1037-00004 · Solstice Biomedical Devices Ltd · Regulatory & Compliance

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MEMORANDUM

PRIVILEGED & CONFIDENTIAL ATTORNEY WORK PRODUCT

TO: Eamon Rourke, General Counsel, Solstice Biomedical Devices Ltd. Brendan Molloy, CFO, Solstice Biomedical Devices Ltd.

FROM: Marcus Delgado, Responsible Partner, Calderwood & Harkness LLP Christy Bauer, Lead Associate, Calderwood & Harkness LLP

DATE: June 9, 2025

RE: Tax Implications of Lump-Sum and Royalty Payments Under Proposed Settlement — Apex Surgical Innovations, Inc. v. Solstice Biomedical, Inc., Case No. 1:24-cv-00587-RGA (D. Del.)

MATTER NO.: 10294.0017

COPIES: Dr. Fiona Tierney, CEO, Solstice Biomedical Devices Ltd. Niamh Cassidy, VP, Regulatory & IP, Solstice Biomedical Devices Ltd. Peter Vassiliev, Working Associate, Calderwood & Harkness LLP

PREPARED FROM: Calderwood & Harkness LLP 1201 Market Street, Suite 2500 Wilmington, DE 19801

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I. Executive Summary

This memorandum analyzes the U.S. federal income tax, Delaware state tax, and Irish tax treatment of the two categories of payments that Solstice will make to Apex Surgical Innovations, Inc. ("Apex") under the proposed settlement of Apex Surgical Innovations, Inc. v. Solstice Biomedical, Inc., Case No. 1:24-cv-00587-RGA (D. Del.) (the "Litigation"). The two payment categories are:

(a) The lump-sum payment of $8,750,000, payable in two tranches — $5,250,000 due on or before June 30, 2025, and $3,500,000 due on or before September 15, 2025; and

(b) The ongoing running royalty of 3.75% of Net Sales of Licensed Products (specifically, the PrecisionEdge™ PE-5000, PE-12000, and PE-15000 series instruments and all successor models), payable for the remaining life of the Licensed Patents (through January 10, 2038).

We note at the outset that both the lump-sum settlement payments and the running royalty obligations are borne entirely by Solstice. These payments are not covered by the intellectual property insurance policy maintained with Halcyon Specialty Insurance Co. under Policy No. HSI-IP-2023-04891. That policy covers only defense fees and costs incurred in connection with the Litigation. Accordingly, Solstice will bear the full economic burden of both payment categories, and the tax implications analyzed below have a direct and material effect on the after-tax cost of the settlement to Solstice.

The analysis herein accounts for the dual-entity corporate structure through which Solstice operates. Solstice Biomedical Devices Ltd. (the "Irish Parent") is an Irish-incorporated company (CRO No. 648217) with its registered office at Unit 14, Clonskeagh Business Park, Clonskeagh Road, Dublin 14, D14 YF28, Ireland. It is the ultimate parent entity of the Solstice group. Solstice Biomedical, Inc. (the "U.S. Subsidiary" or "Solstice US") is a Delaware corporation (EIN: 84-3291056) with its principal offices at 3800 Concord Pike, Suite 410, Wilmington, DE 19803. The U.S. Subsidiary is a wholly owned subsidiary of the Irish Parent and is the named defendant in the Litigation.

Apex Surgical Innovations, Inc. ("Apex") is a Delaware corporation (EIN: 51-0483762) with its principal office at 1220 North Market Street, Suite 550, Wilmington, DE 19801. Both the payor subsidiary and the payee are U.S. domestic entities for purposes of the domestic payments. However, a separate analysis is required for the potential Irish tax consequences at the parent-company level, including the treatment of any intercompany recharges, transfer pricing implications, and the application of the U.S.-Ireland income tax treaty.

Our key conclusions, which are developed in detail in the body of this memorandum, are as follows:

1. Lump-Sum Payment — U.S. Federal Deductibility. The lump-sum payment of $8,750,000 is likely deductible for U.S. federal income tax purposes as an ordinary and necessary business expense under IRC § 162(a), to the extent it is properly allocable to the settlement of past infringement damages. Any portion allocable to the acquisition of the prospective non-exclusive patent license may be subject to capitalization and amortization under IRC § 167 or § 197. We recommend that the Definitive Settlement Agreement include language maximizing the allocation to past damages.

2. Running Royalty Payments — U.S. Federal Deductibility. The running royalty payments of 3.75% of Net Sales are deductible as ordinary and necessary business expenses under IRC § 162(a) in the taxable year in which they accrue. There is no capitalization issue with respect to periodic royalty payments for ongoing use of the licensed technology.

3. Withholding Tax and U.S.-Ireland Treaty. Because both the direct payor (Solstice US) and the payee (Apex) are U.S. domestic corporations, no U.S. withholding tax applies to the settlement or royalty payments. However, if any portion of the settlement cost is economically borne or reimbursed by the Irish Parent through intercompany arrangements, the U.S.-Ireland Income Tax Treaty (Article 12, Royalties) may be relevant. Under the treaty, the applicable withholding rate on patent royalties paid to a qualifying Irish resident is 0%.

4. Irish Corporation Tax Treatment. If the settlement costs are borne at the U.S. Subsidiary level, there are no direct Irish corporation tax consequences. If the Irish Parent funds, reimburses, or is recharged for any portion of the settlement costs, the deductibility of such amounts will depend on whether the expenditure qualifies as "wholly and exclusively laid out for the purposes of the trade" under Section 81 of the Taxes Consolidation Act 1997. The Irish Parent's trading income is taxed at the 12.5% rate; passive income is taxed at 25%.

5. Transfer Pricing. Any intercompany allocation of the settlement costs between the Irish Parent and the U.S. Subsidiary must comply with the arm's-length principle under both IRC § 482 and Part 35A of the Taxes Consolidation Act 1997 (as amended by Finance Act 2019). Contemporaneous documentation should be prepared to support the allocation rationale.

We strongly recommend that Solstice coordinate with its auditors, Glenmore & Byrne LLP (25 St. Stephen's Green, Dublin 2, Ireland), on the Irish tax reporting and IFRS accounting treatment of the settlement liability and royalty obligations. The remainder of this memorandum sets forth the detailed analysis underlying these conclusions.

II. Background and Settlement Payment Structure

A. The Litigation and Settlement Context

On May 9, 2024, Apex Surgical Innovations, Inc. filed a complaint for patent infringement in the United States District Court for the District of Delaware, Case No. 1:24-cv-00587-RGA, before the Honorable Richard G. Andrews, United States District Judge. The complaint alleges that Solstice Biomedical, Inc.'s PrecisionEdge™ line of laparoscopic surgical instruments infringes three Apex utility patents:

• U.S. Patent No. 9,814,237 (the "'237 Patent"), entitled "Articulating Jaw Assembly for Minimally Invasive Surgical Instruments," issued November 14, 2017, with an expiration date of June 22, 2035;

• U.S. Patent No. 10,271,884 (the "'884 Patent"), entitled "Bipolar Electrosurgical Sealing Device with Adaptive Pressure Control," issued April 30, 2019, with an expiration date of September 15, 2036; and

• U.S. Patent No. 10,932,105 (the "'105 Patent"), entitled "Integrated Tissue Sensing and Feedback System for Laparoscopic Instruments," issued March 3, 2020, with an expiration date of January 10, 2038.

The named inventor on all three patents is Dr. Raymond Szabo, currently Vice President of Engineering at Apex. All three patents have been assigned to Apex and are maintained in good standing with the United States Patent and Trademark Office.

The accused Solstice products are the PrecisionEdge™ PE-5000, PE-12000, and PE-15000 series of laparoscopic surgical instruments, which are manufactured by the Irish Parent at its facility in Dublin and sold in the United States by the U.S. Subsidiary. Combined U.S. sales of the accused PrecisionEdge™ products from calendar year 2021 through the third quarter of 2024 totaled approximately $74,600,000, broken down as follows:

The weighted average gross margin on the accused PrecisionEdge™ products over this period was approximately 61.3%, reflecting the premium positioning of these instruments in the advanced laparoscopic surgery market.

Apex retained Hugh Danaher, CFA, of Keystone Valuation Advisors LLC, as its damages expert. Mr. Danaher's preliminary report, served on April 22, 2025, claimed $31,800,000 in reasonable royalty damages based on a hypothetical negotiation analysis and application of the Georgia-Pacific factors. Although Solstice's damages expert, Dr. Miriam Chen of Quantitative Analytics Group, submitted a responsive report estimating significantly lower damages, the parties determined that a negotiated settlement was in the best interest of all stakeholders.

The parties executed a binding Term Sheet on June 10, 2025, setting forth the principal economic and legal terms of the settlement. The Definitive Settlement Agreement and Patent License Agreement (collectively, the "Settlement Documents") are targeted for execution on June 16, 2025. Upon execution, the parties will file a joint stipulation of dismissal with prejudice with the Court.

B. Payment Terms

The settlement requires Solstice to make two categories of payments to Apex, as described below.

Lump-Sum Payment. Solstice will pay Apex a total of $8,750,000 in two tranches:

Tranche 1: $5,250,000 due within ten (10) business days of the execution of the Definitive Settlement Agreement. Based on a targeted execution date of June 16, 2025, the payment deadline for Tranche 1 is June 30, 2025.

Tranche 2: $3,500,000 due on or before September 15, 2025.

Both tranches are to be deposited into an escrow account established and maintained by Tidewater Fiduciary Services, Inc. (300 Delaware Avenue, Suite 1400, Wilmington, DE 19801; contact: Jennifer Hsu, Vice President, Escrow Services). Under the terms of the Escrow Agreement, Tidewater will release the escrowed funds to Apex within three (3) business days of each deposit, provided that no bona fide dispute notice has been filed by either party during the intervening period.

Running Royalty. In addition to the lump-sum payment, Solstice will pay Apex a running royalty of 3.75% of Net Sales of Licensed Products for the remaining life of the Licensed Patents. The key terms of the running royalty obligation are as follows:

• Licensed Products: PrecisionEdge™ PE-5000, PE-12000, and PE-15000 series instruments, and all successor models incorporating technology covered by one or more claims of the Licensed Patents.

• Net Sales: Defined as gross invoiced sales of Licensed Products, less (i) returns, (ii) rebates and volume discounts, (iii) chargebacks (including managed-care and group purchasing organization chargebacks), (iv) outbound freight and shipping charges, and (v) sales taxes, use taxes, and value-added taxes.

• Estimated Year 1 Running Royalty (CY 2026): Approximately $907,500, based on projected Net Sales of $24,200,000, assuming approximately 8% year-over-year growth from FY 2023 Net Sales of approximately $22,400,000.

• Royalty Floor: $500,000 per calendar year, beginning in calendar year 2026. If the calculated royalty (3.75% of Net Sales) in any calendar year is less than $500,000, Solstice will pay the floor amount of $500,000 for that year.

• Royalty Cap: $1,800,000 per calendar year. If the calculated royalty (3.75% of Net Sales) in any calendar year exceeds $1,800,000, Solstice's royalty obligation for that year is limited to $1,800,000.

• Royalty Term: The running royalty obligation commences on the effective date of the Definitive Settlement Agreement and runs through the expiration date of the last-to-expire Licensed Patent, which is January 10, 2038 (the expiration date of the '105 Patent).

• Reporting: Royalties are to be calculated and reported on a quarterly basis, using the Form of Royalty Report attached as Exhibit D to the Patent License Agreement.

C. Payor Entity Identification

An important threshold question for the tax analysis is which Solstice entity will be the payor of the settlement amounts. Based on discussions with Eamon Rourke and Brendan Molloy, and based on the litigation posture, we understand that:

• Solstice Biomedical, Inc. (U.S. Subsidiary) is the named defendant in the Litigation and is the entity that manufactures (through contract manufacturing arrangements with the Irish Parent), markets, distributes, and sells the accused PrecisionEdge™ products in the United States. As such, Solstice US is the logical and presumptive direct payor for both the lump-sum payment and the running royalty obligations. The U.S. revenue from the accused products — totaling $74,600,000 from CY 2021 through Q3 2024 — is generated at the Solstice US level.

