in arrears on June 1 and December 1 of each year, commencing December 1, 2023. Interest is computed on the basis of a 360-day year consisting of twelve 30-day months.
Maturity. The Notes will mature on June 1, 2028, unless earlier converted, redeemed, or repurchased.
Conversion Rights. The Notes are convertible into shares of OWS common stock at the option of the holders, subject to the terms and conditions set forth in the Indenture. The initial conversion rate is 10.5820 shares of OWS common stock per $1,000 principal amount of Notes, which corresponds to an initial conversion price of approximately $94.50 per share (calculated as $1,000 ÷ 10.5820). The initial conversion price represents a premium of approximately 28.8% over the reference price of $73.38 per share, which was the closing price of OWS common stock on The Nasdaq Global Select Market on May 23, 2023, the date on which pricing of the Notes was determined. The conversion rate is subject to customary anti-dilution adjustments as described in the Indenture for stock dividends, stock splits, distributions, and certain other events. The maximum number of shares of OWS common stock issuable upon conversion of all outstanding Notes (based on the initial conversion rate) is approximately 3,042,325 shares.
Net Share Settlement. The Company has elected to settle conversions of the Notes using the net share settlement method. Under this method, upon conversion, the Company will satisfy the conversion obligation by paying cash in an amount equal to the aggregate principal amount of the Notes being converted (or, if less, the conversion value attributable to the principal amount), and by delivering shares of OWS common stock in respect of the conversion value, if any, in excess of the aggregate principal amount. This settlement method is consistent with the Company's desire to limit share dilution.
Optional Redemption. The Notes are not redeemable by the Company at its option prior to June 6, 2026. On or after June 6, 2026, the Company may redeem the Notes, in whole or in part, for cash at a price equal to 100% of the principal amount of the Notes to be redeemed plus any accrued and unpaid interest thereon to, but excluding, the redemption date, provided that the last reported sale price of OWS common stock has exceeded 130% of the then-applicable conversion price (initially, $94.50 × 1.30 = $122.85 per share) for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company delivers the notice of redemption.
Fundamental Change Put Right. If a "Fundamental Change" (as defined in the Indenture) occurs, holders of the Notes will have the right to require the Company to repurchase all or any portion of their Notes at a price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest thereon to, but excluding, the Fundamental Change repurchase date. A Fundamental Change includes, among other events, a change of control, a delisting of the Company's common stock from The Nasdaq Global Select Market (or any successor exchange), or certain bankruptcy events.
Make-Whole Fundamental Change Adjustment. If a "Make-Whole Fundamental Change" (as defined in the Indenture) occurs prior to the maturity date, the conversion rate applicable to Notes that are converted in connection with such event will be increased by a number of additional shares as set forth in the make-whole table contained in the Indenture. The purpose of the make-whole adjustment is to compensate holders for the lost time value of the conversion option in the event of an early fundamental change.
Anti-Dilution Adjustments. The conversion rate is subject to standard adjustments upon the occurrence of certain events, including: (i) the issuance of stock dividends and distributions payable in shares of OWS common stock; (ii) stock splits and reverse stock splits; (iii) distributions to holders of common stock of rights, options, or warrants; (iv) distributions of assets, evidences of indebtedness, or other property; (v) certain cash dividends; and (vi) certain self-tender or exchange offers.
CUSIP and ISIN. The Notes have been assigned CUSIP number 683742AA5 and ISIN number US683742AA53.
Governing Law and Trustee. The Indenture is governed by the laws of the State of New York. Broadmere Trust Company, N.A. serves as trustee under the Indenture.
B. The Capped Call Transactions
Purpose. Concurrently with the pricing of the Notes, OWS entered into the Capped Call Transactions with the Capped Call Counterparties. The purpose of the Capped Call Transactions is to offset the potential dilution to OWS common stock upon any conversion of the Notes or, in the case of net share settlement, to offset cash payments that OWS would be required to make in excess of the aggregate principal amount of the Notes upon conversion.
Counterparties and Allocation. The Capped Call Transactions were allocated between the two Capped Call Counterparties as follows:
Ridgepoint acted in its principal capacity (and not as agent for any other party) in entering into the Capped Call Transactions. Northvane Financial Products LP is a CFTC-registered swap dealer, regulated by the Commodity Futures Trading Commission.
Economic Terms. Each Capped Call Transaction is a capped call option on OWS common stock with the following material terms:
Lower Strike Price (Capped Call Strike Price): The lower strike price is equal to the initial conversion price of the Notes, which is approximately $94.50 per share. This price is subject to adjustment in a manner corresponding to the anti-dilution adjustments applicable to the Notes under the Indenture.
Upper Strike Price (Cap Price): The upper strike price, or cap price, is $110.07 per share, which represents a premium of approximately 50.0% over the reference price of $73.38 per share (the closing price of OWS common stock on May 23, 2023). The cap price is also subject to certain adjustments.
Effective Conversion Price with Capped Calls: Taking into account the Capped Call Transactions, the effective conversion price of the Notes is increased to approximately $110.07 per share. At stock prices below the cap price, the payoff under the Capped Call Transactions offsets the dilution that would otherwise result from conversions of the Notes, such that OWS experiences no net dilution at stock prices between the conversion price and the cap price. At stock prices above the cap price, OWS will experience dilution with respect to the excess of the stock price over the cap price.
