ATTORNEY-CLIENT PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

ATTORNEY-CLIENT PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
MEMORANDUM
PRIVILEGE DESIGNATION: This memorandum is a privileged and confidential attorney-client communication and constitutes attorney work product prepared in anticipation of litigation or in connection with the provision of legal advice. This memorandum is intended solely for the use of the addressee and should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP. Disclosure to any third party may result in a waiver of applicable privileges.
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I. Executive Summary
The purpose of this memorandum is to analyze whether allowing one or more of Optiwave Semiconductor Corp.'s ("OWS" or the "Company") twelve (12) pending patent applications to lapse into abandonment — as a direct consequence of the ongoing budget freeze imposed by Harborview Partners ("Veltrano Capital") under the cost-reduction initiative known internally as "Project Lighthouse," which has been in effect since August 11, 2023 — would constitute an Event of Default or covenant breach under Section 5.15 (Intellectual Property Covenants) of OWS's $55,000,000 Senior Secured Revolving Credit Facility (the "Credit Facility" or "Credit Agreement") with Meridian National Bank, N.A. ("Meridian" or the "Lender").
Top-Line Conclusion. Based on our analysis of the Credit Agreement, the Security Agreement, and applicable law, it is our view that the abandonment of any pending patent application that qualifies as "Material intellectual Property" under Section 1.01 of the Credit Agreement — or that is otherwise subject to the affirmative prosecution obligations set forth in Section 5.15 — would likely constitute a breach of the affirmative covenant contained in Section 5.15. Such a breach would, in turn, constitute an Event of Default under Article VIII of the Credit Agreement, potentially entitling Meridian to (a) accelerate the full $32,500,000 currently drawn on the facility, (b) terminate OWS's access to the remaining $22,500,000 in undrawn revolving commitments, and (c) exercise remedies under the Security Agreement against OWS's intellectual Property Collateral, including foreclosure on the Company's entire patent portfolio valued by Graystone Valuation Advisors, LLC at $38,500,000.
Key Risk. The most imminent and severe threat involves the absolute statutory deadline of March 9, 2025 for responding to the non-final Office Action issued by the United States Patent and Trademark Office ("USPTO") in connection with U.S. Patent Application No. 17/672,204 (referred to herein as "A1"). A1 is the foundational non-provisional application in the Company's pending patent family, upon which the priority chain for all other pending applications depends. All available extensions of time have been exhausted. No further extensions are available under 37 C.F.R. § 1.136(a). Failure to file a substantive response by this date will result in abandonment of A1 by operation of law under 35 U.S.C. § 133, an outcome that would be irrevocable and would permanently extinguish OWS's rights in the parent application.
Recommendations. We recommend that OWS take the following immediate actions:
(a) Authorize and fund responses to the A1 and B1 deadlines on an emergency basis to preserve the most critical filings and avoid triggering a covenant breach. The combined estimated cost of these two actions is approximately $26,500 to $36,750 — a de minimis amount relative to the $32,500,000 acceleration risk and the $12,200,000 attributed value of the pending patent family.
(b) Seek a waiver or amendment from Meridian if OWS determines, as part of a strategic triage exercise, that abandonment of certain lower-priority applications is desirable or unavoidable. Any such abandonment should be undertaken only with Meridian's express prior consent to avoid triggering a default.
(c) Consider proactive disclosure to Meridian regarding the budget constraints and their potential impact on patent prosecution. Proactive communication preserves good faith, may forestall an immediate default declaration upon discovery, and positions OWS to negotiate a waiver or amendment on more favorable terms.
(d) Communicate the lender covenant implications to Veltrano Capital to provide a compelling, quantified basis for requesting an exception to or modification of the Project Lighthouse budget cap.
The balance of this memorandum sets forth the factual background, the relevant contractual provisions, our analysis, and our detailed recommendations.
II. Background
A. The Credit Facility
OWS is the borrower under a $55,000,000 Senior Secured Revolving Credit Facility originally dated September 30, 2020, and subsequently amended and restated as of March 15, 2022 (as so amended and restated, the "Credit Agreement"). The sole lender and administrative agent under the Credit Agreement is Meridian National Bank, N.A., a national banking association with its principal office located at 600 Travis Street, Houston, Texas 77002. The designated Relationship Manager at Meridian for the OWS account is Brian Hartwell.
The Credit Facility provides OWS with a revolving line of credit in an aggregate principal amount of up to $55,000,000. As of December 31, 2024, OWS had drawn $32,500,000 on the facility, leaving $22,500,000 in undrawn revolving commitments available to the Company. The facility serves as OWS's primary source of working capital liquidity and is critical to the Company's ongoing operations.
The Credit Agreement is secured by a first-priority security interest in substantially all assets of OWS, as set forth in the Security Agreement attached as Exhibit C to the Credit Agreement (the "Security Agreement"). The pledged collateral expressly includes "Intellectual Property Collateral," as defined in the Security Agreement, which encompasses all patents, patent applications, and patent rights of OWS, whether now existing or hereafter acquired. This security interest is perfected through filings with the USPTO and the relevant state offices of the Secretary of State, as well as through control agreements and other perfection mechanisms described in the Security Agreement and the related perfection certificates.
The Credit Agreement is governed by New York law, as specified in Section 10.09 of the Credit Agreement.
B. OWS's Patent Portfolio Overview
OWS's intellectual property portfolio, which constitutes a significant component of the Company's enterprise value and a core element of Meridian's collateral base, consists of the following:
Issued Patents. OWS holds thirty-one (31) issued U.S. utility patents, which were prosecuted to issuance by the Company's prior patent counsel, Kessler & Morin LLP, located at 1750 Tysons Boulevard, Suite 800, McLean, Virginia 22102, under the direction of lead partner Dr. Helen Kessler. These issued patents cover various aspects of OWS's existing silicon-photonics technology platform and are currently in force, with maintenance fees paid to date. The issued patents were listed on Schedule 5.15(a) to the Credit Agreement as of the March 15, 2022 amendment and restatement.