• Solstice Biomedical Devices Ltd. (Irish Parent) is also a party to the Settlement Agreement and the Patent License Agreement. The Term Sheet provides that both the Irish Parent and the U.S. Subsidiary are licensees under the non-exclusive patent license. It is necessary to determine whether the Irish Parent is jointly and severally liable for the settlement payments, whether it is guaranteeing the U.S. Subsidiary's payment obligations, or whether its role is limited to being a licensed party under the patent license grant.

The identification of the payor entity has significant implications for the U.S. federal income tax deduction, the Irish corporation tax treatment, and the transfer pricing analysis. If the Irish Parent bears or reimburses any portion of the settlement costs — whether through an intercompany capital contribution, an intercompany loan, or a direct cost-recharge — a separate set of tax consequences arises at both the U.S. and Irish levels, including potential withholding tax and transfer pricing issues. We address these matters in detail in Sections IV through VI below.

III. U.S. Federal Income Tax Treatment

A. Characterization of the Lump-Sum Payment

1. General Principles — Deductibility of Litigation Settlement Payments. Under Section 162(a) of the Internal Revenue Code ("IRC"), a taxpayer may deduct "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." Litigation settlement payments are generally deductible under this provision, provided that the underlying litigation arises out of and is connected to the taxpayer's trade or business activities.

Following the enactment of the Tax Cuts and Jobs Act of 2017 ("TCJA"), IRC § 162(f) was amended to deny deductions for amounts paid or incurred to, or at the direction of, a government or governmental entity in relation to the violation of any law or the investigation or inquiry into the potential violation of any law. However, this provision is inapplicable to the settlement at issue here, which involves a private-party patent infringement dispute between two commercial entities. No governmental entity is involved in the settlement, and the settlement does not relate to any violation of law or regulatory enforcement action.

The characterization of a litigation settlement payment for tax purposes is governed by the "origin-of-the-claim" test, as established by the Supreme Court in United States v. Gilmore, 372 U.S. 39 (1963), and Woodward v. Commissioner, 397 U.S. 572 (1970). Under this test, the tax character of a settlement payment is determined not by the consequences of the litigation or the taxpayer's motives for settling, but rather by the nature and origin of the underlying claim that gave rise to the litigation. The relevant inquiry is: "In lieu of what was the settlement amount paid?"

Applying the origin-of-the-claim test to the present settlement, the underlying claims are for patent infringement — specifically, Apex's allegations that Solstice's PrecisionEdge™ laparoscopic surgical instruments infringe Apex's '237, '884, and '105 Patents. These claims arise directly from and relate to Solstice's ordinary course of business: the manufacture, marketing, distribution, and sale of advanced laparoscopic surgical instruments. This is the core commercial activity of both the Irish Parent (which had FY 2023 consolidated revenue of €187.4 million) and the U.S. Subsidiary (which generated $22.4 million in U.S. Net Sales of the accused products in FY 2023 alone). The settlement payments are made to resolve claims that are inextricably connected to Solstice's ongoing trade or business.

Conclusion: The lump-sum payment of $8,750,000 should be deductible as an ordinary and necessary business expense under IRC § 162(a), subject to the capitalization analysis discussed immediately below.

2. Capitalization vs. Expensing Analysis. Although the lump-sum payment is deductible in principle under § 162(a), an important subsidiary question is whether any portion of the payment must be capitalized rather than currently expensed. Under IRC § 263(a), amounts paid to acquire, produce, or improve tangible or intangible property must be capitalized. The Supreme Court in INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992), held that a taxpayer must capitalize an expenditure that creates or enhances a separate and distinct asset or produces significant future benefits beyond the current taxable year.

The proposed settlement combines two distinct economic components:

(a) Resolution of Past Damages Liability. A substantial portion of the lump-sum payment represents Apex's consideration for releasing its claims for past patent infringement damages. Apex's damages expert, Mr. Danaher, quantified these damages at $31,800,000 based on a reasonable royalty theory. The $8,750,000 lump-sum (combined with the ongoing royalty obligation) represents Solstice's negotiated resolution of this past liability. Amounts paid to settle a pre-existing liability for past infringement are generally currently deductible under § 162(a) as ordinary business expenses. See, e.g., Helvering v. Hampton Cotton Mills Co., 59 F.2d 559 (4th Cir. 1932); Ostheimer v. United States, 264 F.2d 789 (3d Cir. 1959).

(b) Acquisition of a Prospective License Right. The settlement also includes a grant to Solstice of a non-exclusive license under the three Licensed Patents, permitting Solstice to continue manufacturing and selling the PrecisionEdge™ products through the expiration of the last Licensed Patent on January 10, 2038. To the extent any portion of the lump-sum is properly allocable to the acquisition of this prospective license right — an intangible asset with a useful life extending approximately 12.6 years beyond the settlement date — that portion may be subject to capitalization and amortization.

The Term Sheet executed on June 10, 2025, does not explicitly allocate the $8,750,000 lump-sum between (a) compensation for past infringement damages and (b) consideration for the prospective patent license. This absence of an explicit allocation creates ambiguity that could be resolved unfavorably by the IRS upon audit.

Section 197 vs. Section 167 Analysis. If any portion of the lump-sum is capitalized as a cost of acquiring the non-exclusive patent license, the applicable amortization provision must be determined. IRC § 197 generally requires that the cost of certain intangible assets — including "any license, permit, or other right granted by a governmental unit or an agency or instrumentality thereof" — be amortized ratably over a 15-year period beginning in the month of acquisition, regardless of the actual useful life of the asset. However, the § 197 definition of "amortizable intangibles" has been the subject of considerable interpretive complexity with respect to patent licenses acquired from private parties (as opposed to governmental units). Under Treasury Regulation § 1.197-2(b)(8), an interest in a patent or copyright (whether acquired as part of the acquisition of a trade or business or otherwise) is generally a § 197 intangible if it is a "right to use" an intangible rather than an ownership interest. Nevertheless, certain self-created intangibles and intangibles not acquired in connection with the acquisition of a trade or business may be excluded from § 197 treatment under IRC § 197(c)(2) and (d).

If the non-exclusive patent license acquired in the settlement is determined to fall outside the scope of § 197, it would be amortizable under the general depreciation provision of IRC § 167 over its actual useful life — that is, the remaining term of the Licensed Patents through January 10, 2038 (approximately 12.6 years from the settlement date). The distinction is significant: amortization over 12.6 years under § 167 produces larger annual deductions than amortization over 15 years under § 197.

Practical Recommendation. We recommend that Solstice take the following steps to maximize the current deductibility of the lump-sum payment and minimize the portion subject to capitalization:

(i) The Definitive Settlement Agreement should include an explicit allocation clause providing that the lump-sum payment constitutes compensation for the settlement and release of Apex's claims for past patent infringement damages, and that the running royalty constitutes the consideration for the prospective non-exclusive patent license.

(ii) Solstice should prepare and retain contemporaneous documentation supporting the position that the entire $8,750,000 lump-sum (or the maximum defensible portion thereof) is allocable to past damages and is currently deductible. This documentation should include: (a) Apex's damages expert report quantifying past damages at $31,800,000; (b) internal analyses prepared by or for Solstice showing that the lump-sum was negotiated as a discount to Apex's damages claim; and (c) correspondence between the parties during settlement negotiations that reflects the parties' understanding of the lump-sum as damages compensation.

(iii) If any portion of the lump-sum is allocated to the license acquisition (for example, based on a negotiated or auditor-determined fair value allocation), that portion should be capitalized and amortized over the remaining useful life of the Licensed Patents through January 10, 2038, under IRC § 167 (or, if § 197 applies, over 15 years).

We note that Apex may have competing tax preferences with respect to the allocation. For Apex as the recipient, an allocation to past damages would generally produce ordinary income, whereas an allocation to a license grant might be treated differently depending on Apex's specific circumstances. These competing interests may need to be addressed in the settlement negotiations, and we recommend discussing the allocation language with Apex's counsel, Victoria Stanton of Hargrove, Tate & Bennington LLP, to reach a mutually acceptable formulation.

3. Timing of Deduction. Solstice Biomedical, Inc. is a Delaware C-corporation and, based on its revenue level and corporate structure, is required to use the accrual method of accounting for federal income tax purposes. Under the accrual method, a deduction is allowable in the taxable year in which all events have occurred that establish the fact of the liability, the amount of the liability can be determined with reasonable accuracy, and economic performance has occurred with respect to the liability. IRC § 461(h); Treas. Reg. § 1.461-1(a)(2).

All-Events Test. The all-events test is satisfied upon execution of the Definitive Settlement Agreement (targeted for June 16, 2025), at which point Solstice's obligation to pay the lump-sum becomes fixed and determinable. The amount of the liability — $8,750,000 — is specified in the Settlement Agreement.

Economic Performance. Under IRC § 461(h)(2)(C), for liabilities arising from a "tort, breach of contract, or violation of law," economic performance occurs as payment is made. However, because the lump-sum is payable in two tranches (June 30, 2025 and September 15, 2025), and both tranches fall within Solstice's 2025 taxable year (assuming a calendar-year filing), both payments satisfy the economic performance requirement in the 2025 taxable year.

Conclusion: Both tranches of the lump-sum payment — $5,250,000 (due June 30, 2025) and $3,500,000 (due September 15, 2025) — are likely deductible in the 2025 taxable year. The full $8,750,000 deduction should be reflected on Solstice Biomedical, Inc.'s U.S. federal corporate income tax return (IRS Form 1120) for the taxable year ending December 31, 2025.

B. Characterization of the Running Royalty Payments

1. Deductibility. The running royalty payments of 3.75% of Net Sales of Licensed Products are ordinary and necessary business expenses deductible under IRC § 162(a). Royalties paid for the right to use patented technology in the taxpayer's trade or business are a paradigmatic example of currently deductible business expenses. See Treas. Reg. § 1.162-1(a) (listing "rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title" as deductible business expenses).

Unlike the lump-sum payment, the running royalty payments are periodic in nature and represent the ongoing cost of using the licensed patent technology. They do not create a separate and distinct asset, nor do they produce future benefits beyond the period in which they are paid. Accordingly, there is no capitalization issue with respect to the running royalty payments. They are deductible in full as incurred.

The minimum royalty obligation (the "floor" of $500,000 per calendar year beginning in CY 2026) is likewise deductible as an ordinary business expense in the year in which it accrues. Even though the minimum royalty may exceed the calculated 3.75% royalty in a low-sales year, it represents the contractually required cost of maintaining the license and is an ordinary cost of Solstice's business operations.

The royalty cap of $1,800,000 per calendar year limits Solstice's maximum royalty obligation and, correspondingly, limits the maximum annual deduction to $1,800,000, regardless of the calculated royalty amount.

2. Timing. Under the accrual method of accounting, the running royalty payments are deductible in the taxable year in which they accrue. The Patent License Agreement provides for quarterly reporting periods (as specified in Exhibit D, the Form of Royalty Report), and royalties accrue based on Net Sales during each quarterly period. The all-events test is satisfied at the end of each quarter when the Net Sales figures are determined and the royalty liability becomes fixed and determinable.

For the minimum royalty obligation ($500,000 per year beginning CY 2026), the accrual timing depends on the specific terms of the Settlement Agreement. If the minimum royalty is payable as a lump sum at year-end (or upon determination that the calculated royalty is below the floor), the deduction arises at that point. If it is payable in quarterly installments, it accrues ratably over the year. We will review the final payment terms in the Definitive Settlement Agreement to confirm the accrual methodology.

C. Tax Rate and Net Impact

The applicable U.S. federal corporate income tax rate is 21%, as established by the TCJA effective for taxable years beginning after December 31, 2017.