Expiration. The Capped Call Transactions expire on June 1, 2028, coinciding with the stated maturity date of the Notes. The Capped Call Transactions are subject to earlier exercise or termination upon the occurrence of certain events, including the conversion of the corresponding Notes, certain corporate transactions involving OWS, and certain nationalization, insolvency, or delisting events specified in the ISDA Documentation.
Documentation. The Capped Call Transactions are documented pursuant to separate 2002 ISDA Master Agreements and related Confirmations, each dated May 30, 2023, between OWS and the respective Capped Call Counterparty. Each ISDA Master Agreement and Confirmation is governed by the laws of the State of New York.
Regulatory Status. Northvane Financial Products LP is registered as a swap dealer with the CFTC. The Capped Call Transactions are "security-based swap agreements" for purposes of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The regulatory characterization does not affect the federal income tax analysis set forth in this memorandum.
C. Use of Proceeds
The gross proceeds from the offering of the Notes were $287,500,000. The Company applied such proceeds as follows:
Of the net proceeds, the Company intends to use approximately $75,000,000 to repay borrowings outstanding under its $300,000,000 senior secured revolving credit facility (the "Revolver") with Crestline National Bank, N.A. as administrative agent. The remaining net proceeds will be used for general corporate purposes, which may include working capital, capital expenditures, and potential acquisitions.
III. Tax Treatment of the Notes
A. Classification of the Notes — Variable Rate Debt Instrument vs. Contingent Payment Debt Instrument
1. Overview of Applicable Regulations. The U.S. federal income tax treatment of the Notes depends, in the first instance, on the proper classification of the Notes under the Treasury Regulations governing debt instruments. Two principal regulatory regimes are potentially applicable:
Contingent Payment Debt Instruments (CPDIs). Treasury Regulation § 1.1275-4 governs the tax treatment of debt instruments that provide for one or more contingent payments. A debt instrument provides for a contingent payment if a payment is based, in whole or in part, on the occurrence of a future event that is not fixed at the time the instrument is issued. If a debt instrument is classified as a CPDI, the tax treatment for both the issuer and the holders is significantly more complex: OID is computed based on a "comparable yield" (a hypothetical yield on a comparable fixed-rate nonconvertible debt instrument), and holders are required to accrue OID at the comparable yield regardless of the actual payments received. Gain on the sale or disposition of a CPDI is generally treated as ordinary income.
Variable Rate Debt Instruments (VRDIs). Treasury Regulation § 1.1275-5 provides a safe harbor for debt instruments that bear one or more "qualified floating rates" or a single fixed rate (or a combination thereof) and meet certain other requirements. A VRDI is excluded from the CPDI rules, and its tax treatment is generally more straightforward: stated interest is treated as ordinary income to the holder and deductible by the issuer, and gain or loss on sale or disposition is generally capital in nature (assuming the instrument is held as a capital asset).
The classification of the Notes turns on whether the conversion feature — which permits holders to convert the Notes into shares of OWS common stock — constitutes a "contingent payment" that triggers CPDI treatment, or whether the conversion feature is excluded from the CPDI rules under the applicable Treasury Regulation exceptions.
Treasury Regulation § 1.1275-4(b)(9)(iv) addresses the treatment of conversion features in convertible debt instruments. Under this regulation, a holder's option to convert a debt instrument into the stock of the issuer (or a related party) is not treated as a contingent payment if the debt instrument would be a VRDI (or would otherwise be excluded from CPDI treatment) without the conversion feature, and the conversion right is not part of a larger transaction designed to achieve a result that is inconsistent with the purposes of the regulations. This provision reflects the Treasury's recognition that a conventional embedded conversion feature in a debt instrument should not, standing alone, trigger the complex CPDI regime.
2. Analysis — Fixed Rate Qualifies as Qualified Stated Interest / Single Fixed Rate. The Notes bear interest at a single fixed rate of 2.75% per annum, payable semi-annually in arrears on June 1 and December 1 of each year. The interest payments are unconditional — they do not depend on the occurrence of any future event, the financial performance of OWS, or any other contingency. The interest is payable in cash at stated intervals that do not exceed one year (the payments are semi-annual). Accordingly, the stated interest of 2.75% constitutes "qualified stated interest" within the meaning of Treasury Regulation § 1.1273-1(c).
Under Treasury Regulation § 1.1275-5(a)(3), a debt instrument that provides for a single fixed rate of interest and meets the other requirements of the VRDI regulations is treated as a VRDI. Specifically, the regulation provides that a debt instrument issued with a single fixed rate of interest for its entire term qualifies as a VRDI if such interest is unconditionally payable in cash or in property (other than debt instruments of the issuer) at least annually. The Notes satisfy this requirement: the 2.75% fixed rate is unconditionally payable in cash semi-annually, and the Notes do not provide for any floating rate, variable rate, or other rate mechanism. There are no step-up or step-down provisions, no payment-in-kind features, and no deferral mechanisms that would cause the stated interest to fail to qualify under this provision.