Pending Applications. In addition to the issued patents, OWS has twelve (12) pending patent applications organized into three sub-families (designated herein as Sub-Family A, Sub-Family B, and Sub-Family C). These applications are the subject of the prosecution docket that has been managed by Calderwood & Harkness LLP since our engagement as patent prosecution counsel on February 14, 2022. The docket has been substantially dormant since September 2023 due to the Project Lighthouse budget freeze, as discussed in Section II.C below.
All twelve pending applications ultimately claim priority to U.S. Provisional Application No. 63/297,841, which was filed on January 10, 2022, and expired on January 10, 2023, in accordance with 35 U.S.C. § 111(b)(5). The twelve non-provisional and international applications that claim priority to this provisional were filed between January 9, 2023, and January 29, 2024, and cover OWS's next-generation silicon-photonics modulator architecture designed for 800G and 1.6T data-center optical transceivers. This technology is expected to form the basis of OWS's next product generation and is central to the Company's competitive positioning in the high-speed data-center interconnect market.
Valuation. On April 28, 2023, Graystone Valuation Advisors, LLC ("Graystone"), located at 150 North Wacker Drive, Suite 2200, Chicago, Illinois 60606, under the direction of lead engagement partner Rebecca Thornton, completed a formal valuation of OWS's full patent portfolio. Graystone's valuation report attributed a fair market value of $38,500,000 to the aggregate portfolio, of which approximately $12,200,000 (approximately 31.7%) was attributed to the pending application family (i.e., the twelve applications and the value of the claims and priority rights they represent) and approximately $26,300,000 was attributed to the thirty-one issued patents. The Graystone valuation was prepared for purposes of supporting the Company's borrowing base calculations and collateral coverage analysis under the Credit Facility.
A detailed listing of all twelve pending applications, including application numbers, filing dates, jurisdictions, current statuses, and upcoming deadlines, is set forth in Appendix A to this memorandum.
C. The Budget Freeze and Docket Dormancy
The prosecution of OWS's pending patent applications has been substantially suspended since August 2023 due to a company-wide budget freeze imposed by Harborview Partners ("Veltrano Capital"), OWS's majority equity sponsor. Veltrano Capital, headquartered at 200 Lexington Avenue, 38th Floor, New York, New York 10016, acquired a 72% equity stake in OWS in 2019 at an enterprise value of approximately $310,000,000. As the controlling shareholder, Veltrano Capital exercises significant influence over OWS's strategic and operational decisions, including budget allocation and capital expenditures.
On August 11, 2023, Veltrano Capital implemented the initiative known internally as "Project Lighthouse," a comprehensive cost-reduction program applied across Veltrano Capital's portfolio of technology companies. Among other measures, Project Lighthouse imposed a cap on all outside counsel discretionary intellectual property spending at $25,000 per quarter, applied on a portfolio-company-by-portfolio-company basis. This cap is drastically below the level of expenditure required to maintain OWS's patent prosecution docket in an active state. Prior to the imposition of the budget freeze, Calderwood & Harkness's average quarterly prosecution spending on the OWS docket was approximately $87,400 per quarter — exceeding the Project Lighthouse cap by $62,400 per quarter.
The last substantive billable activity performed by Calderwood & Harkness on the OWS prosecution docket prior to the freeze was a two-month extension of time filed by Peter Vassiliev, an associate in our intellectual Property Group, on September 6, 2023, in connection with the A1 application (U.S. 17/672,204). The extension of time fee paid to the USPTO was $640. Since that date, C&H has performed no billable prosecution work on the OWS docket, with a single exception: on October 18, 2024, Sandra Koh, OWS's Senior Director of intellectual Property, authorized an emergency filing of a four-month extension of time in connection with the B1 application (U.S. 17/814,057) to extend the deadline for responding to a Restriction Requirement issued by the USPTO. The fee for that extension was $2,560. Ms. Koh's authorization was granted on an emergency basis outside the Project Lighthouse framework after she identified the approaching deadline during a routine docket review.
The Project Lighthouse budget freeze was itself precipitated by a significant decline in OWS's financial performance. In fiscal year 2023, OWS reported revenue of $47,300,000, a decline of 30.5% from fiscal year 2022 revenue of $68,100,000. This revenue decline reflected broader softness in the data-center and semiconductor capital expenditure environment, as well as delays in the Company's next-generation product roadmap. The revenue shortfall prompted Veltrano Capital to implement Project Lighthouse as a means of preserving cash and extending the Company's runway.
D. Imminent Deadlines at Risk
As a consequence of the prolonged prosecution dormancy, multiple deadlines across the twelve pending applications are now approaching — several of which are absolute or practical deadlines that, if missed, will result in the irrevocable loss of patent rights. The five most critical deadlines are as follows:
1.  March 9, 2025 — A1 (U.S. Patent Application No. 17/672,204): This is the absolute statutory deadline for filing a response to the non-final Office Action issued by the USPTO on March 9, 2024. All five available two-month extensions of time under 37 C.F.R. § 1.136(a) have been purchased (the last of which was filed by Mr. Vassiliev on September 6, 2023, and subsequent extensions were purchased through a combination of the September 2023 filing and the passage of the extension period structure). No further extensions of time are available. Failure to file a substantive response by this date will result in the abandonment of the foundational U.S. non-provisional application in the patent family, an outcome that is irrevocable absent a successful petition under 37 C.F.R. § 1.137 (the availability and likelihood of success of which is uncertain and should not be relied upon).
2.  April 21, 2025 — B1 (U.S. Patent Application No. 17/814,057): This is the deadline for responding to the Restriction Requirement issued by the USPTO, as extended by the four-month extension of time filed on October 18, 2024. Failure to timely respond will result in constructive abandonment of B1. Additionally, B2, which is planned as a divisional application of B1 for the non-elected invention groups, cannot be filed if B1 is abandoned, resulting in the loss of Sub-Family B's entire U.S. coverage.
3.  May 17, 2025 — B3 (European Patent Application No. EP 23 741 682.3): This is the deadline for filing a response to the Extended European Search Report ("EESR") issued by the European Patent Office ("EPO"). Failure to respond will result in deemed withdrawal of the European application under the rules of the European Patent Convention ("EPC"), permanently foreclosing European patent protection for the electrode fabrication process covered by Sub-Family B.