The estimated tax benefits from the settlement payments are as follows:

These estimates assume that the lump-sum is fully deductible as a current expense under § 162(a). To the extent any portion of the lump-sum is capitalized and amortized, the tax benefit in 2025 would be reduced, and the benefit would be spread over the amortization period.

Delaware State Tax. Delaware does not impose a corporate income tax on corporate income. However, Delaware does impose a gross receipts tax (the "Delaware Mercantile License Fee") on certain in-state business receipts. This tax applies to the receipts of businesses operating in Delaware, not to outbound payments made by Delaware entities. Accordingly, the gross receipts tax should not apply to Solstice's settlement or royalty payments. We recommend confirming this analysis with Brendan Molloy, as the gross receipts tax rules contain nuances that may warrant further review depending on the characterization of the payments in Solstice US's books and records.

We note that Delaware's gross receipts tax could potentially apply to Apex's receipt of funds as a Delaware-domiciled corporation, but this is Apex's concern and not Solstice's.

IV. U.S. Withholding Tax Analysis

A. Domestic Payment Scenario (Solstice US to Apex)

Both Solstice Biomedical, Inc. and Apex Surgical Innovations, Inc. are U.S. domestic corporations organized under the laws of Delaware. Payments made by one U.S. domestic corporation to another U.S. domestic corporation are not subject to U.S. withholding tax. IRC §§ 1441 and 1442, which impose withholding obligations on payments of U.S.-source income to foreign persons, are inapplicable to payments between two domestic entities.

Accordingly, Solstice US may remit the lump-sum payments and the running royalty payments directly to Apex (through the Tidewater escrow account or otherwise) without withholding any portion for U.S. federal tax purposes.

Information Reporting Requirements. Although no withholding tax applies, Solstice US may have information reporting obligations with respect to the settlement and royalty payments:

• Lump-Sum Payment: Depending on the characterization of the lump-sum payment, Solstice may be required to report the payment to Apex and to the IRS on IRS Form 1099-MISC (or Form 1099-NEC, if the payment is characterized as non-employee compensation, which is unlikely in this context). In general, payments of $600 or more made to a corporation in connection with the settlement of a legal proceeding are reportable under IRC § 6045(f) on Form 1099-MISC, box 10 (Gross proceeds paid to an attorney). However, because the settlement payment here is made directly to Apex (the party to the litigation) rather than to Apex's attorneys, the applicability of the reporting requirement depends on the specific payment routing. We recommend that Solstice consult with its tax return preparer on the applicable reporting form.

• Running Royalty Payments: Royalty payments in excess of $10 in any calendar year are reportable on IRS Form 1099-MISC, box 2 (Royalties). Solstice US should issue a Form 1099-MISC to Apex for each calendar year in which royalty payments exceed $10.

Recommendation: Solstice Biomedical, Inc. should obtain a completed IRS Form W-9 (Request for Taxpayer Identification Number and Certification) from Apex Surgical Innovations, Inc. prior to making the initial escrow deposit. The W-9 will confirm Apex's taxpayer identification number (EIN: 51-0483762) and certify that Apex is not subject to backup withholding.

B. Cross-Border Scenario: If the Irish Parent Bears or is Reimbursed for Settlement Costs

Although the direct payment flow is from Solstice US (a U.S. entity) to Apex (a U.S. entity), the analysis becomes more complex if the Irish Parent funds the settlement payments or is reimbursed for them. Several scenarios are possible:

(i) Capital Contribution. The Irish Parent may make a capital contribution to Solstice US to fund the settlement payments. In this case, the direct payment remains U.S.-to-U.S., and no withholding tax applies. The capital contribution itself has no immediate income tax consequences to either entity (it increases the Irish Parent's basis in Solstice US stock).

(ii) Intercompany Loan. The Irish Parent may lend funds to Solstice US to enable it to make the settlement payments. Again, the direct payment is U.S.-to-U.S., and no withholding tax applies to the settlement payment itself. However, interest payments on the intercompany loan from Solstice US to the Irish Parent would constitute U.S.-source interest subject to withholding under IRC § 1442, unless reduced or eliminated by the U.S.-Ireland Income Tax Treaty.

(iii) Intercompany Cost Recharge. If the Irish Parent directly reimburses or is recharged for a portion of the settlement costs through the intercompany transfer pricing framework, the recharge may be recharacterized for U.S. tax purposes as a deemed royalty or other payment from Solstice US to the Irish Parent. Such a recharacterized payment could be subject to U.S. withholding tax under IRC § 1442, unless the treaty provides a reduced rate.

In each of these scenarios, the direct payment from Solstice US to Apex remains a domestic payment not subject to withholding. The withholding tax issue arises only with respect to the intercompany flows between Solstice US and the Irish Parent. These intercompany flows, and the applicable treaty provisions, are discussed below and in Section VI.

C. U.S.-Ireland Income Tax Treaty Provisions

The Convention between the Government of the United States of America and the Government of Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains (the "Treaty"), signed on July 28, 1997, and as amended by the Protocol signed on March 24, 1999, governs the allocation of taxing rights between the United States and Ireland with respect to cross-border income flows.

Article 12 — Royalties. Article 12 of the Treaty provides that royalties arising in a Contracting State (i.e., the United States) and paid to a resident of the other Contracting State (i.e., Ireland) may be taxed in the state of residence. Article 12(1) further provides that such royalties may also be taxed in the Contracting State in which they arise, but the tax shall not exceed the rate specified in the Treaty. For royalties paid for the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, the Treaty rate is 0% — meaning that the United States may not impose withholding tax on patent royalties paid to a qualifying Irish resident.

This provision is significant in the present context. If any intercompany arrangement between Solstice US and the Irish Parent results in a deemed royalty payment from Solstice US to the Irish Parent — for example, if the Irish Parent is recharged for the cost of the Apex license and the recharge is treated as a payment for the use of patent rights — the Treaty would reduce the applicable U.S. withholding rate to 0%, effectively eliminating any U.S. withholding obligation.

Article 23 — Limitation on Benefits (LOB). The Treaty contains a limitation on benefits ("LOB") clause in Article 23, which is designed to prevent "treaty shopping" — that is, the use of the Treaty by persons who are not genuine residents of Ireland. To claim treaty benefits, Solstice Biomedical Devices Ltd. must satisfy one of the qualifying tests under Article 23. The relevant tests include:

(a) Ownership and Base Erosion Test: The Irish company must be more than 50% owned (directly or indirectly) by qualifying residents of Ireland or the United States, and less than 50% of the company's gross income must be paid or accrued to persons who are not residents of either Contracting State.

(b) Active Trade or Business Test: The Irish company must be engaged in the active conduct of a trade or business in Ireland, and the income for which treaty benefits are claimed must be derived in connection with, or incidental to, that trade or business.

(c) Derivative Benefits Test: The Irish company must be owned by persons who would have been entitled to equivalent or better treaty benefits had they received the income directly.

Solstice Biomedical Devices Ltd. is an Irish-domiciled company with substantial business operations in Ireland, including approximately 620 employees worldwide (with a significant portion based at the Dublin facility), FY 2023 consolidated revenue of €187.4 million, and active manufacturing and research and development operations at its Clonskeagh Business Park facility in Dublin. Based on these facts, Solstice is likely to satisfy the active trade or business test under Article 23, and thus qualifies for Treaty benefits, including the 0% withholding rate on patent royalties under Article 12.

IRS Form W-8BEN-E. If Solstice Biomedical Devices Ltd. receives any U.S.-source payments directly (or if the Irish Parent's entitlement to Treaty benefits needs to be documented for intercompany recharge purposes), the Irish Parent should file IRS Form W-8BEN-E (Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting) with the payor (Solstice US). The form would claim Treaty benefits under Article 12, specifying the 0% rate for patent royalties.

V. Irish Tax Treatment

A. Irish Corporation Tax on the Lump-Sum Payment

Under Irish tax law, the applicable corporation tax rate depends on the characterization of the income or expense at issue. Trading income of an Irish-resident company is taxed at the standard rate of 12.5%. Non-trading (passive) income — including investment income, rental income, and certain categories of foreign-source income — is taxed at the higher rate of 25%.

The treatment of the lump-sum payment for Irish corporation tax purposes depends on which Solstice entity bears the cost:

Scenario 1: Cost Borne by Solstice US. If the settlement payment is made by Solstice Biomedical, Inc. (the U.S. Subsidiary) out of its own funds and is treated as a cost of the U.S. Subsidiary's operations, the payment will not directly appear in the Irish Parent's profit and loss account. In this scenario, there are no direct Irish corporation tax consequences arising from the lump-sum payment. The cost is absorbed at the Solstice US level and reduces U.S. taxable income.

Scenario 2: Cost Funded or Reimbursed by the Irish Parent. If the Irish Parent funds or reimburses the settlement payment — for example, by making a capital contribution to Solstice US, lending funds to Solstice US, or directly recharging a portion of the settlement cost to itself under a cost-sharing arrangement — the deductibility of the expense at the Irish level depends on whether it qualifies as an expense "wholly and exclusively laid out or expended for the purposes of the trade or profession" under Section 81 of the Taxes Consolidation Act 1997 ("TCA 1997").

The lump-sum payment relates to the PrecisionEdge™ product line, which is sold predominantly in the U.S. market through the U.S. Subsidiary. However, the products are manufactured by the Irish Parent at its Dublin facility, and the underlying intellectual property of Solstice (as distinguished from the Apex patents at issue) may be held or co-developed by the Irish Parent. If the Irish Parent's trade encompasses activities related to the U.S. sales (such as manufacturing, product development, or group-level IP management), the settlement cost may qualify as a trading expense deductible at the 12.5% rate.

The Irish Revenue Commissioners may scrutinize whether a settlement payment arising from U.S. patent litigation is sufficiently connected to the Irish Parent's trade. If the Irish Parent can demonstrate that the settlement protects its manufacturing activities, its group-wide IP portfolio, or its interest in the PrecisionEdge™ product line, a deduction is defensible. However, if the settlement cost is viewed as relating exclusively to the U.S. Subsidiary's sales activities, the deductibility at the Irish level may be challenged.

Recommendation: We recommend coordinating with Glenmore & Byrne LLP (25 St. Stephen's Green, Dublin 2, Ireland), Solstice's auditors, on the proper characterization of the settlement expense under Irish tax law. Glenmore & Byrne should be provided with a copy of the executed Settlement Agreement and Patent License Agreement to assess the deductibility of any recharged costs.

B. Irish Tax Treatment of Running Royalty Payments

The Irish tax treatment of the running royalty payments follows a similar structure to the lump-sum analysis:

Scenario 1: Cost Borne by Solstice US. If the running royalties are paid by Solstice US to Apex, and the cost is borne entirely at the U.S. Subsidiary level, there is no direct Irish tax consequence. The royalty expense reduces Solstice US's U.S. taxable income but does not affect the Irish Parent's Irish tax position.

Scenario 2: Cost Recharged to the Irish Parent. If the royalty cost is recharged to the Irish Parent through the intercompany transfer pricing framework — for example, as part of a cost-plus or residual profit-split arrangement between the Irish Parent and Solstice US — the recharged royalty expense at the Irish level would need to be analyzed for deductibility under Section 81, TCA 1997. If the expense qualifies as a trading expense, it would be deductible against Irish trading income at the 12.5% rate.

The Irish transfer pricing rules, set forth in Part 35A of the TCA 1997 (as substantially amended by Finance Act 2019 to adopt the OECD's arm's-length principle more comprehensively), require that arrangements between associated enterprises be conducted at arm's length. If the royalty cost is recharged to the Irish Parent, the intercompany pricing of the recharge must be documented and must reflect the arm's-length standard. The Irish Parent's transfer pricing documentation file should include a description of the intercompany arrangement, a functional analysis, the chosen transfer pricing method, and supporting economic analysis.