Furthermore, because the Notes were issued at par (i.e., the issue price of $1,000 per Note equals the stated redemption price at maturity of $1,000 per Note), there is no OID on the Notes. The absence of OID simplifies the tax analysis considerably, as there is no need to accrue discount over the term of the Notes, and the stated interest of 2.75% per annum represents the entirety of the periodic income recognized by holders and the periodic deduction claimed by OWS.
We therefore conclude that, without regard to the conversion feature, the Notes satisfy the requirements for classification as VRDIs under Treasury Regulation § 1.1275-5(a)(3).
3. Treatment of the Conversion Feature. The holders' right to convert the Notes into shares of OWS common stock at a conversion rate of 10.5820 shares per $1,000 principal amount constitutes, in economic terms, a contingent payment — the amount and timing of any payment attributable to the conversion feature depend on the future price of OWS common stock and the holders' exercise decisions. If this conversion feature were treated as a contingent payment for purposes of Treasury Regulation § 1.1275-4, the Notes would be classified as CPDIs, with materially different tax consequences for both OWS and the holders.
However, Treasury Regulation § 1.1275-4(b)(9)(iv) provides that the conversion feature of a convertible debt instrument is not treated as a contingent payment that would cause the instrument to be a CPDI if two conditions are met:
(i) The instrument would be a VRDI without the conversion feature. As demonstrated in Section III.A.2 above, the Notes, without the conversion feature, would be a five-year, fixed-rate debt instrument bearing 2.75% stated interest per annum. Such an instrument qualifies as a VRDI under Treasury Regulation § 1.1275-5(a)(3). This condition is therefore satisfied.
(ii) The conversion right is not part of a larger transaction designed to achieve a result inconsistent with the purposes of the Treasury Regulations. There is no evidence that the conversion feature of the Notes is part of a tax-avoidance scheme or a structured transaction designed to circumvent the purposes of the CPDI or VRDI regulations. The Notes were offered in a conventional Rule 144A convertible debt offering to institutional investors, and the conversion feature serves a legitimate business purpose — it provides the Company with lower-cost financing (a 2.75% coupon, compared to the estimated 5.25%–5.50% coupon that would have been required on a comparable non-convertible senior unsecured note) and provides holders with equity upside. The conversion terms are market-standard for convertible debt offerings in the semiconductor sector. This condition is therefore satisfied.
Because both conditions are met, the conversion feature does not cause the Notes to be classified as CPDIs. The Notes are expected to be treated as VRDIs for U.S. federal income tax purposes, and the conversion feature is treated as a separate option held by the noteholders rather than as a contingent payment embedded in the debt instrument.
We note, for completeness, that if the Notes were classified as CPDIs (a position we do not expect the IRS to take), the tax consequences would be significantly different. OWS would be required to determine a "comparable yield" — the yield at which OWS could issue a comparable nonconvertible fixed-rate debt instrument — and a "projected payment schedule" that includes the projected value of the contingent payments (i.e., the conversion value). OID would accrue at the comparable yield, and OWS would be entitled to deduct such OID as it accrues (subject to Section 163(j)). Holders would include OID in income at the comparable yield and, upon conversion, would be required to recognize gain or loss based on the difference between the value of the stock received and the holder's adjusted tax basis in the Notes. Any gain recognized by a holder on the sale, exchange, or conversion of a CPDI would be treated as ordinary income to the extent of prior OID inclusions.
We do not expect CPDI treatment to apply, and our analysis throughout this memorandum proceeds on the assumption that the Notes are properly classified as VRDIs.
4. Effect of Make-Whole Adjustments and Anti-Dilution Adjustments. The Indenture provides for an increase in the conversion rate upon the occurrence of a Make-Whole Fundamental Change, pursuant to a customary make-whole table. In addition, the conversion rate is subject to standard anti-dilution adjustments for stock dividends, stock splits, distributions, and other customary corporate events.
Under Treasury Regulation § 1.1275-4(b)(9)(iv), adjustments to the conversion ratio that are based on changes in the stock price, corporate events, or fundamental changes are generally not treated as separate contingent payments that would convert the instrument into a CPDI, provided that the adjustments are of a customary nature. The make-whole adjustment in the Indenture is a standard feature of convertible debt instruments and is designed to compensate holders for the lost time value of the conversion option in the event of an early fundamental change — it is not an additional payment or a mechanism designed to circumvent the CPDI regulations.
Similarly, the anti-dilution adjustments are formulaic provisions that adjust the conversion rate to prevent dilution to holders from corporate events such as stock splits and dividends. These adjustments are universally present in convertible debt instruments and are not treated as contingent payments under the applicable regulations.
We note that certain types of anti-dilution adjustments may give rise to deemed distributions to holders under Section 305 of the Code (discussed briefly below in the context of holder-level consequences), but such adjustments do not alter the classification of the Notes as VRDIs.
Conclusion: The make-whole fundamental change adjustment and the anti-dilution adjustments do not alter the VRDI classification of the Notes.