4.  July 9, 2025 — A4 (PCT/US2023/010584) and A5 (PCT/US2023/010612): This is the thirty-month deadline from the January 10, 2022 priority date for entering the national phase in desired jurisdictions (e.g., South Korea, China, and any additional jurisdictions beyond Japan and the European Patent Office, which have already been entered). Missing this deadline permanently forecloses national-phase entry in all unselected jurisdictions.
5.  January 9, 2026 — B4 (JP 2024-542197) and C3 (JP 2024-542305): This is the three-year deadline from the respective PCT international filing dates for requesting examination at the Japan Patent Office ("JPO"). Failure to request examination within the statutory period results in deemed withdrawal of the Japanese applications under Japanese Patent Law Article 48-3.
A comprehensive listing of all twelve applications and their respective deadlines, together with a covenant-risk assessment for each, is set forth in Appendix A.
III. Relevant Credit Agreement Provisions
This Section identifies and discusses the key provisions of the Credit Agreement and the Security Agreement that are relevant to the analysis of OWS's patent prosecution obligations.
A. Section 1.01 — Definition of "Material intellectual Property"
Section 1.01 of the Credit Agreement defines "Material intellectual Property" as follows:
"Material intellectual Property" means all patents and patent applications listed on Schedule 5.15(a), as updated from time to time, all registered trademarks and trademark applications listed on Schedule 5.15(b), as updated from time to time, and all registered copyrights listed on Schedule 5.15(c), as updated from time to time.
Schedule 5.15(a), which lists the patents and patent applications constituting Material intellectual Property for purposes of the Credit Agreement, was last updated on March 15, 2022 — the date of the amended and restated Credit Agreement. As of that date, Schedule 5.15(a) listed all thirty-one (31) of OWS's then-issued U.S. utility patents, as well as the then-pending U.S. Provisional Application No. 63/297,841 (filed January 10, 2022).
Critically, the twelve (12) currently pending applications that are the subject of this memorandum were all filed after the March 15, 2022 schedule update — between January 9, 2023, and January 29, 2024 — and are therefore not expressly listed on Schedule 5.15(a) as currently constituted. No supplemental update to Schedule 5.15(a) has been made at any time since March 15, 2022.
This gap between the current portfolio and the schedule gives rise to a key interpretive question that we address in Section IV below: whether the twelve pending applications fall within the definition of "Material intellectual Property" notwithstanding their absence from the schedule.
B. Section 5.15 — Intellectual Property Covenants
Section 5.15 of the Credit Agreement sets forth OWS's affirmative covenants with respect to its intellectual property. The operative language of Section 5.15 provides, in relevant part:
The Borrower shall maintain, preserve, and protect all Material intellectual Property, including by timely prosecuting all pending patent applications and paying all required maintenance fees, and shall not do or fail to do, or permit to be done or fail to be done, any act or thing which would impair, invalidate, or render unenforceable any Material intellectual Property, except where the failure to do so could not reasonably be expected to have a Material Adverse Effect.
Two operative components of this covenant merit emphasis:
First, the general obligation to "maintain, preserve, and protect all Material intellectual Property." This language is broad and imposes an affirmative duty on OWS to take all reasonable steps to ensure that its Material intellectual Property remains in force and is not impaired, invalidated, or rendered unenforceable.
Second, the specific illustrative obligation to "timely prosecut[e] all pending patent applications and pa[y] all required maintenance fees." This language identifies patent prosecution and maintenance fee payment as specific actions required to satisfy the general preservation obligation. Notably, the reference to "all pending patent applications" is not expressly limited to applications listed on Schedule 5.15(a); we discuss the significance of this drafting choice in Section IV below.
It is important to note that Section 5.15 is structured as an affirmative covenant. A breach of an affirmative covenant under the Credit Agreement does not require any notice from the Lender to be effective; the breach is self-executing upon the Borrower's failure to perform the covenanted action. The Borrower's compliance obligation exists independently of any lender notification or demand.
Section 5.15 does contain a carve-out for failures that "could not reasonably be expected to have a Material Adverse Effect." However, given the Graystone valuation attributing $12,200,000 of portfolio value to the pending application family — representing approximately 31.7% of the total portfolio value and a significant component of Meridian's collateral coverage — it is difficult to argue that abandonment of one or more of these applications, particularly the foundational A1 application, would not constitute a Material Adverse Effect. We do not believe OWS could successfully rely on this carve-out to excuse abandonment of any of the applications analyzed herein.
The interplay between Section 5.15 and the Credit Agreement's event-of-default provisions is discussed in Section III.D below.
C. Security Agreement — Exhibit C: Intellectual Property Collateral
The Security Agreement, attached as Exhibit C to the Credit Agreement, grants Meridian a first-priority security interest in all "Intellectual Property Collateral" of the Borrower. Section 1 of the Security Agreement defines "Intellectual Property Collateral" to include, among other categories:
"all patents, patent applications, and patent rights, whether now existing or hereafter acquired, including without limitation all reissues, continuations, continuations-in-part, divisionals, extensions, and renewals thereof, and all income, royalties, damages, and payments now or hereafter due or payable under or with respect thereto, including without limitation damages and payments for past, present, or future infringements thereof."
The inclusion of the phrase "hereafter acquired" is of critical significance. This language operates to bring within the scope of Meridian's security interest all patent applications filed by OWS after the execution of the Security Agreement, regardless of whether those applications are specifically listed on Schedule 5.15(a) or any other schedule to the Credit Agreement. Accordingly, Meridian's first-priority security interest unambiguously extends to all twelve (12) of the currently pending applications, even if their status as "Material intellectual Property" for purposes of the Section 5.15 covenant is subject to debate under the definitional analysis discussed in Section IV.
The practical implication of this is twofold. First, any abandonment of a pending application reduces the aggregate value of Meridian's collateral pool, potentially impairing the Lender's collateral coverage ratio. Second, the Security Agreement's preservation obligations — which typically require the grantor to maintain and protect collateral from impairment — may provide an independent basis for asserting a default, separate from and in addition to the Section 5.15 covenant analysis.