C. Irish Withholding Tax on Royalties Received (Not Directly Applicable)

For completeness, we note that Irish domestic law imposes a withholding tax of 20% on patent royalties paid from Ireland to any person (whether resident or non-resident). This provision is set forth in Section 238 of the TCA 1997 and applies to royalties paid for the use of, or the right to use, any patent in Ireland.

In the present case, Solstice is the payor of royalties to Apex (a U.S. company), not the recipient of royalties from an Irish source. Accordingly, the Irish withholding tax on patent royalties is not directly relevant to the current settlement structure.

However, we note this provision for completeness because it may become relevant if Solstice establishes any sub-license arrangements or intercompany license structures in the future. For example, if the Irish Parent sublicenses the Apex patent rights to any Solstice affiliate operating through Ireland, the sublicense royalties could constitute Irish-source patent royalties subject to the 20% withholding tax. This possibility should be borne in mind in structuring any future intercompany arrangements.

D. Irish Capital Gains Considerations

The acquisition of a non-exclusive patent license is generally not treated as a capital acquisition for Irish tax purposes. A non-exclusive license grants the licensee a right to use the patented technology but does not convey any ownership interest in the underlying patents. Accordingly, the license grant does not give rise to a chargeable gain or loss for Irish Capital Gains Tax ("CGT") purposes.

No Irish CGT implications are anticipated from the patent license grant itself. However, if Solstice were to dispose of the license rights (for example, by assigning the license to a third party, if permitted under the Settlement Agreement), the proceeds of such a disposal could potentially give rise to a chargeable gain. We do not anticipate that such a disposal is contemplated at this time.

VI. Transfer Pricing Considerations

A. Intercompany Allocation of Settlement Costs

Solstice Biomedical Devices Ltd. (Irish Parent) and Solstice Biomedical, Inc. (U.S. Subsidiary) are "associated enterprises" within the meaning of both U.S. and Irish transfer pricing rules. They are members of the same multinational enterprise group, with the Irish Parent holding 100% of the shares of Solstice US. Accordingly, all intercompany transactions between the two entities — including any allocation or recharge of the settlement costs — must be conducted at arm's length.

The applicable legal frameworks are:

• U.S.: IRC § 482, which authorizes the IRS to distribute, apportion, or allocate gross income, deductions, credits, or allowances among commonly controlled taxpayers if necessary to prevent evasion of taxes or to clearly reflect income. The Treasury Regulations under § 482 (Treas. Reg. §§ 1.482-1 through 1.482-9) provide detailed guidance on arm's-length pricing methods for various types of intercompany transactions, including transfers of intangible property, cost-sharing arrangements, and services.

• Ireland: Part 35A of the TCA 1997 (as amended by Finance Act 2019), which requires that arrangements between associated entities be conducted in accordance with the arm's-length principle. The Irish rules are aligned with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2022 edition).

The key transfer pricing question is: Which entity should bear the economic cost of the settlement? The answer depends on the functional profile and risk allocation of each entity within the Solstice group's transfer pricing framework:

• If the U.S. Subsidiary bears market and infringement risk: The U.S. Subsidiary sells the accused PrecisionEdge™ products in the U.S. market and generated $74,600,000 in combined U.S. sales from CY 2021 through Q3 2024. If the U.S. Subsidiary bears the commercial risks associated with U.S. market activities — including the risk of third-party patent infringement claims — then the settlement cost logically relates to the U.S. Subsidiary's activities and should be borne by Solstice US. This allocation is consistent with the transfer pricing principle that entities bearing economic risks should receive the associated returns (and bear the associated costs).

• If the Irish Parent owns group-wide IP and bears strategic risk: If the Irish Parent owns the underlying Solstice proprietary technology (as distinguished from the Apex patents at issue) and licenses it to the U.S. Subsidiary — a common structure in multinational groups with centralized IP ownership in a favorable tax jurisdiction — some portion of the settlement cost may relate to protecting the group's ability to use its own technology without infringing third-party rights. In this case, the settlement cost could be viewed as a cost of maintaining the group's IP portfolio, partially justifiable as a cost to be shared between the Irish Parent and the U.S. Subsidiary.

The determination of the appropriate allocation will depend on the specific facts of Solstice's existing intercompany transfer pricing framework, including the characterization of each entity's functions, assets, and risks, and the existing intercompany agreements. We are not currently in possession of the full transfer pricing documentation for the Solstice group and recommend that this analysis be conducted in coordination with the group's transfer pricing advisors.

Recommendation: Regardless of which entity ultimately bears the settlement cost, the allocation rationale should be documented in contemporaneous transfer pricing documentation. This documentation should be prepared at or near the time of the settlement and should include a detailed explanation of why the chosen allocation reflects the arm's-length standard. Failure to maintain such documentation could expose Solstice to transfer pricing adjustments and penalties in both the United States and Ireland.

B. Intercompany License of the Apex Patent Rights

The non-exclusive license under the Licensed Patents is granted to both Solstice Biomedical Devices Ltd. (Irish Parent) and Solstice Biomedical, Inc. (U.S. Subsidiary) as co-licensees. This dual-licensee structure creates an important transfer pricing consideration: if either entity makes the licensed technology available to the other (through a sublicense, a cost-sharing arrangement, or otherwise), there must be an arm's-length intercompany charge for the benefit conferred.

For example, if the Irish Parent, as a co-licensee under the Apex license, makes the licensed technology available to the U.S. Subsidiary as part of a broader intercompany technology license arrangement, the intercompany charge for the Apex patent rights should be determined at arm's length. Similarly, if the U.S. Subsidiary bears the full cost of the Apex license (both the lump-sum and the running royalties) but the Irish Parent also benefits from the license (e.g., for manufacturing activities in Ireland), the transfer pricing framework should allocate a portion of the cost to the Irish Parent.

Arm's-Length Benchmark. The OECD Transfer Pricing Guidelines (2022) and the IRS regulations under § 482 identify several methods for determining arm's-length pricing for transfers of intangible property. In the present case, the comparable uncontrolled transaction (CUT) method may be particularly appropriate because the Apex license itself provides an arm's-length royalty rate (3.75% of Net Sales) negotiated between two unrelated parties (Apex and Solstice) in an adversarial settlement context. This rate can serve as a benchmark for any intercompany charge related to the same patent rights.

C. Documentation Requirements

Both the United States and Ireland impose transfer pricing documentation requirements on multinational enterprises:

United States. IRC § 6662(e) imposes accuracy-related penalties (generally 20% of the underpayment) for substantial valuation misstatements in the context of intercompany transactions. These penalties may be avoided if the taxpayer maintains contemporaneous documentation demonstrating that the intercompany pricing was determined in accordance with the arm's-length standard. The documentation must include a description of the intercompany transactions, the transfer pricing method applied, the economic analysis performed, and the comparable transactions or data relied upon.

Ireland. Section 835E of the TCA 1997 imposes mandatory transfer pricing documentation requirements on certain taxpayers, including "large" and "medium" companies as defined under the Irish Companies Act. Solstice Biomedical Devices Ltd., with consolidated revenue of €187.4 million, is likely classified as a "large" company and is therefore subject to the full documentation requirements, including a Master File and a Local File as described in the OECD Transfer Pricing Guidelines (Chapter V).

OECD Country-by-Country Reporting (CbCR). The OECD CbCR requirements, implemented in Ireland under Section 891H of the TCA 1997, apply to multinational enterprise groups with consolidated group revenue of €750 million or more. Solstice's consolidated revenue of €187.4 million is below the €750 million threshold. Accordingly, CbCR is not required for the Solstice group. However, the local documentation requirements (Master File and Local File) still apply and should address the settlement cost allocation.

VII. Specific Structural Recommendations

Based on the analysis set forth above, we recommend the following specific actions to optimize the tax treatment of the settlement and royalty payments.

A. Allocation of the Lump-Sum Payment in the Definitive Settlement Agreement

We recommend that the Definitive Settlement Agreement include explicit language characterizing the lump-sum payment of $8,750,000 as compensation for the settlement and full release of Apex's claims for past patent infringement damages. This characterization maximizes the portion of the lump-sum that is currently deductible as an ordinary business expense under IRC § 162(a), as opposed to being capitalized and amortized as a cost of acquiring the non-exclusive patent license.

Specifically, we recommend the inclusion of a recital provision substantially as follows:

"The Parties acknowledge and agree that the Lump-Sum Payment of $8,750,000, payable in two tranches as set forth in Section __, constitutes full and complete compensation to Apex for the settlement and release of all claims for damages, including reasonable royalty damages, arising from the alleged infringement of the Licensed Patents prior to the Effective Date, and is not consideration for the grant of the License set forth in Article __ of the Patent License Agreement."

We recognize that the inclusion of such language requires negotiation with Apex's counsel. Victoria Stanton of Hargrove, Tate & Bennington LLP should be consulted on whether this characterization is acceptable to Apex. As noted above, Apex may have competing tax preferences: for example, if Apex prefers to characterize the lump-sum as consideration for a capital asset (the license grant), it may seek capital gains treatment on the receipt. However, because the license is a non-exclusive license (not a transfer of "all substantial rights" in the patents), Apex is unlikely to qualify for capital gains treatment under IRC § 1235 in any event, which may reduce Apex's resistance to a damages-based allocation.

We are prepared to draft appropriate recital and operative language for inclusion in the Definitive Settlement Agreement and to coordinate with Ms. Stanton on the final formulation.

B. Entity-Level Payment Routing

We recommend that Solstice Biomedical, Inc. (the U.S. Subsidiary) make both the lump-sum and running royalty payments directly to Apex. This recommendation is driven by the following considerations:

1. Avoidance of U.S. withholding tax complexity. If the payments are routed through or made by the Irish Parent, the payments may be subject to U.S. withholding tax analysis under IRC §§ 1441 and 1442, requiring the filing of treaty claims and IRS Forms W-8BEN-E. By routing all payments from Solstice US (a U.S. domestic corporation) to Apex (another U.S. domestic corporation), the payment remains entirely within the domestic sphere, and no withholding tax issues arise.

2. Alignment of deduction with revenue. Solstice US generates the U.S. revenue from the accused PrecisionEdge™ products. Allowing Solstice US to deduct the settlement and royalty payments against its U.S. revenue produces the most efficient tax result, because the deduction offsets income taxed at the 21% U.S. corporate rate.

3. Simplicity and audit trail. Direct payment from Solstice US to Apex through the Tidewater escrow account provides a clean audit trail and minimizes the complexity of intercompany flows.

To implement this recommendation:

• All wire transfers to the escrow account at Tidewater Fiduciary Services, Inc. should originate from Solstice Biomedical, Inc.'s U.S. bank accounts.

• The wire transfer instructions letter to Jennifer Hsu at Tidewater should identify Solstice Biomedical, Inc. as the payor entity.

• Brendan Molloy (CFO) should ensure that the internal accounting records of Solstice US reflect the lump-sum and royalty payments as expenses of the U.S. Subsidiary.

C. Reporting and Compliance

The following reporting and compliance actions should be taken to ensure proper tax treatment:

Solstice Biomedical, Inc. (U.S. Subsidiary):

• Deduct the lump-sum payment on its U.S. federal corporate income tax return (IRS Form 1120) for the taxable year ending December 31, 2025.

• Deduct the running royalty payments on its IRS Form 1120 for the taxable year in which each royalty payment accrues.

• Issue IRS Form 1099-MISC to Apex Surgical Innovations, Inc. for royalty payments exceeding $10 in any calendar year, reporting the royalty amount in box 2 (Royalties).

• Obtain and retain a completed IRS Form W-9 from Apex prior to the initial escrow deposit.

Solstice Biomedical Devices Ltd. (Irish Parent):

• Report any intercompany recharges related to the settlement costs on its Irish corporation tax return (Form CT1) for the relevant accounting period.

• Maintain a complete transfer pricing documentation file supporting the arm's-length nature of any intercompany cost allocation, including a Master File and Local File in compliance with Section 835E, TCA 1997.