5. Effect of the Optional Redemption Feature. OWS's right to redeem the Notes on or after June 6, 2026, for cash at 100% of the principal amount plus accrued and unpaid interest, subject to the satisfaction of a trading price condition ($122.85 per share for at least 20 of 30 consecutive trading days), is an issuer call option. Under Treasury Regulation § 1.1272-1(c), an issuer call option embedded in a debt instrument does not create contingent payment treatment. The redemption price is fixed at par plus accrued interest — there is no contingent component to the redemption payment itself. The trading price trigger is a condition to the exercise of the call, not a variable that affects the redemption price. Accordingly, the optional redemption feature is treated for tax purposes simply as a call option that may shorten the term of the Notes.
Under the OID regulations, when a debt instrument includes an issuer call option, the yield and maturity of the instrument are determined by reference to the payment schedule that minimizes the yield on the instrument (taking into account the call premium, if any). In this case, because the Notes were issued at par and are redeemable at par (plus accrued interest), the presence of the call option does not create OID regardless of whether the Notes are assumed to be held to maturity or redeemed at the earliest call date.
Conclusion: The optional redemption feature has no impact on the VRDI classification of the Notes and does not create OID.
6. Effect of the Fundamental Change Put. Holders of the Notes have the right to require OWS to repurchase the Notes at 100% of the principal amount plus accrued and unpaid interest upon the occurrence of a Fundamental Change. This is a holder put option that is triggered by the occurrence of specific events defined in the Indenture.
Under the Treasury Regulations, a holder's put right at par (plus accrued interest) does not produce OID or contingent payment issues. The put price is not contingent — it is fixed at 100% of the principal amount. The triggering events are corporate events (change of control, delisting, bankruptcy) that are standard in convertible debt instruments and are not designed to create a contingent payment structure.
Moreover, under Treasury Regulation § 1.1272-1(c), a holder put option is taken into account in determining the yield and maturity of a debt instrument only if, based on all the facts and circumstances as of the issue date, it is reasonably certain that the option will be exercised. Here, it is not reasonably certain as of the issue date that a Fundamental Change will occur during the term of the Notes, and therefore the put option is not assumed to be exercised for purposes of computing yield and OID.
Conclusion: The Fundamental Change put right has no impact on the VRDI classification of the Notes and does not create OID or contingent payment treatment.
B. Tax Consequences for OWS as Issuer
1. Interest Deductions. OWS may deduct the stated interest of 2.75% per annum on the Notes as it accrues, in accordance with its regular method of accounting (which is the accrual method). The total annual interest expense on the full $287,500,000 aggregate principal amount is $7,906,250 (calculated as $287,500,000 × 0.0275). This interest is payable semi-annually, with each semi-annual payment equal to $3,953,125.
Because the Notes were issued at par, there is no OID on the Notes, and OWS has no OID deduction. The stated interest of 2.75% represents the entirety of the periodic interest deduction available to OWS with respect to the Notes.
The deductibility of the interest expense is subject to the limitations imposed by Section 163(j) of the Code, which limits a taxpayer's deduction for "business interest expense" in any taxable year to the sum of (i) the taxpayer's "business interest income" for the year, (ii) 30% of the taxpayer's "adjusted taxable income" for the year (which, for taxable years beginning after December 31, 2021, is computed without adding back depreciation, amortization, or depletion — i.e., using an EBIT, rather than EBITDA, measure), and (iii) the taxpayer's floor plan financing interest for the year.
Based on publicly available financial information, OWS reported adjusted EBITDA of approximately $198,700,000 for the fiscal year ended December 31, 2022. While the Section 163(j) limitation is computed on the basis of adjusted taxable income (which may differ from adjusted EBITDA), the Company's earnings capacity appears to be substantially in excess of the anticipated annual interest expense on the Notes. We note, however, that the Section 163(j) limitation must be recalculated on an annual basis, and the Company's ability to fully deduct its interest expense in any given year will depend on its taxable income and other financial metrics for that year. Any disallowed business interest expense may generally be carried forward indefinitely to future taxable years.
2. Issuance — Section 1032. Under Section 1032(a) of the Code, no gain or loss is recognized by a corporation on the receipt of money or other property in exchange for stock (including treasury stock) of such corporation. This provision also applies to the issuance of debt instruments that are convertible into the issuer's stock, because the issuance of such instruments is treated as a transaction in the corporation's own stock (or rights to acquire its stock).
The issuance of the Notes by OWS in exchange for $287,500,000 in cash proceeds falls squarely within the scope of Section 1032. The Notes are convertible into shares of OWS common stock, and OWS received cash consideration in exchange for the Notes. Accordingly, OWS does not recognize any gain or loss upon the issuance of the Notes. This conclusion applies regardless of the ultimate tax classification of the Notes (whether as VRDIs, CPDIs, or otherwise).
Conclusion: OWS recognizes no gain or loss on the issuance of the Notes under Section 1032.
3. Conversion of Notes — Section 1032. Upon conversion of the Notes by a holder, OWS will deliver either (a) shares of OWS common stock (in a full physical settlement) or (b) cash in respect of the principal amount and shares of OWS common stock in respect of the conversion value in excess of the principal amount (in a net share settlement). In either case, the delivery of OWS common stock to the converting holder is a transaction in OWS's own stock, and Section 1032 applies to shield OWS from gain or loss recognition.