D. Event of Default Provisions
Article VIII of the Credit Agreement sets forth the events that constitute an "Event of Default" under the Credit Agreement. The standard cross-reference provision states that a breach of any affirmative covenant under Article V — which includes Section 5.15 — constitutes an Event of Default under Article VIII.
For non-payment defaults, including covenant breaches, Article VIII typically provides a notice and cure period. Based on our review of the Credit Agreement, the standard cure period for non-payment covenant breaches is thirty (30) days following receipt of written notice from the Lender specifying the nature of the breach. However, this cure period is available only where the breach is capable of cure. In the context of patent prosecution, the abandonment of a patent application due to failure to timely respond to a USPTO Office Action is irrevocable upon expiration of the statutory deadline. Once the deadline passes and the application is abandoned, the breach is no longer capable of cure (except potentially through a petition to revive under 37 C.F.R. § 1.137, the success of which is not guaranteed and which imposes additional conditions including proof of unintentionality). Accordingly, Meridian may argue that the thirty-day cure period is inapplicable because the breach — i.e., the failure to timely prosecute — became incapable of cure at the moment the application was abandoned.
Upon the occurrence and during the continuance of an Event of Default, the Credit Agreement entitles Meridian to exercise the following remedies, among others:
(a) Acceleration: Declare all amounts outstanding under the Credit Facility (currently $32,500,000) to be immediately due and payable in full, without further demand, presentment, protest, or notice of any kind.
(b) Termination of Commitments: Terminate all remaining revolving commitments (currently $22,500,000 undrawn), permanently cutting off OWS's access to further draws on the facility.
(c) Enforcement of Security Interest: Exercise all rights and remedies available under the Security Agreement, including foreclosure on and disposition of the intellectual Property Collateral (i.e., OWS's entire patent portfolio, including the 31 issued patents and any surviving pending applications).
These remedies are cumulative and may be exercised concurrently. The severity of these potential consequences underscores the importance of the analysis that follows.
IV. Analysis: Do the 12 Pending Applications Constitute "Material intellectual Property"?
A threshold question in assessing whether abandonment of the pending applications would breach Section 5.15 is whether the twelve applications fall within the definition of "Material intellectual Property" as set forth in Section 1.01 of the Credit Agreement. As discussed in Section III.A, the definition references "all patents and patent applications listed on Schedule 5.15(a), as updated from time to time," and the twelve applications are not expressly listed on the schedule as currently constituted. This Section analyzes whether, notwithstanding that omission, the twelve applications are properly treated as Material intellectual Property for covenant purposes.
A. The Schedule 5.15(a) Gap
The twelve pending applications are not expressly listed on Schedule 5.15(a) for the straightforward reason that they were filed between January 9, 2023, and January 29, 2024 — in each case, after the March 15, 2022 date on which Schedule 5.15(a) was last updated. The schedule was described in the Credit Agreement as being updated "from time to time," contemplating that the Borrower would supplement the schedule as new patents issued or new applications were filed. However, no such supplemental update has been made at any time since March 15, 2022.
OWS had an implicit, if not express, obligation to update Schedule 5.15(a) on a periodic basis to reflect changes in its patent portfolio. The failure to do so appears to have been an administrative oversight, likely attributable to the transition in patent prosecution counsel from Kessler & Morin LLP to Calderwood & Harkness LLP and the subsequent disruptions caused by the Project Lighthouse budget freeze. However, as a matter of contract interpretation, OWS's failure to update the schedule should not be construed as removing new patent applications from the scope of "Material intellectual Property." To allow the Borrower to narrow the scope of its own covenant obligations through its own omission would be inconsistent with the protective purpose of the covenant and contrary to the reasonable expectations of the Lender.
Moreover, it is significant that U.S. Provisional Application No. 63/297,841 is listed on Schedule 5.15(a). The twelve pending applications all claim priority to that provisional application and are its direct progeny — representing the non-provisional and international continuation of the same inventive subject matter. A reasonable interpretation of the schedule, read in light of the broader covenant and the intent of the parties, would include within "Material intellectual Property" those applications that are the natural successors and continuations of applications already listed on the schedule.
B. The General Covenant Language as an Independent Basis
Even if the definition of "Material intellectual Property" were construed narrowly to cover only those applications expressly listed on Schedule 5.15(a), Section 5.15's operative covenant language provides an independent basis for OWS's prosecution obligations. Specifically, the covenant requires OWS to "maintain, preserve, and protect all Material intellectual Property, including by timely prosecuting all pending patent applications" (emphasis added).
The phrase "all pending patent applications" is not expressly limited to applications listed on Schedule 5.15(a) or to applications that fall within the definition of "Material intellectual Property." Rather, it is drafted as a general, unrestricted reference to the Borrower's entire portfolio of pending patent applications. This language can be read in two ways:
First, as an illustrative example of the types of actions required to "maintain, preserve, and protect" Material intellectual Property — in which case the obligation to prosecute would extend only to pending applications that themselves constitute Material intellectual Property (i.e., those listed on the schedule). Under this reading, the twelve unlisted applications would not be subject to the prosecution obligation.
Second, as a standalone affirmative obligation extending to every pending patent application in OWS's portfolio, regardless of whether the application is listed on Schedule 5.15(a). Under this reading, the obligation to "timely prosecute all pending patent applications" would encompass the twelve applications at issue, and failure to prosecute them would constitute a breach of Section 5.15 irrespective of their status as "Material intellectual Property."
We believe the second reading is the more likely interpretation, for several reasons. The use of the word "all" — rather than "such" or "the foregoing" — suggests that the prosecution obligation is not limited to the specific subset of applications listed on the schedule. The word "including" introduces the prosecution obligation as an illustrative, non-exhaustive example of the types of actions required under the broader preservation obligation, rather than as a limitation on its scope. Moreover, the purpose of the covenant — to preserve the value of the Lender's intellectual property collateral — supports a broad reading that encompasses all pending applications, as each pending application contributes to the aggregate value of the collateral pool.