• Coordinate with Glenmore & Byrne LLP (Dublin) on the IFRS accounting treatment of the settlement liability and royalty obligation. Under IFRS, the settlement obligation will likely be recognized as a provision (or an accrued liability) upon execution of the Definitive Settlement Agreement, having previously been disclosed as a contingent liability in the notes to the financial statements. The transition from contingent liability to actual liability should be reflected in the financial statements for the period in which the Settlement Agreement is executed.

D. VAT / Sales Tax Considerations

U.S. Federal Sales Tax. There is no U.S. federal sales tax, and no U.S. federal value-added tax. The settlement payments and royalty payments are not subject to any U.S. federal consumption tax.

Irish VAT. Patent license royalties may be subject to reverse-charge VAT under the EU VAT Directive provisions for business-to-business cross-border supplies of services. Under the general rule for B2B services (Article 44 of the VAT Directive, implemented in Ireland by Section 34 of the Value-Added Tax Consolidation Act 2010), the place of supply is the place where the recipient of the service is established. If the Irish Parent is treated as the recipient of a patent license service from Apex (a U.S. supplier), the Irish Parent would be required to self-account for Irish VAT under the reverse-charge mechanism at the standard rate of 23%.

However, in the present case, the direct license is from Apex (a U.S. entity) to both the Irish Parent and the U.S. Subsidiary as co-licensees, and the primary payor is the U.S. Subsidiary. To the extent the license is used primarily in the United States (for the sale of PrecisionEdge™ products in the U.S. market), the Irish VAT exposure is minimized. We recommend that this issue be reviewed in greater detail with Glenmore & Byrne LLP if any portion of the license cost is recharged to the Irish Parent.

Delaware Gross Receipts Tax. As noted above, Delaware's gross receipts tax could potentially apply to Apex's receipt of the settlement and royalty payments as a Delaware-domiciled corporation. This is Apex's tax issue and not Solstice's obligation, but we note it here for completeness.

VIII. Impact on Insurance and Covered Costs

The $8,750,000 lump-sum settlement payment and all running royalty payments under the proposed settlement are explicitly not covered by Solstice's intellectual property insurance policy maintained with Halcyon Specialty Insurance Co. (Policy No. HSI-IP-2023-04891). The Halcyon policy provides coverage only for defense fees and costs incurred in connection with the defense of intellectual property infringement claims; it does not cover indemnity payments, settlement amounts, or license royalties.

As of June 1, 2025, total fees and costs billed in connection with the defense of the Litigation are as follows:

Of this amount, $2,597,319.42 has been covered by Halcyon, after application of the $250,000 self-insured retention ("SIR") borne by Solstice. The SIR was exhausted by invoices submitted through October 2024.

The insurance recovery is generally includable in Solstice's gross income for U.S. federal income tax purposes, unless it represents reimbursement of a previously deducted expense. Under the tax benefit rule of IRC § 111, if a taxpayer receives a recovery of an amount that was previously deducted (such as a refund of attorney fees that were deducted as business expenses in a prior year), the recovery is includable in gross income to the extent the prior deduction produced a tax benefit. Conversely, if the defense costs were deducted in the same year that the insurance reimbursement is received, the net effect is a wash (the deduction reduces income, and the reimbursement increases income).

The timing of insurance receipts relative to the deduction of defense costs is therefore relevant. We recommend that Brendan Molloy coordinate with Sandra Keene, the