With respect to the cash component of a net share settlement, the payment of cash equal to the principal amount of the Notes being converted is treated as a retirement of the debt instrument at its face amount. Because the Notes were issued at par, and the cash payment upon conversion is equal to the principal amount ($1,000 per Note), the Notes are retired at their adjusted issue price, and no gain or loss is recognized by OWS.
In the event that Notes are retired for an amount in excess of their adjusted issue price (for example, if OWS were required to make a make-whole premium payment in cash), the excess would generally be deductible by OWS as a premium on the retirement of debt under Treasury Regulation § 1.163-4. Conversely, if the Notes were retired for an amount less than their adjusted issue price, OWS would recognize cancellation of debt income under Section 61(a)(12) of the Code. However, because the Notes are settled at principal amount in cash (with equity appreciation delivered in shares), neither of these scenarios is expected to arise in the ordinary course.
Conclusion: OWS recognizes no gain or loss upon the conversion of the Notes under Section 1032 (with respect to shares delivered) and recognizes no gain or loss on the cash component of a net share settlement (to the extent the cash payment equals the principal amount of the Notes).
4. Redemption. If OWS exercises its optional redemption right (available on or after June 6, 2026, subject to the trading price condition), it will pay cash equal to 100% of the principal amount of the redeemed Notes plus any accrued and unpaid interest to the redemption date. The accrued and unpaid interest will be deductible by OWS as an ordinary interest expense. The retirement of the Notes at par does not give rise to any gain, loss, or cancellation of debt income, because the redemption price equals the adjusted issue price of the Notes.
Conclusion: No gain or loss is recognized by OWS upon the optional redemption of the Notes at par plus accrued interest.
C. Tax Consequences for U.S. Holders of the Notes
The following is a brief summary of the expected U.S. federal income tax consequences for holders of the Notes who are U.S. persons for tax purposes and who hold the Notes as capital assets. This summary is provided for completeness and context; the primary focus of this memorandum is on the tax consequences for OWS as issuer.
1. Interest Income. A U.S. holder will include the stated interest of 2.75% per annum in gross income as ordinary income in accordance with the holder's regular method of accounting for federal income tax purposes (i.e., cash or accrual method). Because the Notes do not have OID, no OID inclusions are required.
2. Conversion. A U.S. holder who converts Notes into shares of OWS common stock should generally not recognize gain or loss upon conversion. This treatment is based on the application of the recapitalization rules under Sections 368(a)(1)(E) and 354 of the Code, which provide that an exchange of securities of a corporation for stock of the same corporation in a recapitalization is a tax-free exchange, provided the requirements of those sections are satisfied. Under this analysis, the holder's adjusted tax basis in the common stock received upon conversion will equal the holder's adjusted tax basis in the Notes surrendered (reduced by any basis allocable to a fractional share for which cash is received), and the holding period for the common stock will include the period during which the holder held the Notes.
Cash received in lieu of a fractional share of common stock upon conversion is treated as received in exchange for such fractional share, and the holder will recognize gain or loss equal to the difference between the cash received and the portion of the holder's adjusted tax basis in the Notes allocable to such fractional share.
Under the net share settlement method, a holder will receive cash in respect of the principal amount of the Notes converted and shares of OWS common stock in respect of the conversion value in excess of the principal amount. The cash received for the principal amount is treated as a payment in retirement of debt. The holder will recognize gain or loss on the cash component equal to the difference between the cash received and the holder's adjusted tax basis allocable to the principal component of the Notes. Any gain or loss on the cash component will be capital gain or loss (assuming the Notes are held as capital assets) and will be long-term capital gain or loss if the Notes have been held for more than one year at the time of conversion. The shares of common stock received in excess of the principal amount should generally be received tax-free under the recapitalization provisions, with a basis equal to their fair market value at the time of receipt.
3. Sale or Disposition. Upon a sale or other taxable disposition of the Notes, a U.S. holder will recognize gain or loss equal to the difference between the amount realized on the sale or disposition (excluding amounts attributable to accrued and unpaid interest, which are taxed as ordinary income) and the holder's adjusted tax basis in the Notes. Such gain or loss will be capital gain or loss if the Notes are held as capital assets, and will be long-term capital gain or loss if the Notes have been held for more than one year.
4. Make-Whole Payments / Increased Conversion Rate. An increase in the conversion rate of the Notes pursuant to a make-whole fundamental change may, depending on the circumstances, be treated as additional consideration received by the holder in connection with the conversion. The tax treatment of the increased conversion rate depends on whether the increase is treated as a payment of additional interest (in which case it would be ordinary income) or as a separate payment in respect of the conversion right (in which case it may be treated as a component of the conversion exchange). The treatment of make-whole adjustments under the Code is not entirely settled, and the IRS could take the position that the value of the additional shares received by reason of the make-whole adjustment is taxable to the holder as a separate payment. Holders should consult their own tax advisors regarding the tax treatment of any make-whole adjustment.
In addition, we note that certain anti-dilution adjustments (or the failure to make anti-dilution adjustments) may give rise to a deemed distribution to holders of the Notes under Section 305(c) of the Code. Such deemed distributions would be taxable as dividends to the extent of OWS's current and accumulated earnings and profits, and as a return of capital (or capital gain) thereafter. This analysis depends on the specific facts and circumstances of any adjustment (or failure to adjust) and is beyond the scope of this memorandum.