From a practical standpoint, Meridian would almost certainly adopt the broader reading. Lenders drafting intellectual property covenants intend to protect the full scope of their collateral, and Meridian would have every incentive to argue that "all pending patent applications" means precisely what it says — all pending patent applications, not merely those listed on a potentially outdated schedule.
C. The "Hereafter Acquired" Security Interest
Even if the covenant analysis were to remain inconclusive — that is, even if a court were to adopt the narrower reading of Section 5.15 and conclude that the twelve applications are not "Material intellectual Property" subject to the specific prosecution obligation — the "hereafter acquired" language of the Security Agreement provides an independent and arguably sufficient basis for Meridian to assert a breach.
As discussed in Section III.C, the Security Agreement grants Meridian a first-priority security interest in all "patents, patent applications, and patent rights, whether now existing or hereafter acquired." This language unambiguously captures the twelve pending applications as intellectual Property Collateral. The general obligation under Section 5.15 to "maintain, preserve, and protect" Material intellectual Property, combined with the Security Agreement's own preservation covenants (which typically require the grantor to protect collateral from impairment, waste, or loss), creates an obligation on OWS not to allow collateral to be destroyed through inaction.
The analogy is apt: permitting a patent application that is subject to the Lender's security interest to go abandoned through failure to prosecute is functionally equivalent to allowing pledged equipment to be destroyed or disposed of without the Lender's consent. In either case, the result is a diminution in the value of the Lender's collateral that the Borrower had an obligation to preserve.
D. Conclusion on Scope
Based on the foregoing analysis, we conclude as follows:
(a) There is a strong argument that the twelve pending applications fall within the definition of "Material intellectual Property" under the general covenant language of Section 5.15, even though they are not expressly listed on Schedule 5.15(a). This argument is supported by the breadth of the phrase "all pending patent applications," the purpose of the covenant, the listing of the priority provisional application on the schedule, and OWS's own failure to update the schedule.
(b) At minimum, the twelve pending applications constitute intellectual Property Collateral under the Security Agreement, and OWS's failure to prosecute them — resulting in abandonment — would diminish the value of Meridian's collateral pool in breach of the general preservation obligation and the Security Agreement's collateral maintenance covenants.
(c) A conservative approach should assume that Meridian would treat the abandonment of any of the twelve pending applications as a covenant breach and potential Event of Default. This is particularly true for the A1 application, given its foundational role in the patent family and the substantial value attributed to the pending portfolio by Graystone.
Accordingly, the remainder of this memorandum proceeds on the assumption that the twelve pending applications are subject to the prosecution obligation under Section 5.15, and that abandonment of any of them would implicate the covenant.
V. Analysis: Would Abandonment Constitute a Breach of Section 5.15?
Having concluded that the twelve pending applications are subject to the prosecution obligation under Section 5.15, we turn to the question of whether the abandonment of specific applications — through failure to respond to pending deadlines — would constitute a breach of the covenant. We analyze each of the five critical deadline scenarios identified in Section II.D in turn.
A. Abandonment of A1 (U.S. Patent Application No. 17/672,204)
A1 is the foundational non-provisional application in OWS's pending patent family. It was filed on January 9, 2023, and claims priority to U.S. Provisional Application No. 63/297,841. A1 is the parent application from which the continuation and continuation-in-part applications in Sub-Family A derive their priority claims. The non-final Office Action issued by the USPTO on March 9, 2024, raised prior art rejections under 35 U.S.C. §§ 102 and 103 with respect to certain independent claims, and also included indefiniteness rejections under 35 U.S.C. § 112(b) directed to dependent claims.
The statutory deadline for responding to the non-final Office Action was originally six months from the date of mailing (i.e., September 9, 2024), extendable in two-month increments up to a total of six months of extension time under 37 C.F.R. § 1.136(a). All available extensions have been purchased, with the final extension establishing an absolute deadline of March 9, 2025. No further extensions of time are available under the rules. This is a hard deadline; it cannot be moved.
Failure to file a substantive response by March 9, 2025, will result in the abandonment of A1 by operation of law under 35 U.S.C. § 133. Such abandonment would be irrevocable under ordinary circumstances. While a petition to revive under 37 C.F.R. § 1.137 is theoretically available, the petition requires a showing that the failure to respond was "unintentional," and the USPTO's standard for evaluating that showing has become more rigorous in recent years. Moreover, a deliberate decision not to fund a response — as opposed to an inadvertent oversight — would make it significantly more difficult to satisfy the unintentionality standard. OWS should not rely on the petition-to-revive mechanism as a fallback.
The abandonment of A1 would clearly and unambiguously constitute a failure to "timely prosecute" a pending patent application within the meaning of Section 5.15. There is no colorable argument to the contrary. The covenant requires timely prosecution; allowing a non-final Office Action response deadline to expire without filing a response is the paradigmatic example of a failure to prosecute.
The consequences of A1's abandonment extend beyond the immediate loss of the application itself. Graystone attributed $12,200,000 of portfolio value to the pending family collectively, and A1, as the parent case, represents a disproportionate share of that value. The claims of A1 define the broadest scope of protection available in the patent family and serve as the foundation for the narrower claims pursued in the continuation and continuation-in-part applications. Loss of A1 would also have direct competitive implications: as set forth in Calderwood & Harkness's freedom-to-operate analysis delivered to OWS on October 14, 2022 (C&H Ref. No. FTO-2022-0391), OWS faces "moderate-to-high" infringement risk with respect to Pinnacle Optics, Inc.'s U.S. Patent Nos. 10,823,417 and 11,105,662, absent the design-around features that are the subject of the pending patent family. Loss of A1 would eliminate OWS's ability to secure claims covering those design-around features, potentially increasing the Company's exposure to infringement liability.
Covenant Risk Assessment: HIGH. Abandonment of A1 would constitute a clear breach of Section 5.15 and would very likely trigger an Event of Default.