MEMORANDUM
PRIVILEGED & CONFIDENTIAL ATTORNEY WORK PRODUCT
TO: Eamon Rourke, General Counsel, Solstice Biomedical Devices Ltd. Brendan Molloy, CFO, Solstice Biomedical Devices Ltd.
FROM: Marcus Delgado, Responsible Partner, Calderwood & Harkness LLP Christy Bauer, Lead Associate, Calderwood & Harkness LLP
DATE: June 9, 2025
RE: Tax Implications of Lump-Sum and Royalty Payments Under Proposed Settlement — Apex Surgical Innovations, Inc. v. Solstice Biomedical, Inc., Case No. 1:24-cv-00587-RGA (D. Del.)
MATTER NO.: 10294.0017
COPIES: Dr. Fiona Tierney, CEO, Solstice Biomedical Devices Ltd. Niamh Cassidy, VP, Regulatory & IP, Solstice Biomedical Devices Ltd. Peter Vassiliev, Working Associate, Calderwood & Harkness LLP
PREPARED FROM: Calderwood & Harkness LLP 1201 Market Street, Suite 2500 Wilmington, DE 19801
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I. Executive Summary
This memorandum analyzes the U.S. federal income tax, Delaware state tax, and Irish tax treatment of the two categories of payments that Solstice will make to Apex Surgical Innovations, Inc. ("Apex") under the proposed settlement of Apex Surgical Innovations, Inc. v. Solstice Biomedical, Inc., Case No. 1:24-cv-00587-RGA (D. Del.) (the "Litigation"). The two payment categories are:
(a) The lump-sum payment of $8,750,000, payable in two tranches — $5,250,000 due on or before June 30, 2025, and $3,500,000 due on or before September 15, 2025; and
(b) The ongoing running royalty of 3.75% of Net Sales of Licensed Products (specifically, the PrecisionEdge™ PE-5000, PE-12000, and PE-15000 series instruments and all successor models), payable for the remaining life of the Licensed Patents (through January 10, 2038).
We note at the outset that both the lump-sum settlement payments and the running royalty obligations are borne entirely by Solstice. These payments are not covered by the intellectual property insurance policy maintained with Halcyon Specialty Insurance Co. under Policy No. HSI-IP-2023-04891. That policy covers only defense fees and costs incurred in connection with the Litigation. Accordingly, Solstice will bear the full economic burden of both payment categories, and the tax implications analyzed below have a direct and material effect on the after-tax cost of the settlement to Solstice.
The analysis herein accounts for the dual-entity corporate structure through which Solstice operates. Solstice Biomedical Devices Ltd. (the "Irish Parent") is an Irish-incorporated company (CRO No. 648217) with its registered office at Unit 14, Clonskeagh Business Park, Clonskeagh Road, Dublin 14, D14 YF28, Ireland. It is the ultimate parent entity of the Solstice group. Solstice Biomedical, Inc. (the "U.S. Subsidiary" or "Solstice US") is a Delaware corporation (EIN: 84-3291056) with its principal offices at 3800 Concord Pike, Suite 410, Wilmington, DE 19803. The U.S. Subsidiary is a wholly owned subsidiary of the Irish Parent and is the named defendant in the Litigation.
Apex Surgical Innovations, Inc. ("Apex") is a Delaware corporation (EIN: 51-0483762) with its principal office at 1220 North Market Street, Suite 550, Wilmington, DE 19801. Both the payor subsidiary and the payee are U.S. domestic entities for purposes of the domestic payments. However, a separate analysis is required for the potential Irish tax consequences at the parent-company level, including the treatment of any intercompany recharges, transfer pricing implications, and the application of the U.S.-Ireland income tax treaty.
Our key conclusions, which are developed in detail in the body of this memorandum, are as follows:
1. Lump-Sum Payment — U.S. Federal Deductibility. The lump-sum payment of $8,750,000 is likely deductible for U.S. federal income tax purposes as an ordinary and necessary business expense under IRC § 162(a), to the extent it is properly allocable to the settlement of past infringement damages. Any portion allocable to the acquisition of the prospective non-exclusive patent license may be subject to capitalization and amortization under IRC § 167 or § 197. We recommend that the Definitive Settlement Agreement include language maximizing the allocation to past damages.
2. Running Royalty Payments — U.S. Federal Deductibility. The running royalty payments of 3.75% of Net Sales are deductible as ordinary and necessary business expenses under IRC § 162(a) in the taxable year in which they accrue. There is no capitalization issue with respect to periodic royalty payments for ongoing use of the licensed technology.
3. Withholding Tax and U.S.-Ireland Treaty. Because both the direct payor (Solstice US) and the payee (Apex) are U.S. domestic corporations, no U.S. withholding tax applies to the settlement or royalty payments. However, if any portion of the settlement cost is economically borne or reimbursed by the Irish Parent through intercompany arrangements, the U.S.-Ireland Income Tax Treaty (Article 12, Royalties) may be relevant. Under the treaty, the applicable withholding rate on patent royalties paid to a qualifying Irish resident is 0%.
4. Irish Corporation Tax Treatment. If the settlement costs are borne at the U.S. Subsidiary level, there are no direct Irish corporation tax consequences. If the Irish Parent funds, reimburses, or is recharged for any portion of the settlement costs, the deductibility of such amounts will depend on whether the expenditure qualifies as "wholly and exclusively laid out for the purposes of the trade" under Section 81 of the Taxes Consolidation Act 1997. The Irish Parent's trading income is taxed at the 12.5% rate; passive income is taxed at 25%.
5. Transfer Pricing. Any intercompany allocation of the settlement costs between the Irish Parent and the U.S. Subsidiary must comply with the arm's-length principle under both IRC § 482 and Part 35A of the Taxes Consolidation Act 1997 (as amended by Finance Act 2019). Contemporaneous documentation should be prepared to support the allocation rationale.
We strongly recommend that Solstice coordinate with its auditors, Glenmore & Byrne LLP (25 St. Stephen's Green, Dublin 2, Ireland), on the Irish tax reporting and IFRS accounting treatment of the settlement liability and royalty obligations. The remainder of this memorandum sets forth the detailed analysis underlying these conclusions.
II. Background and Settlement Payment Structure
A. The Litigation and Settlement Context
On May 9, 2024, Apex Surgical Innovations, Inc. filed a complaint for patent infringement in the United States District Court for the District of Delaware, Case No. 1:24-cv-00587-RGA, before the Honorable Richard G. Andrews, United States District Judge. The complaint alleges that Solstice Biomedical, Inc.'s PrecisionEdge™ line of laparoscopic surgical instruments infringes three Apex utility patents:
• U.S. Patent No. 9,814,237 (the "'237 Patent"), entitled "Articulating Jaw Assembly for Minimally Invasive Surgical Instruments," issued November 14, 2017, with an expiration date of June 22, 2035;
• U.S. Patent No. 10,271,884 (the "'884 Patent"), entitled "Bipolar Electrosurgical Sealing Device with Adaptive Pressure Control," issued April 30, 2019, with an expiration date of September 15, 2036; and
• U.S. Patent No. 10,932,105 (the "'105 Patent"), entitled "Integrated Tissue Sensing and Feedback System for Laparoscopic Instruments," issued March 3, 2020, with an expiration date of January 10, 2038.
The named inventor on all three patents is Dr. Raymond Szabo, currently Vice President of Engineering at Apex. All three patents have been assigned to Apex and are maintained in good standing with the United States Patent and Trademark Office.
The accused Solstice products are the PrecisionEdge™ PE-5000, PE-12000, and PE-15000 series of laparoscopic surgical instruments, which are manufactured by the Irish Parent at its facility in Dublin and sold in the United States by the U.S. Subsidiary. Combined U.S. sales of the accused PrecisionEdge™ products from calendar year 2021 through the third quarter of 2024 totaled approximately $74,600,000, broken down as follows:
The weighted average gross margin on the accused PrecisionEdge™ products over this period was approximately 61.3%, reflecting the premium positioning of these instruments in the advanced laparoscopic surgery market.
Apex retained Hugh Danaher, CFA, of Keystone Valuation Advisors LLC, as its damages expert. Mr. Danaher's preliminary report, served on April 22, 2025, claimed $31,800,000 in reasonable royalty damages based on a hypothetical negotiation analysis and application of the Georgia-Pacific factors. Although Solstice's damages expert, Dr. Miriam Chen of Quantitative Analytics Group, submitted a responsive report estimating significantly lower damages, the parties determined that a negotiated settlement was in the best interest of all stakeholders.
The parties executed a binding Term Sheet on June 10, 2025, setting forth the principal economic and legal terms of the settlement. The Definitive Settlement Agreement and Patent License Agreement (collectively, the "Settlement Documents") are targeted for execution on June 16, 2025. Upon execution, the parties will file a joint stipulation of dismissal with prejudice with the Court.
B. Payment Terms
The settlement requires Solstice to make two categories of payments to Apex, as described below.
Lump-Sum Payment. Solstice will pay Apex a total of $8,750,000 in two tranches:
Tranche 1: $5,250,000 due within ten (10) business days of the execution of the Definitive Settlement Agreement. Based on a targeted execution date of June 16, 2025, the payment deadline for Tranche 1 is June 30, 2025.
Tranche 2: $3,500,000 due on or before September 15, 2025.
Both tranches are to be deposited into an escrow account established and maintained by Tidewater Fiduciary Services, Inc. (300 Delaware Avenue, Suite 1400, Wilmington, DE 19801; contact: Jennifer Hsu, Vice President, Escrow Services). Under the terms of the Escrow Agreement, Tidewater will release the escrowed funds to Apex within three (3) business days of each deposit, provided that no bona fide dispute notice has been filed by either party during the intervening period.
Running Royalty. In addition to the lump-sum payment, Solstice will pay Apex a running royalty of 3.75% of Net Sales of Licensed Products for the remaining life of the Licensed Patents. The key terms of the running royalty obligation are as follows:
• Licensed Products: PrecisionEdge™ PE-5000, PE-12000, and PE-15000 series instruments, and all successor models incorporating technology covered by one or more claims of the Licensed Patents.
• Net Sales: Defined as gross invoiced sales of Licensed Products, less (i) returns, (ii) rebates and volume discounts, (iii) chargebacks (including managed-care and group purchasing organization chargebacks), (iv) outbound freight and shipping charges, and (v) sales taxes, use taxes, and value-added taxes.
• Estimated Year 1 Running Royalty (CY 2026): Approximately $907,500, based on projected Net Sales of $24,200,000, assuming approximately 8% year-over-year growth from FY 2023 Net Sales of approximately $22,400,000.
• Royalty Floor: $500,000 per calendar year, beginning in calendar year 2026. If the calculated royalty (3.75% of Net Sales) in any calendar year is less than $500,000, Solstice will pay the floor amount of $500,000 for that year.
• Royalty Cap: $1,800,000 per calendar year. If the calculated royalty (3.75% of Net Sales) in any calendar year exceeds $1,800,000, Solstice's royalty obligation for that year is limited to $1,800,000.
• Royalty Term: The running royalty obligation commences on the effective date of the Definitive Settlement Agreement and runs through the expiration date of the last-to-expire Licensed Patent, which is January 10, 2038 (the expiration date of the '105 Patent).
• Reporting: Royalties are to be calculated and reported on a quarterly basis, using the Form of Royalty Report attached as Exhibit D to the Patent License Agreement.
C. Payor Entity Identification
An important threshold question for the tax analysis is which Solstice entity will be the payor of the settlement amounts. Based on discussions with Eamon Rourke and Brendan Molloy, and based on the litigation posture, we understand that:
• Solstice Biomedical, Inc. (U.S. Subsidiary) is the named defendant in the Litigation and is the entity that manufactures (through contract manufacturing arrangements with the Irish Parent), markets, distributes, and sells the accused PrecisionEdge™ products in the United States. As such, Solstice US is the logical and presumptive direct payor for both the lump-sum payment and the running royalty obligations. The U.S. revenue from the accused products — totaling $74,600,000 from CY 2021 through Q3 2024 — is generated at the Solstice US level.
• Solstice Biomedical Devices Ltd. (Irish Parent) is also a party to the Settlement Agreement and the Patent License Agreement. The Term Sheet provides that both the Irish Parent and the U.S. Subsidiary are licensees under the non-exclusive patent license. It is necessary to determine whether the Irish Parent is jointly and severally liable for the settlement payments, whether it is guaranteeing the U.S. Subsidiary's payment obligations, or whether its role is limited to being a licensed party under the patent license grant.
The identification of the payor entity has significant implications for the U.S. federal income tax deduction, the Irish corporation tax treatment, and the transfer pricing analysis. If the Irish Parent bears or reimburses any portion of the settlement costs — whether through an intercompany capital contribution, an intercompany loan, or a direct cost-recharge — a separate set of tax consequences arises at both the U.S. and Irish levels, including potential withholding tax and transfer pricing issues. We address these matters in detail in Sections IV through VI below.
III. U.S. Federal Income Tax Treatment
A. Characterization of the Lump-Sum Payment
1. General Principles — Deductibility of Litigation Settlement Payments. Under Section 162(a) of the Internal Revenue Code ("IRC"), a taxpayer may deduct "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." Litigation settlement payments are generally deductible under this provision, provided that the underlying litigation arises out of and is connected to the taxpayer's trade or business activities.
Following the enactment of the Tax Cuts and Jobs Act of 2017 ("TCJA"), IRC § 162(f) was amended to deny deductions for amounts paid or incurred to, or at the direction of, a government or governmental entity in relation to the violation of any law or the investigation or inquiry into the potential violation of any law. However, this provision is inapplicable to the settlement at issue here, which involves a private-party patent infringement dispute between two commercial entities. No governmental entity is involved in the settlement, and the settlement does not relate to any violation of law or regulatory enforcement action.
The characterization of a litigation settlement payment for tax purposes is governed by the "origin-of-the-claim" test, as established by the Supreme Court in United States v. Gilmore, 372 U.S. 39 (1963), and Woodward v. Commissioner, 397 U.S. 572 (1970). Under this test, the tax character of a settlement payment is determined not by the consequences of the litigation or the taxpayer's motives for settling, but rather by the nature and origin of the underlying claim that gave rise to the litigation. The relevant inquiry is: "In lieu of what was the settlement amount paid?"
Applying the origin-of-the-claim test to the present settlement, the underlying claims are for patent infringement — specifically, Apex's allegations that Solstice's PrecisionEdge™ laparoscopic surgical instruments infringe Apex's '237, '884, and '105 Patents. These claims arise directly from and relate to Solstice's ordinary course of business: the manufacture, marketing, distribution, and sale of advanced laparoscopic surgical instruments. This is the core commercial activity of both the Irish Parent (which had FY 2023 consolidated revenue of €187.4 million) and the U.S. Subsidiary (which generated $22.4 million in U.S. Net Sales of the accused products in FY 2023 alone). The settlement payments are made to resolve claims that are inextricably connected to Solstice's ongoing trade or business.
Conclusion: The lump-sum payment of $8,750,000 should be deductible as an ordinary and necessary business expense under IRC § 162(a), subject to the capitalization analysis discussed immediately below.
2. Capitalization vs. Expensing Analysis. Although the lump-sum payment is deductible in principle under § 162(a), an important subsidiary question is whether any portion of the payment must be capitalized rather than currently expensed. Under IRC § 263(a), amounts paid to acquire, produce, or improve tangible or intangible property must be capitalized. The Supreme Court in INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992), held that a taxpayer must capitalize an expenditure that creates or enhances a separate and distinct asset or produces significant future benefits beyond the current taxable year.