IV. Tax Treatment of the Capped Call Transactions
A. Characterization of the Capped Call Transactions
1. Overview. In connection with the offering of the Notes, OWS purchased capped call options from the Capped Call Counterparties — Ridgepoint (60% allocation) and Northvane (40% allocation). The total premium paid by OWS for the Capped Call Transactions was $28,750,000 ($17,250,000 to Ridgepoint and $11,500,000 to Northvane).
Each Capped Call Transaction entitles OWS to receive, upon exercise or settlement, shares of OWS common stock (or, at OWS's election or as otherwise provided in the ISDA Documentation, cash in lieu thereof) having a value equal to the appreciation in OWS common stock between the lower strike price (approximately $94.50 per share, equal to the initial conversion price of the Notes) and the upper strike price ($110.07 per share, the cap price). The economic effect of the Capped Call Transactions is to provide OWS with a hedge against the dilution that would otherwise result from the conversion of the Notes at stock prices between the conversion price and the cap price.
Economically, each Capped Call Transaction is equivalent to a "bull call spread" — a combination of a purchased call option with a strike price of approximately $94.50 per share and a written (sold) call option with a strike price of $110.07 per share. The purchased call provides OWS with upside participation above $94.50, while the written call caps OWS's participation at $110.07. The net effect is that OWS benefits from stock price appreciation between $94.50 and $110.07 — precisely the range in which the conversion feature of the Notes would otherwise cause dilution.
2. Integration Analysis — Separate Treatment vs. Integration with the Notes. The Question. A threshold question in the tax analysis of the Capped Call Transactions is whether the Capped Call Transactions should be integrated with the Notes for U.S. federal income tax purposes, or whether they should be treated as separate transactions. If the instruments are integrated, the combined instrument (Notes plus Capped Call Transactions) could be treated as a single convertible debt instrument with a higher effective conversion price of approximately $110.07 per share, which could affect the classification and tax treatment of the combined instrument. If the instruments are treated separately, each is analyzed on its own terms — the Notes as VRDIs (as discussed in Section III above) and the Capped Call Transactions as equity-linked derivative contracts.
The Integration Doctrine. Under general principles of federal income tax law, the IRS and the courts have the authority to integrate or combine nominally separate instruments or transactions that are part of a single plan or arrangement if the economic substance of the combined transaction differs materially from the separate treatment of each instrument standing alone. The integration doctrine has been applied in various contexts, including the combination of debt instruments with hedging contracts, the combination of stock with forward contracts, and the combination of puts and calls that replicate a forward sale.
However, the integration doctrine is applied on a case-by-case basis, and the IRS has generally respected the separate characterization of instruments that are separately documented, involve different counterparties, and have independent economic substance. In the specific context of convertible debt offerings with concurrent capped call transactions, the IRS has not issued definitive guidance mandating integration, and market practice overwhelmingly treats the capped call as a separate instrument.
Analysis Favoring Separate Treatment. Several factors strongly support the separate treatment of the Capped Call Transactions from the Notes:
Separate Documentation. The Capped Call Transactions are documented under 2002 ISDA Master Agreements and related Confirmations — a documentation framework entirely separate from the Indenture governing the Notes. The ISDA Documentation is a standardized derivatives framework governed by its own terms and conditions, including netting provisions, termination events, and credit support arrangements that are distinct from the terms of the Notes.
Different Counterparties. The Capped Call Counterparties (Ridgepoint and Northvane) are derivatives dealers acting in their principal capacity. They are not holders of the Notes. The holders of the Notes are qualified institutional buyers who purchased the Notes in the secondary market from the initial purchasers. There is no privity of contract between the Capped Call Counterparties (in their capacity as counterparties to the capped calls) and the noteholders, and the noteholders have no rights under the Capped Call Transactions.
Independent Economic Substance. The Capped Call Transactions have independent economic substance. OWS paid arm's-length premiums totaling $28,750,000 for the capped calls, which provide OWS with a genuine economic benefit — the ability to hedge dilution between $94.50 and $110.07 per share. The premium amount was independently negotiated between OWS and the Capped Call Counterparties based on prevailing option pricing models, implied volatilities, and other market factors. The Capped Call Transactions have their own risk profile (OWS bears the risk that the capped calls expire worthless if the stock price remains below the lower strike price) and their own settlement mechanics.
Regulatory and Market Precedent. IRS Notice 2002-36, while not directly on point (it addresses the application of the economic substance doctrine to certain tax-motivated transactions involving convertible debt), reflects the IRS's general approach to analyzing related-but-separate instruments. Case law has generally respected the separate characterization of capped call overlays entered into in connection with convertible note offerings when the capped calls are separately documented and have independent economic terms. Market practice in the convertible debt market has consistently treated capped calls as separate instruments, and the tax disclosure in offering memoranda for convertible notes universally describes the capped calls as separate transactions.
Tax Disclosure. The Offering Memorandum for the Notes describes the tax treatment of the Capped Call Transactions as separate prepaid forward contracts, consistent with the analysis in this memorandum. While the tax disclosure in an offering memorandum is not binding on the IRS, it reflects the Company's intended tax position and is consistent with the position taken by substantially all issuers of convertible debt with concurrent capped call transactions.