B. Abandonment of B1 (U.S. Patent Application No. 17/814,057)
B1 is the foundational application in Sub-Family B, covering OWS's proprietary electrode fabrication process for silicon-photonics modulators. The USPTO issued a Restriction Requirement on June 21, 2024, dividing the claimed subject matter into three separate invention groups and requiring OWS to elect a single group for prosecution. An election and response to the Restriction Requirement are due by April 21, 2025, as extended by the four-month extension of time filed on October 18, 2024.
Failure to file a timely response to the Restriction Requirement will result in constructive abandonment of B1. Unlike A1, the Restriction Requirement response is not a substantively complex filing — it requires only the election of one invention group for continued prosecution and is typically a relatively straightforward and inexpensive matter. However, the consequences of abandonment are severe. If B1 is abandoned, OWS will lose the ability to file the planned B2 divisional application (which would have claimed the non-elected invention groups from the Restriction Requirement), thereby forfeiting the entirety of Sub-Family B's U.S. patent coverage for the electrode fabrication process.
The analysis under Section 5.15 is the same as for A1: failure to respond to the Restriction Requirement constitutes a failure to "timely prosecute" the application, in breach of the covenant.
Covenant Risk Assessment: HIGH. Abandonment of B1 would constitute a clear breach of Section 5.15.
C. Deemed Withdrawal of B3 (European Patent Application No. EP 23 741 682.3)
B3 is the European regional-phase application corresponding to the PCT application filed for Sub-Family B. The EPO issued an Extended European Search Report on November 17, 2024, and OWS has until May 17, 2025 to file a response. Failure to respond will result in deemed withdrawal of the European application under the rules of the European Patent Convention, permanently foreclosing European patent protection for the electrode fabrication process.
Although the EPO is not subject to U.S. patent law or the rules of the USPTO, the covenant language in Section 5.15 is not expressly limited to U.S. patent applications. The phrase "all pending patent applications" is drafted without geographic limitation, and it arguably encompasses international filings, including European patent applications and PCT applications. A lender seeking to enforce the covenant broadly would contend that the purpose of the covenant — to preserve the value of OWS's intellectual property portfolio and Meridian's collateral — is served by requiring prosecution of all pending applications, regardless of jurisdiction.
Moreover, the Security Agreement's definition of "Intellectual Property Collateral" includes "all patents, patent applications, and patent rights" without geographic limitation, and the "hereafter acquired" language brings the European application within the scope of Meridian's security interest. Allowing the European application to lapse reduces the value of the collateral pool.
We note that there is some ambiguity as to whether the phrase "timely prosecuting all pending patent applications" in Section 5.15 extends to foreign applications, as the covenant does not explicitly address international prosecution. However, we believe the stronger interpretation — and the interpretation that Meridian would adopt — is that the covenant encompasses all pending applications, whether domestic or international.
Covenant Risk Assessment: HIGH. Deemed withdrawal of B3 would likely constitute a breach of Section 5.15, though the argument is somewhat less clear-cut than for the U.S. applications.
D. Forfeiture of National-Phase Rights — A4 (PCT/US2023/010584) and A5 (PCT/US2023/010612)
A4 and A5 are international (PCT) applications in Sub-Family A. The thirty-month deadline from the January 10, 2022 priority date for entering the national phase in desired jurisdictions is July 9, 2025. OWS has already entered the national phase in Japan and at the European Patent Office for certain applications, but has not yet made national-phase entry decisions for other potentially important jurisdictions, including South Korea and China. Missing the July 9, 2025 deadline will permanently foreclose national-phase entry in all unselected jurisdictions.
Whether the failure to enter the national phase constitutes a "failure to prosecute" under Section 5.15 is a closer question. National-phase entry is a discretionary decision requiring affirmative action to designate specific countries, rather than a response to a pending office action. A borrower might argue that a decision not to enter the national phase in a particular jurisdiction is a legitimate business judgment, not a failure to prosecute. However, if the decision not to enter the national phase is driven solely by budget constraints rather than by strategic considerations — and particularly if the failure to act is a consequence of inaction and default rather than deliberate election — the Lender may argue that the Borrower has failed to "maintain, preserve, and protect" its intellectual property by allowing valuable rights to expire through neglect.
The broader preservation obligation in Section 5.15, requiring OWS to "maintain, preserve, and protect all Material intellectual Property" and not to "do or fail to do . . . any act or thing which would impair, invalidate, or render unenforceable any Material intellectual Property," supports Meridian's position. Allowing PCT rights to lapse through inaction rather than through an affirmative, considered strategic decision is more likely to be viewed as a breach than a deliberate election to forgo protection in a particular jurisdiction.
Covenant Risk Assessment: MEDIUM. Failure to enter the national phase is likely a breach of the general preservation obligation, though the argument is less definitive than for failure to respond to a pending office action.
E. JPO Examination Requests — B4 (JP 2024-542197) and C3 (JP 2024-542305)
B4 and C3 are Japanese national-phase applications in Sub-Families B and C, respectively. Under Japanese Patent Law Article 48-3, an applicant must request examination within three years of the international filing date. The deadline for B4 and C3 is January 9, 2026. Failure to request examination within the statutory period results in deemed withdrawal of the applications.
The analysis here parallels that for B3 (the EPO application). The covenant language in Section 5.15 is not expressly limited to U.S. applications, and the phrase "timely prosecuting all pending patent applications" can reasonably be read to encompass the obligation to take all steps necessary to maintain the pendency of foreign applications, including requesting examination where required by foreign patent law. The Security Agreement's "hereafter acquired" language independently supports the conclusion that these applications are part of Meridian's collateral.
While the January 9, 2026 deadline provides more breathing room than the earlier deadlines, OWS should not defer consideration of these applications. If the budget freeze remains in effect, OWS faces the same risk of default with respect to B4 and C3 as it does with respect to the more immediate deadlines.
Covenant Risk Assessment: MEDIUM. Deemed withdrawal of B4 and C3 would likely constitute a breach of Section 5.15 under the same analysis applied to B3.