Analysis That Might Support Integration. We acknowledge that certain factors could, in theory, be cited in support of integration:
Concurrence. The Capped Call Transactions were entered into concurrently with, and as a condition to, the pricing and issuance of the Notes. The Offering Memorandum describes the Capped Call Transactions as being entered into "in connection with" the offering of the Notes.
Cross-References. The terms of the Capped Call Transactions directly reference the Notes' conversion price (as the lower strike price) and the Notes' maturity date (as the expiration date). The Capped Call Transactions are designed to dovetail with the Notes' conversion terms.
Combined Economic Effect. Some commentators have argued that the combined economic effect of a convertible note plus a capped call is equivalent to a convertible note with a higher effective conversion price. Under this view, the "true" conversion price of the combined instrument is $110.07 per share (the cap price), not $94.50 per share (the initial conversion price of the Notes standing alone). If the combined instrument were treated as a single convertible note, the tax analysis could differ.
Conclusion. On balance, the factors favoring separate treatment substantially outweigh the factors that might support integration. The Capped Call Transactions are separately documented, involve different counterparties from the noteholders, have independent economic substance, and are consistent with established market practice. There is no IRS guidance or case law that would mandate integration of separately documented capped call transactions with convertible notes in these circumstances. Accordingly, the Capped Call Transactions should be respected as separate transactions from the Notes for U.S. federal income tax purposes. This is the position expected to be taken by OWS on its federal income tax returns, and it is consistent with the tax treatment described in the Offering Memorandum.
We further note that even if the IRS were to integrate the Notes and the Capped Call Transactions, the combined instrument would likely still be treated as a VRDI (or, at worst, as a conventional convertible debt instrument with a higher conversion price), and the conversion feature of the combined instrument would still qualify for the exception from CPDI treatment under Treasury Regulation § 1.1275-4(b)(9)(iv). Integration would not create OID (because the combined instrument would still be treated as issued at par for the principal amount of the Notes), and the interest deductions would remain unchanged. Accordingly, while we believe separate treatment is the correct and more supportable position, integration would not produce a materially adverse tax result for OWS.
3. Treatment as Prepaid Forward Contracts. Assuming the Capped Call Transactions are respected as separate instruments (as we expect), the Capped Call Transactions are properly characterized as prepaid forward contracts (or, equivalently, purchased options) on OWS common stock. OWS paid an upfront premium ($17,250,000 to Ridgepoint; $11,500,000 to Northvane; total $28,750,000) and will receive, upon settlement, delivery of shares of OWS common stock (or cash) based on the spread between the lower strike price and the upper strike price.
Under general tax principles, the premium paid by OWS for the Capped Call Transactions is not currently deductible as a business expense. The premium is a capital expenditure — the cost of acquiring an option or forward contract — and is capitalized by OWS as its basis in the Capped Call Transactions. The premium is not an expense of the type described in Section 162 of the Code (ordinary and necessary business expenses), nor is it interest expense or any other currently deductible item.
Upon settlement or expiration of the Capped Call Transactions, the tax consequences depend on the price of OWS common stock at the time of settlement, subject to the application of Section 1032 (discussed in Section IV.B below):
Stock Price Below the Lower Strike (~$94.50 per share). If the price of OWS common stock is below the lower strike price at the expiration of the Capped Call Transactions, the capped calls expire worthless, and OWS recognizes a loss equal to the total premium paid ($28,750,000, or the applicable portion thereof). However, as discussed below, Section 1032 may apply to deny recognition of this loss (because the capped calls relate to OWS's own stock), in which case the loss would not be recognized. This is the expected treatment.
Stock Price Between the Lower Strike (~$94.50) and the Upper Strike ($110.07). If the price of OWS common stock at settlement is between the lower strike price and the upper strike price, OWS receives shares (or cash) with a value equal to the spread between the stock price and the lower strike price, multiplied by the number of shares covered by the Capped Call Transactions. Gain or loss would ordinarily be measured as the difference between the settlement value received and OWS's basis (the premium paid), but Section 1032 would apply to deny recognition of any gain or loss.
Stock Price Above the Upper Strike ($110.07). If the price of OWS common stock at settlement exceeds the upper strike price, OWS receives the maximum payout under the Capped Call Transactions — an amount equal to the difference between the upper strike price and the lower strike price ($110.07 − $94.50 = $15.57 per share), multiplied by the number of shares covered. Again, any gain would not be recognized under Section 1032.
B. Section 1032 Analysis — Capped Call Transactions
1. Issue. Section 1032 of the Code provides that a corporation does not recognize gain or loss on transactions in its own stock. The question presented is whether Section 1032 applies to OWS's purchase and settlement of the Capped Call Transactions, which are capped call options on OWS common stock.
2. Analysis. The Capped Call Transactions are derivative contracts that reference OWS common stock as the underlying asset. Upon settlement, OWS will receive (or may receive) shares of its own common stock, or cash in an amount determined by reference to the price of its own common stock. The Capped Call Transactions are therefore "transactions in the corporation's own stock" within the meaning of Section 1032.
Treasury Regulation § 1.1032-3 provides specific rules for the application of Section 1032 to a corporation's forward contracts, options, and similar transactions with respect to its own stock. Under these regulations, a corporation that enters into a "forward contract" (defined broadly to include futures contracts, forward contracts, and options) with respect to its own stock does not recognize gain or loss upon the settlement of the contract, regardless of whether the contract is settled by delivery of the corporation's stock or by cash payment.
Revenue Ruling 2003-97 confirms that Section 1032 applies to a corporation's purchase of call options on its own stock. In that ruling, the IRS held that a corporation that purchased a call option on its own stock and subsequently exercised the option (receiving its own stock) did not recognize gain or loss on the transaction under Section 1032. The ruling also addressed the premium paid for the option, concluding that the premium was treated as an equity-related cost that was not separately deductible.
Applying these authorities to the Capped Call Transactions, OWS's purchase of capped call options on its own common stock is a transaction in OWS's own stock. Upon settlement — whether OWS receives shares of its own stock or cash determined by reference to the price of its own stock — Section 1032 applies to deny recognition of gain or loss. If the capped calls expire worthless, the loss of the premium is similarly not recognized (because the expiration of an option on the corporation's own stock is a closing of the transaction in the corporation's own stock, governed by Section 1032).
Conclusion: Section 1032 applies to the Capped Call Transactions. OWS should not recognize gain or loss upon settlement, exercise, or expiration of the Capped Call Transactions, whether settled in stock or cash, to the extent the settlement relates to OWS common stock.
3. Treatment of the Capped Call Premium. The total premium of $28,750,000 paid by OWS for the Capped Call Transactions ($17,250,000 to Ridgepoint and $11,500,000 to Northvane) is treated as a cost related to a transaction in OWS's own stock under Section 1032 and the related Treasury Regulations. Because Section 1032 governs the entire transaction, the premium is treated as an equity transaction cost — a reduction to the equity accounts of OWS — rather than as a deductible expense or as an element of the cost basis of a separate asset.
For financial accounting purposes, under ASC 470-20 (as amended by ASU 2020-06, which became effective for OWS for fiscal years beginning after December 15, 2021), the cost of the Capped Call Transactions is recorded as a reduction to additional paid-in capital ("APIC") on OWS's balance sheet, net of the income tax effect. The tax treatment is consistent with the accounting treatment: the $28,750,000 premium is not deductible as a current expense, is not amortizable over the life of the capped calls, and does not create OID or affect the yield on the Notes. The premium is treated purely as an equity-related expenditure.
We emphasize that this means the $28,750,000 cost of the Capped Call Transactions will not provide OWS with any current or future tax benefit (other than as a component of OWS's equity accounts). This is a permanent difference for tax purposes — the premium is a non-deductible cost that is never recovered through deductions or recognized losses. The Company's tax team and financial reporting team should ensure that this permanent difference is properly reflected in the Company's tax provision and deferred tax calculations.
C. Constructive Sale Analysis — Section 1259
1. Issue. Section 1259 of the Code treats certain transactions as "constructive sales" of appreciated financial positions. If a constructive sale occurs, the taxpayer is treated as having sold and immediately reacquired the appreciated financial position at its fair market value, and the taxpayer recognizes gain as if the position had actually been sold. The question presented is whether OWS's entry into the Capped Call Transactions constitutes a constructive sale of OWS's interest in its own common stock.
2. Application of Section 1259. Section 1259(a) provides that a taxpayer shall recognize gain (as if the position had been sold, assigned, or otherwise terminated at its fair market value on the date of the constructive sale) if the taxpayer holds an "appreciated financial position" with respect to any stock, debt instrument, or partnership interest and enters into one of the following transactions:
(i) a short sale of the same or substantially identical property;
(ii) an offsetting notional principal contract with respect to the same or substantially identical property;
(iii) a futures or forward contract to deliver the same or substantially identical property; or
(iv) any other transaction that the Secretary may identify by regulation as having substantially the same effect as the foregoing.
Key Point: OWS Does Not Hold an "Appreciated Financial Position" in Its Own Stock. The critical threshold requirement of Section 1259 is that the taxpayer must hold an "appreciated financial position" in "property." Under Section 1259(b)(1), an "appreciated financial position" means any position with respect to any stock, debt instrument, or partnership interest if there would be gain were the position sold, assigned, or otherwise terminated at its fair market value on the date of the determination.
OWS, as the issuer of its own common stock, does not hold an "appreciated financial position" in its own common stock within the meaning of Section 1259. A corporation's own unissued shares or treasury shares do not constitute "property" of the corporation for purposes of Section 1259. A corporation's "position" in its own stock is fundamentally different from an investor's position in the stock of another entity — when a corporation issues its own stock, it is not disposing of "property" but rather creating a new equity interest. This principle is consistent with Section 1032, which provides that a corporation does not recognize gain or loss on transactions in its own stock, and reflects the fundamental tax concept that a corporation cannot realize income from dealing in its own shares.
The Capped Call Transactions Are Purchased Options, Not Short Sales or Forwards. Even if Section 1259 could theoretically apply to a corporation's transactions in its own stock (which we believe it cannot)

CALDERWOOD & HARKNESS LLP Counselors at Law

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