F. Overall Conclusion
Based on the foregoing analysis, we conclude that the abandonment of any of the twelve pending patent applications — and particularly the abandonment of A1, which is the most critical application and faces the most imminent deadline — would constitute a breach of Section 5.15 of the Credit Agreement under the most likely interpretation of the covenant. The breach would arise from the failure to "timely prosecute" pending patent applications and, independently, from the failure to "maintain, preserve, and protect" Material intellectual Property and intellectual Property Collateral.
Even under a narrow reading of the "Material intellectual Property" definition limited to applications expressly listed on Schedule 5.15(a), the general preservation obligation and the security interest provisions provide independent grounds for Meridian to assert a breach and declare an Event of Default. A court applying New York law — which governs the Credit Agreement — would likely interpret the covenant in accordance with its plain language and protective purpose, favoring the broader reading that encompasses all pending applications in OWS's portfolio.
OWS should proceed on the assumption that any abandonment will be treated by Meridian as a covenant breach and potential Event of Default, and should take the steps recommended in Section VII to mitigate this risk.
VI. Consequences of a Section 5.15 Default
The consequences of an Event of Default under the Credit Agreement would be severe and potentially existential for OWS. This Section outlines the principal consequences.
A. Event of Default and Acceleration
As discussed in Section III.D, a breach of Section 5.15 constitutes an Event of Default under Article VIII of the Credit Agreement. Upon the occurrence of an Event of Default, Meridian is entitled to accelerate the full outstanding balance under the Credit Facility. As of December 31, 2024, $32,500,000 was drawn on the facility. Acceleration would make this entire amount immediately due and payable, without further demand, presentment, protest, or notice.
OWS's current cash position and revenue trajectory (FY 2023 revenue of $47,300,000, down 30.5% from FY 2022) suggest that the Company would be unable to repay $32,500,000 on short notice without a significant capital infusion or refinancing — neither of which would be readily available in a default scenario. An acceleration event would likely precipitate a liquidity crisis.
In addition to accelerating the drawn balance, Meridian would have the right to terminate the remaining $22,500,000 in undrawn revolving commitments, permanently cutting off OWS's access to its primary source of working capital liquidity. The loss of the revolver would compound the liquidity pressure and could impair OWS's ability to fund ongoing operations, meet payroll, and satisfy trade obligations.
B. Remedies Under the Security Agreement
Upon an Event of Default, Meridian may exercise all remedies available to it under the Security Agreement, including foreclosure on and disposition of OWS's intellectual Property Collateral. The IP Collateral includes all thirty-one issued U.S. patents, as well as any pending applications that have not been abandoned as of the date of foreclosure. Additionally, the Security Agreement grants Meridian a security interest in OWS's other assets, including equipment, inventory, accounts receivable, and general intangibles.
Foreclosure on the intellectual Property Collateral would result in a forced disposition of the patent portfolio. The proceeds of a forced sale or disposition in a default scenario would likely be significantly less than the $38,500,000 fair market value estimated by Graystone Valuation Advisors as of April 28, 2023. Distressed sales of intellectual property assets routinely yield 20% to 40% of fair market value, depending on the nature of the assets, the urgency of the sale, and the availability of willing buyers. A disposition at a 60% to 80% discount to appraised value would result in proceeds of approximately $7,700,000 to $15,400,000 — far below the $32,500,000 outstanding on the facility, leaving a substantial deficiency balance.
Moreover, the loss of the patent portfolio would strip OWS of its principal competitive advantage in the silicon-photonics modulator market and would likely render the Company's equity value nominal.
C. Cross-Default and Downstream Effects
Standard cross-default provisions in the Credit Agreement may trigger defaults under other OWS financing arrangements, if any. While we have not been asked to review OWS's full suite of financing documents, cross-default provisions are common in commercial lending agreements, and a default under the Meridian facility could trigger cascading defaults across the Company's capital structure.
Beyond the immediate financial consequences, an Event of Default and potential foreclosure would cause significant reputational damage. Customers, suppliers, and business partners would become aware of the Company's financial distress, potentially leading to loss of counterparty confidence, accelerated customer attrition, and difficulty attracting and retaining key employees. The impact on OWS's ability to refinance the facility with a new lender, or to raise additional equity capital, would be profoundly negative.
D. Impact on Veltrano Capital
The consequences of a Section 5.15 default would fall disproportionately on Harborview Partners, which holds a 72% equity stake in OWS acquired at an enterprise value of approximately $310,000,000. A lender default, followed by acceleration of the $32,500,000 facility and potential foreclosure on the Company's IP portfolio, would severely impair — and potentially eliminate — Veltrano Capital's equity value in OWS.
There is a significant irony in the current situation. The Project Lighthouse budget cap of $25,000 per quarter for outside counsel IP spending was imposed as a cost-saving measure designed to preserve Veltrano Capital's equity value. However, the budget cap has had the paradoxical effect of creating a risk of far greater financial harm. The cost of responding to the A1 and B1 deadlines — estimated at $26,500 to $36,750 combined — is trivial compared to the $32,500,000 acceleration risk and the potential impairment of Veltrano Capital's equity investment. The full cost of reactivating the entire prosecution docket through mid-2026 — estimated at $220,000 to $295,000 — remains a small fraction of the value at risk.
We believe that communicating these financial realities to Veltrano Capital provides the most compelling basis for obtaining an exception to or modification of the Project Lighthouse budget cap, as discussed further in Section VII.E.
VII. Risk Mitigation Recommendations
Based on the foregoing analysis, we recommend that OWS take the following actions to mitigate the risk of a Section 5.15 default. We have organized these recommendations in order of priority and urgency.
A. Immediate Budget Authorization for Critical Deadlines
We recommend that OWS immediately authorize and fund prosecution responses for the two most critical and most imminent deadlines:
Priority 1: A1 (U.S. Patent Application No. 17/672,204) — Office Action Response.
The absolute deadline for responding to the non-final Office Action in A1 is March 9, 2025. As of the date of this memorandum, approximately forty-six (46) calendar days remain. No further extensions of time are available. This is a non-negotiable, irrevocable deadline; if it passes without a substantive response, the foundational U.S. application in OWS's pending patent family will be abandoned.
Calderwood & Harkness estimates the cost of preparing and filing the Office Action response at approximately $22,000 to $30,000. This estimate reflects approximately 40 to 55 attorney hours at the discounted blended rates set forth in our engagement letter, plus applicable USPTO filing fees. We note that a draft response was partially prepared by Christy Bauer through August 2023, prior to the suspension of work following the Project Lighthouse budget freeze. The draft was suspended before partner review and will require updating to reflect current case law and any intervening prior art, but the existence of the partial draft will reduce the total hours required.
Priority 2: B1 (U.S. Patent Application No. 17/814,057) — Restriction Requirement Response.
The deadline for responding to the Restriction Requirement in B1 is April 21, 2025. We estimate the cost of preparing and filing the Restriction Requirement response at approximately $4,500 to $6,750, reflecting approximately 8 to 12 attorney hours. No USPTO fee is required for a Restriction Requirement response. The response requires only an election of a single invention group for continued prosecution; the substantive work is primarily strategic (determining which group to elect) and drafting the election.
Combined Cost. The combined estimated cost for these two priority actions is approximately $26,500 to $36,750. This amount is well below the Project Lighthouse quarterly cap of $25,000 if allocated across two quarters, and in any event represents a negligible expenditure relative to the potential harm of a $32,500,000 loan acceleration, the loss of a $12,200,000 patent portfolio, and the broader downstream consequences described in Section VI.
We respectfully but strongly urge OWS to authorize these expenditures immediately. Every day of delay increases the risk that the work cannot be completed in time, particularly with respect to the A1 deadline.
B. Proactive Lender Disclosure
We recommend that OWS provide proactive written notice to Meridian National Bank — specifically to Brian Hartwell, OWS's designated Relationship Manager — regarding the budget constraints imposed under Project Lighthouse and their potential impact on the Company's ability to maintain its patent prosecution docket. A separate draft notification letter dated January 25, 2025, has been prepared by this office and is available for your review.
Proactive disclosure serves several important purposes:
(a) Preservation of good faith. Disclosing the issue before a breach occurs (or before Meridian discovers the issue independently) demonstrates that OWS is acting in good faith and is taking the covenant obligation seriously. This goodwill may be critical in any subsequent negotiation with Meridian regarding waivers, amendments, or forbearance.
(b) Forestalling an immediate default declaration. If Meridian learns of the prosecution dormancy independently — for example, through a routine collateral audit, a public patent database search, or a third-party report — the Lender may react by declaring an immediate Event of Default and exercising its remedies without providing OWS an opportunity to negotiate. Proactive disclosure allows OWS to frame the issue and propose a path forward on its own terms.
(c) Positioning for a waiver or amendment. A proactive disclosure, coupled with a specific plan for addressing the prosecution deadlines, positions OWS to negotiate a limited waiver or amendment from Meridian (as discussed in Section VII.C below).
We recognize that proactive disclosure carries risk. Alerting Meridian to the budget constraints and prosecution dormancy may prompt increased scrutiny of OWS's IP portfolio, requests for updated collateral valuations or appraisals, borrowing base adjustments, requests for additional reporting or compliance certifications, or other actions that could constrain OWS's operational flexibility. However, in our judgment, the risk of non-disclosure — i.e., that Meridian discovers the issue independently and reacts adversely — is significantly greater than the risk of proactive engagement. We recommend proceeding with disclosure, but only after OWS has authorized the A1 and B1 prosecution actions so that OWS can present Meridian with a credible remediation plan.
C. Covenant Waiver or Amendment
If, after consulting with Veltrano Capital and its board of directors, OWS determines that strategic abandonment of certain lower-priority applications is desirable or unavoidable — for example, that selective PCT national-phase entries should be limited to core jurisdictions, or that certain C-family applications should be abandoned in favor of concentrating resources on the A and B families — OWS should seek a limited waiver from Meridian before the relevant deadlines pass.
The waiver should be narrowly tailored to accomplish the following objectives:
(a) Specify, by application number and jurisdiction, which applications OWS may abandon or allow to lapse without triggering a breach of Section 5.15 or an Event of Default.
(b) Confirm that the Lender's consent to the specified abandonments does not constitute a waiver of any other covenant obligation or a modification of the Lender's rights under the Credit Agreement.
(c) Require OWS to provide an updated Schedule 5.15(a) reflecting the remaining portfolio following the abandonments.
(d) Potentially include enhanced reporting obligations, such as quarterly prosecution status reports, to provide Meridian with ongoing visibility into the status of the remaining pending applications.
Calderwood & Harkness is prepared to draft the waiver request and supporting documentation upon authorization. We note that engaging Meridian in a waiver discussion may also provide an opportunity to address the Schedule 5.15(a) update obligation discussed in Section VII.D below.
D. Schedule 5.15(a) Update
Regardless of the abandonment decisions ultimately made, OWS should update Schedule 5.15(a) to reflect the current state of its patent portfolio. The schedule has not been updated since March 15, 2022, and no longer accurately reflects the patents and patent applications that constitute Material intellectual Property under the Credit Agreement. The twelve pending applications filed between January 2023 and January 2024 should be added to the schedule (or, in the event that certain applications are abandoned with Meridian's consent, the remaining applications should be added and the abandoned applications identified).
Updating the schedule serves two purposes. First, it clarifies the scope of the "Material intellectual Property" definition going forward, reducing ambiguity and the risk of future disputes. Second, it demonstrates OWS's compliance with its obligation to maintain accurate disclosure schedules under the Credit Agreement — a separate obligation that OWS has arguably failed to satisfy since March 2022.
The update should be submitted to Meridian in connection with the proactive disclosure and waiver request discussed above, as a package of corrective actions demonstrating OWS's commitment to covenant compliance.
E. Coordination with Veltrano Capital
We strongly recommend that OWS communicate the lender covenant implications of the Project Lighthouse budget freeze to the appropriate decision-makers at Harborview Partners, specifically Christine Paulsen, Operating Partner, Technology, and Theodore "Ted" Hargrove, Managing Partner.
The analysis set forth in this memorandum provides a compelling, quantified basis for requesting an exception to or m