The proposed settlement combines two distinct economic components:
(a) Resolution of Past Damages Liability. A substantial portion of the lump-sum payment represents Apex's consideration for releasing its claims for past patent infringement damages. Apex's damages expert, Mr. Danaher, quantified these damages at $31,800,000 based on a reasonable royalty theory. The $8,750,000 lump-sum (combined with the ongoing royalty obligation) represents Solstice's negotiated resolution of this past liability. Amounts paid to settle a pre-existing liability for past infringement are generally currently deductible under § 162(a) as ordinary business expenses. See, e.g., Helvering v. Hampton Cotton Mills Co., 59 F.2d 559 (4th Cir. 1932); Ostheimer v. United States, 264 F.2d 789 (3d Cir. 1959).
(b) Acquisition of a Prospective License Right. The settlement also includes a grant to Solstice of a non-exclusive license under the three Licensed Patents, permitting Solstice to continue manufacturing and selling the PrecisionEdge™ products through the expiration of the last Licensed Patent on January 10, 2038. To the extent any portion of the lump-sum is properly allocable to the acquisition of this prospective license right — an intangible asset with a useful life extending approximately 12.6 years beyond the settlement date — that portion may be subject to capitalization and amortization.
The Term Sheet executed on June 10, 2025, does not explicitly allocate the $8,750,000 lump-sum between (a) compensation for past infringement damages and (b) consideration for the prospective patent license. This absence of an explicit allocation creates ambiguity that could be resolved unfavorably by the IRS upon audit.
Section 197 vs. Section 167 Analysis. If any portion of the lump-sum is capitalized as a cost of acquiring the non-exclusive patent license, the applicable amortization provision must be determined. IRC § 197 generally requires that the cost of certain intangible assets — including "any license, permit, or other right granted by a governmental unit or an agency or instrumentality thereof" — be amortized ratably over a 15-year period beginning in the month of acquisition, regardless of the actual useful life of the asset. However, the § 197 definition of "amortizable intangibles" has been the subject of considerable interpretive complexity with respect to patent licenses acquired from private parties (as opposed to governmental units). Under Treasury Regulation § 1.197-2(b)(8), an interest in a patent or copyright (whether acquired as part of the acquisition of a trade or business or otherwise) is generally a § 197 intangible if it is a "right to use" an intangible rather than an ownership interest. Nevertheless, certain self-created intangibles and intangibles not acquired in connection with the acquisition of a trade or business may be excluded from § 197 treatment under IRC § 197(c)(2) and (d).
If the non-exclusive patent license acquired in the settlement is determined to fall outside the scope of § 197, it would be amortizable under the general depreciation provision of IRC § 167 over its actual useful life — that is, the remaining term of the Licensed Patents through January 10, 2038 (approximately 12.6 years from the settlement date). The distinction is significant: amortization over 12.6 years under § 167 produces larger annual deductions than amortization over 15 years under § 197.
Practical Recommendation. We recommend that Solstice take the following steps to maximize the current deductibility of the lump-sum payment and minimize the portion subject to capitalization:
(i) The Definitive Settlement Agreement should include an explicit allocation clause providing that the lump-sum payment constitutes compensation for the settlement and release of Apex's claims for past patent infringement damages, and that the running royalty constitutes the consideration for the prospective non-exclusive patent license.
(ii) Solstice should prepare and retain contemporaneous documentation supporting the position that the entire $8,750,000 lump-sum (or the maximum defensible portion thereof) is allocable to past damages and is currently deductible. This documentation should include: (a) Apex's damages expert report quantifying past damages at $31,800,000; (b) internal analyses prepared by or for Solstice showing that the lump-sum was negotiated as a discount to Apex's damages claim; and (c) correspondence between the parties during settlement negotiations that reflects the parties' understanding of the lump-sum as damages compensation.
(iii) If any portion of the lump-sum is allocated to the license acquisition (for example, based on a negotiated or auditor-determined fair value allocation), that portion should be capitalized and amortized over the remaining useful life of the Licensed Patents through January 10, 2038, under IRC § 167 (or, if § 197 applies, over 15 years).
We note that Apex may have competing tax preferences with respect to the allocation. For Apex as the recipient, an allocation to past damages would generally produce ordinary income, whereas an allocation to a license grant might be treated differently depending on Apex's specific circumstances. These competing interests may need to be addressed in the settlement negotiations, and we recommend discussing the allocation language with Apex's counsel, Victoria Stanton of Hargrove, Tate & Bennington LLP, to reach a mutually acceptable formulation.
3. Timing of Deduction. Solstice Biomedical, Inc. is a Delaware C-corporation and, based on its revenue level and corporate structure, is required to use the accrual method of accounting for federal income tax purposes. Under the accrual method, a deduction is allowable in the taxable year in which all events have occurred that establish the fact of the liability, the amount of the liability can be determined with reasonable accuracy, and economic performance has occurred with respect to the liability. IRC § 461(h); Treas. Reg. § 1.461-1(a)(2).
All-Events Test. The all-events test is satisfied upon execution of the Definitive Settlement Agreement (targeted for June 16, 2025), at which point Solstice's obligation to pay the lump-sum becomes fixed and determinable. The amount of the liability — $8,750,000 — is specified in the Settlement Agreement.
Economic Performance. Under IRC § 461(h)(2)(C), for liabilities arising from a "tort, breach of contract, or violation of law," economic performance occurs as payment is made. However, because the lump-sum is payable in two tranches (June 30, 2025 and September 15, 2025), and both tranches fall within Solstice's 2025 taxable year (assuming a calendar-year filing), both payments satisfy the economic performance requirement in the 2025 taxable year.
Conclusion: Both tranches of the lump-sum payment — $5,250,000 (due June 30, 2025) and $3,500,000 (due September 15, 2025) — are likely deductible in the 2025 taxable year. The full $8,750,000 deduction should be reflected on Solstice Biomedical, Inc.'s U.S. federal corporate income tax return (IRS Form 1120) for the taxable year ending December 31, 2025.
B. Characterization of the Running Royalty Payments
1. Deductibility. The running royalty payments of 3.75% of Net Sales of Licensed Products are ordinary and necessary business expenses deductible under IRC § 162(a). Royalties paid for the right to use patented technology in the taxpayer's trade or business are a paradigmatic example of currently deductible business expenses. See Treas. Reg. § 1.162-1(a) (listing "rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title" as deductible business expenses).
Unlike the lump-sum payment, the running royalty payments are periodic in nature and represent the ongoing cost of using the licensed patent technology. They do not create a separate and distinct asset, nor do they produce future benefits beyond the period in which they are paid. Accordingly, there is no capitalization issue with respect to the running royalty payments. They are deductible in full as incurred.
The minimum royalty obligation (the "floor" of $500,000 per calendar year beginning in CY 2026) is likewise deductible as an ordinary business expense in the year in which it accrues. Even though the minimum royalty may exceed the calculated 3.75% royalty in a low-sales year, it represents the contractually required cost of maintaining the license and is an ordinary cost of Solstice's business operations.
The royalty cap of $1,800,000 per calendar year limits Solstice's maximum royalty obligation and, correspondingly, limits the maximum annual deduction to $1,800,000, regardless of the calculated royalty amount.
2. Timing. Under the accrual method of accounting, the running royalty payments are deductible in the taxable year in which they accrue. The Patent License Agreement provides for quarterly reporting periods (as specified in Exhibit D, the Form of Royalty Report), and royalties accrue based on Net Sales during each quarterly period. The all-events test is satisfied at the end of each quarter when the Net Sales figures are determined and the royalty liability becomes fixed and determinable.
For the minimum royalty obligation ($500,000 per year beginning CY 2026), the accrual timing depends on the specific terms of the Settlement Agreement. If the minimum royalty is payable as a lump sum at year-end (or upon determination that the calculated royalty is below the floor), the deduction arises at that point. If it is payable in quarterly installments, it accrues ratably over the year. We will review the final payment terms in the Definitive Settlement Agreement to confirm the accrual methodology.
C. Tax Rate and Net Impact
The applicable U.S. federal corporate income tax rate is 21%, as established by the TCJA effective for taxable years beginning after December 31, 2017.
The estimated tax benefits from the settlement payments are as follows:
These estimates assume that the lump-sum is fully deductible as a current expense under § 162(a). To the extent any portion of the lump-sum is capitalized and amortized, the tax benefit in 2025 would be reduced, and the benefit would be spread over the amortization period.
Delaware State Tax. Delaware does not impose a corporate income tax on corporate income. However, Delaware does impose a gross receipts tax (the "Delaware Mercantile License Fee") on certain in-state business receipts. This tax applies to the receipts of businesses operating in Delaware, not to outbound payments made by Delaware entities. Accordingly, the gross receipts tax should not apply to Solstice's settlement or royalty payments. We recommend confirming this analysis with Brendan Molloy, as the gross receipts tax rules contain nuances that may warrant further review depending on the characterization of the payments in Solstice US's books and records.
We note that Delaware's gross receipts tax could potentially apply to Apex's receipt of funds as a Delaware-domiciled corporation, but this is Apex's concern and not Solstice's.
IV. U.S. Withholding Tax Analysis
A. Domestic Payment Scenario (Solstice US to Apex)
Both Solstice Biomedical, Inc. and Apex Surgical Innovations, Inc. are U.S. domestic corporations organized under the laws of Delaware. Payments made by one U.S. domestic corporation to another U.S. domestic corporation are not subject to U.S. withholding tax. IRC §§ 1441 and 1442, which impose withholding obligations on payments of U.S.-source income to foreign persons, are inapplicable to payments between two domestic entities.
Accordingly, Solstice US may remit the lump-sum payments and the running royalty payments directly to Apex (through the Tidewater escrow account or otherwise) without withholding any portion for U.S. federal tax purposes.
Information Reporting Requirements. Although no withholding tax applies, Solstice US may have information reporting obligations with respect to the settlement and royalty payments:
• Lump-Sum Payment: Depending on the characterization of the lump-sum payment, Solstice may be required to report the payment to Apex and to the IRS on IRS Form 1099-MISC (or Form 1099-NEC, if the payment is characterized as non-employee compensation, which is unlikely in this context). In general, payments of $600 or more made to a corporation in connection with the settlement of a legal proceeding are reportable under IRC § 6045(f) on Form 1099-MISC, box 10 (Gross proceeds paid to an attorney). However, because the settlement payment here is made directly to Apex (the party to the litigation) rather than to Apex's attorneys, the applicability of the reporting requirement depends on the specific payment routing. We recommend that Solstice consult with its tax return preparer on the applicable reporting form.
• Running Royalty Payments: Royalty payments in excess of $10 in any calendar year are reportable on IRS Form 1099-MISC, box 2 (Royalties). Solstice US should issue a Form 1099-MISC to Apex for each calendar year in which royalty payments exceed $10.
Recommendation: Solstice Biomedical, Inc. should obtain a completed IRS Form W-9 (Request for Taxpayer Identification Number and Certification) from Apex Surgical Innovations, Inc. prior to making the initial escrow deposit. The W-9 will confirm Apex's taxpayer identification number (EIN: 51-0483762) and certify that Apex is not subject to backup withholding.
B. Cross-Border Scenario: If the Irish Parent Bears or is Reimbursed for Settlement Costs
Although the direct payment flow is from Solstice US (a U.S. entity) to Apex (a U.S. entity), the analysis becomes more complex if the Irish Parent funds the settlement payments or is reimbursed for them. Several scenarios are possible:
(i) Capital Contribution. The Irish Parent may make a capital contribution to Solstice US to fund the settlement payments. In this case, the direct payment remains U.S.-to-U.S., and no withholding tax applies. The capital contribution itself has no immediate income tax consequences to either entity (it increases the Irish Parent's basis in Solstice US stock).
(ii) Intercompany Loan. The Irish Parent may lend funds to Solstice US to enable it to make the settlement payments. Again, the direct payment is U.S.-to-U.S., and no withholding tax applies to the settlement payment itself. However, interest payments on the intercompany loan from Solstice US to the Irish Parent would constitute U.S.-source interest subject to withholding under IRC § 1442, unless reduced or eliminated by the U.S.-Ireland Income Tax Treaty.
(iii) Intercompany Cost Recharge. If the Irish Parent directly reimburses or is recharged for a portion of the settlement costs through the intercompany transfer pricing framework, the recharge may be recharacterized for U.S. tax purposes as a deemed royalty or other payment from Solstice US to the Irish Parent. Such a recharacterized payment could be subject to U.S. withholding tax under IRC § 1442, unless the treaty provides a reduced rate.
In each of these scenarios, the direct payment from Solstice US to Apex remains a domestic payment not subject to withholding. The withholding tax issue arises only with respect to the intercompany flows between Solstice US and the Irish Parent. These intercompany flows, and the applicable treaty provisions, are discussed below and in Section VI.
C. U.S.-Ireland Income Tax Treaty Provisions
The Convention between the Government of the United States of America and the Government of Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains (the "Treaty"), signed on July 28, 1997, and as amended by the Protocol signed on March 24, 1999, governs the allocation of taxing rights between the United States and Ireland with respect to cross-border income flows.
Article 12 — Royalties. Article 12 of the Treaty provides that royalties arising in a Contracting State (i.e., the United States) and paid to a resident of the other Contracting State (i.e., Ireland) may be taxed in the state of residence. Article 12(1) further provides that such royalties may also be taxed in the Contracting State in which they arise, but the tax shall not exceed the rate specified in the Treaty. For royalties paid for the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, the Treaty rate is 0% — meaning that the United States may not impose withholding tax on patent royalties paid to a qualifying Irish resident.
This provision is significant in the present context. If any intercompany arrangement between Solstice US and the Irish Parent results in a deemed royalty payment from Solstice US to the Irish Parent — for example, if the Irish Parent is recharged for the cost of the Apex license and the recharge is treated as a payment for the use of patent rights — the Treaty would reduce the applicable U.S. withholding rate to 0%, effectively eliminating any U.S. withholding obligation.
Article 23 — Limitation on Benefits (LOB). The Treaty contains a limitation on benefits ("LOB") clause in Article 23, which is designed to prevent "treaty shopping" — that is, the use of the Treaty by persons who are not genuine residents of Ireland. To claim treaty benefits, Solstice Biomedical Devices Ltd. must satisfy one of the qualifying tests under Article 23. The relevant tests include:
(a) Ownership and Base Erosion Test: The Irish company must be more than 50% owned (directly or indirectly) by qualifying residents of Ireland or the United States, and less than 50% of the company's gross income must be paid or accrued to persons who are not residents of either Contracting State.
(b) Active Trade or Business Test: The Irish company must be engaged in the active conduct of a trade or business in Ireland, and the income for which treaty benefits are claimed must be derived in connection with, or incidental to, that trade or business.
(c) Derivative Benefits Test: The Irish company must be owned by persons who would have been entitled to equivalent or better treaty benefits had they received the income directly.
Solstice Biomedical Devices Ltd. is an Irish-domiciled company with substantial business operations in Ireland, including approximately 620 employees worldwide (with a significant portion based at the Dublin facility), FY 2023 consolidated revenue of €187.4 million, and active manufacturing and research and development operations at its Clonskeagh Business Park facility in Dublin. Based on these facts, Solstice is likely to satisfy the active trade or business test under Article 23, and thus qualifies for Treaty benefits, including the 0% withholding rate on patent royalties under Article 12.
IRS Form W-8BEN-E. If Solstice Biomedical Devices Ltd. receives any U.S.-source payments directly (or if the Irish Parent's entitlement to Treaty benefits needs to be documented for intercompany recharge purposes), the Irish Parent should file IRS Form W-8BEN-E (Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting) with the payor (Solstice US). The form would claim Treaty benefits under Article 12, specifying the 0% rate for patent royalties.
V. Irish Tax Treatment
A. Irish Corporation Tax on the Lump-Sum Payment
Under Irish tax law, the applicable corporation tax rate depends on the characterization of the income or expense at issue. Trading income of an Irish-resident company is taxed at the standard rate of 12.5%. Non-trading (passive) income — including investment income, rental income, and certain categories of foreign-source income — is taxed at the higher rate of 25%.
The treatment of the lump-sum payment for Irish corporation tax purposes depends on which Solstice entity bears the cost:
Scenario 1: Cost Borne by Solstice US. If the settlement payment is made by Solstice Biomedical, Inc. (the U.S. Subsidiary) out of its own funds and is treated as a cost of the U.S. Subsidiary's operations, the payment will not directly appear in the Irish Parent's profit and loss account. In this scenario, there are no direct Irish corporation tax consequences arising from the lump-sum payment. The cost is absorbed at the Solstice US level and reduces U.S. taxable income.
Scenario 2: Cost Funded or Reimbursed by the Irish Parent. If the Irish Parent funds or reimburses the settlement payment — for example, by making a capital contribution to Solstice US, lending funds to Solstice US, or directly recharging a portion of the settlement cost to itself under a cost-sharing arrangement — the deductibility of the expense at the Irish level depends on whether it qualifies as an expense "wholly and exclusively laid out or expended for the purposes of the trade or profession" under Section 81 of the Taxes Consolidation Act 1997 ("TCA 1997").
The lump-sum payment relates to the PrecisionEdge™ product line, which is sold predominantly in the U.S. market through the U.S. Subsidiary. However, the products are manufactured by the Irish Parent at its Dublin facility, and the underlying intellectual property of Solstice (as distinguished from the Apex patents at issue) may be held or co-developed by the Irish Parent. If the Irish Parent's trade encompasses activities related to the U.S. sales (such as manufacturing, product development, or group-level IP management), the settlement cost may qualify as a trading expense deductible at the 12.5% rate.
The Irish Revenue Commissioners may scrutinize whether a settlement payment arising from U.S. patent litigation is sufficiently connected to the Irish Parent's trade. If the Irish Parent can demonstrate that the settlement protects its manufacturing activities, its group-wide IP portfolio, or its interest in the PrecisionEdge™ product line, a deduction is defensible. However, if the settlement cost is viewed as relating exclusively to the U.S. Subsidiary's sales activities, the deductibility at the Irish level may be challenged.
Recommendation: We recommend coordinating with Glenmore & Byrne LLP (25 St. Stephen's Green, Dublin 2, Ireland), Solstice's auditors, on the proper characterization of the settlement expense under Irish tax law. Glenmore & Byrne should be provided with a copy of the executed Settlement Agreement and Patent License Agreement to assess the deductibility of any recharged costs.
B. Irish Tax Treatment of Running Royalty Payments
The Irish tax treatment of the running royalty payments follows a similar structure to the lump-sum analysis:
Scenario 1: Cost Borne by Solstice US. If the running royalties are paid by Solstice US to Apex, and the cost is borne entirely at the U.S. Subsidiary level, there is no direct Irish tax consequence. The royalty expense reduces Solstice US's U.S. taxable income but does not affect the Irish Parent's Irish tax position.
Scenario 2: Cost Recharged to the Irish Parent. If the royalty cost is recharged to the Irish Parent through the intercompany transfer pricing framework — for example, as part of a cost-plus or residual profit-split arrangement between the Irish Parent and Solstice US — the recharged royalty expense at the Irish level would need to be analyzed for deductibility under Section 81, TCA 1997. If the expense qualifies as a trading expense, it would be deductible against Irish trading income at the 12.5% rate.
The Irish transfer pricing rules, set forth in Part 35A of the TCA 1997 (as substantially amended by Finance Act 2019 to adopt the OECD's arm's-length principle more comprehensively), require that arrangements between associated enterprises be conducted at arm's length. If the royalty cost is recharged to the Irish Parent, the intercompany pricing of the recharge must be documented and must reflect the arm's-length standard. The Irish Parent's transfer pricing documentation file should include a description of the intercompany arrangement, a functional analysis, the chosen transfer pricing method, and supporting economic analysis.
C. Irish Withholding Tax on Royalties Received (Not Directly Applicable)
For completeness, we note that Irish domestic law imposes a withholding tax of 20% on patent royalties paid from Ireland to any person (whether resident or non-resident). This provision is set forth in Section 238 of the TCA 1997 and applies to royalties paid for the use of, or the right to use, any patent in Ireland.
In the present case, Solstice is the payor of royalties to Apex (a U.S. company), not the recipient of royalties from an Irish source. Accordingly, the Irish withholding tax on patent royalties is not directly relevant to the current settlement structure.
However, we note this provision for completeness because it may become relevant if Solstice establishes any sub-license arrangements or intercompany license structures in the future. For example, if the Irish Parent sublicenses the Apex patent rights to any Solstice affiliate operating through Ireland, the sublicense royalties could constitute Irish-source patent royalties subject to the 20% withholding tax. This possibility should be borne in mind in structuring any future intercompany arrangements.
D. Irish Capital Gains Considerations
The acquisition of a non-exclusive patent license is generally not treated as a capital acquisition for Irish tax purposes. A non-exclusive license grants the licensee a right to use the patented technology but does not convey any ownership interest in the underlying patents. Accordingly, the license grant does not give rise to a chargeable gain or loss for Irish Capital Gains Tax ("CGT") purposes.
No Irish CGT implications are anticipated from the patent license grant itself. However, if Solstice were to dispose of the license rights (for example, by assigning the license to a third party, if permitted under the Settlement Agreement), the proceeds of such a disposal could potentially give rise to a chargeable gain. We do not anticipate that such a disposal is contemplated at this time.
VI. Transfer Pricing Considerations
A. Intercompany Allocation of Settlement Costs
Solstice Biomedical Devices Ltd. (Irish Parent) and Solstice Biomedical, Inc. (U.S. Subsidiary) are "associated enterprises" within the meaning of both U.S. and Irish transfer pricing rules. They are members of the same multinational enterprise group, with the Irish Parent holding 100% of the shares of Solstice US. Accordingly, all intercompany transactions between the two entities — including any allocation or recharge of the settlement costs — must be conducted at arm's length.
The applicable legal frameworks are:
• U.S.: IRC § 482, which authorizes the IRS to distribute, apportion, or allocate gross income, deductions, credits, or allowances among commonly controlled taxpayers if necessary to prevent evasion of taxes or to clearly reflect income. The Treasury Regulations under § 482 (Treas. Reg. §§ 1.482-1 through 1.482-9) provide detailed guidance on arm's-length pricing methods for various types of intercompany transactions, including transfers of intangible property, cost-sharing arrangements, and services.
• Ireland: Part 35A of the TCA 1997 (as amended by Finance Act 2019), which requires that arrangements between associated entities be conducted in accordance with the arm's-length principle. The Irish rules are aligned with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2022 edition).
The key transfer pricing question is: Which entity should bear the economic cost of the settlement? The answer depends on the functional profile and risk allocation of each entity within the Solstice group's transfer pricing framework:
• If the U.S. Subsidiary bears market and infringement risk: The U.S. Subsidiary sells the accused PrecisionEdge™ products in the U.S. market and generated $74,600,000 in combined U.S. sales from CY 2021 through Q3 2024. If the U.S. Subsidiary bears the commercial risks associated with U.S. market activities — including the risk of third-party patent infringement claims — then the settlement cost logically relates to the U.S. Subsidiary's activities and should be borne by Solstice US. This allocation is consistent with the transfer pricing principle that entities bearing economic risks should receive the associated returns (and bear the associated costs).
• If the Irish Parent owns group-wide IP and bears strategic risk: If the Irish Parent owns the underlying Solstice proprietary technology (as distinguished from the Apex patents at issue) and licenses it to the U.S. Subsidiary — a common structure in multinational groups with centralized IP ownership in a favorable tax jurisdiction — some portion of the settlement cost may relate to protecting the group's ability to use its own technology without infringing third-party rights. In this case, the settlement cost could be viewed as a cost of maintaining the group's IP portfolio, partially justifiable as a cost to be shared between the Irish Parent and the U.S. Subsidiary.
The determination of the appropriate allocation will depend on the specific facts of Solstice's existing intercompany transfer pricing framework, including the characterization of each entity's functions, assets, and risks, and the existing intercompany agreements. We are not currently in possession of the full transfer pricing documentation for the Solstice group and recommend that this analysis be conducted in coordination with the group's transfer pricing advisors.
Recommendation: Regardless of which entity ultimately bears the settlement cost, the allocation rationale should be documented in contemporaneous transfer pricing documentation. This documentation should be prepared at or near the time of the settlement and should include a detailed explanation of why the chosen allocation reflects the arm's-length standard. Failure to maintain such documentation could expose Solstice to transfer pricing adjustments and penalties in both the United States and Ireland.
B. Intercompany License of the Apex Patent Rights
The non-exclusive license under the Licensed Patents is granted to both Solstice Biomedical Devices Ltd. (Irish Parent) and Solstice Biomedical, Inc. (U.S. Subsidiary) as co-licensees. This dual-licensee structure creates an important transfer pricing consideration: if either entity makes the licensed technology available to the other (through a sublicense, a cost-sharing arrangement, or otherwise), there must be an arm's-length intercompany charge for the benefit conferred.
For example, if the Irish Parent, as a co-licensee under the Apex license, makes the licensed technology available to the U.S. Subsidiary as part of a broader intercompany technology license arrangement, the intercompany charge for the Apex patent rights should be determined at arm's length. Similarly, if the U.S. Subsidiary bears the full cost of the Apex license (both the lump-sum and the running royalties) but the Irish Parent also benefits from the license (e.g., for manufacturing activities in Ireland), the transfer pricing framework should allocate a portion of the cost to the Irish Parent.
Arm's-Length Benchmark. The OECD Transfer Pricing Guidelines (2022) and the IRS regulations under § 482 identify several methods for determining arm's-length pricing for transfers of intangible property. In the present case, the comparable uncontrolled transaction (CUT) method may be particularly appropriate because the Apex license itself provides an arm's-length royalty rate (3.75% of Net Sales) negotiated between two unrelated parties (Apex and Solstice) in an adversarial settlement context. This rate can serve as a benchmark for any intercompany charge related to the same patent rights.
C. Documentation Requirements
Both the United States and Ireland impose transfer pricing documentation requirements on multinational enterprises:
United States. IRC § 6662(e) imposes accuracy-related penalties (generally 20% of the underpayment) for substantial valuation misstatements in the context of intercompany transactions. These penalties may be avoided if the taxpayer maintains contemporaneous documentation demonstrating that the intercompany pricing was determined in accordance with the arm's-length standard. The documentation must include a description of the intercompany transactions, the transfer pricing method applied, the economic analysis performed, and the comparable transactions or data relied upon.
Ireland. Section 835E of the TCA 1997 imposes mandatory transfer pricing documentation requirements on certain taxpayers, including "large" and "medium" companies as defined under the Irish Companies Act. Solstice Biomedical Devices Ltd., with consolidated revenue of €187.4 million, is likely classified as a "large" company and is therefore subject to the full documentation requirements, including a Master File and a Local File as described in the OECD Transfer Pricing Guidelines (Chapter V).
OECD Country-by-Country Reporting (CbCR). The OECD CbCR requirements, implemented in Ireland under Section 891H of the TCA 1997, apply to multinational enterprise groups with consolidated group revenue of €750 million or more. Solstice's consolidated revenue of €187.4 million is below the €750 million threshold. Accordingly, CbCR is not required for the Solstice group. However, the local documentation requirements (Master File and Local File) still apply and should address the settlement cost allocation.
VII. Specific Structural Recommendations
Based on the analysis set forth above, we recommend the following specific actions to optimize the tax treatment of the settlement and royalty payments.
A. Allocation of the Lump-Sum Payment in the Definitive Settlement Agreement
We recommend that the Definitive Settlement Agreement include explicit language characterizing the lump-sum payment of $8,750,000 as compensation for the settlement and full release of Apex's claims for past patent infringement damages. This characterization maximizes the portion of the lump-sum that is currently deductible as an ordinary business expense under IRC § 162(a), as opposed to being capitalized and amortized as a cost of acquiring the non-exclusive patent license.
Specifically, we recommend the inclusion of a recital provision substantially as follows:
"The Parties acknowledge and agree that the Lump-Sum Payment of $8,750,000, payable in two tranches as set forth in Section __, constitutes full and complete compensation to Apex for the settlement and release of all claims for damages, including reasonable royalty damages, arising from the alleged infringement of the Licensed Patents prior to the Effective Date, and is not consideration for the grant of the License set forth in Article __ of the Patent License Agreement."
We recognize that the inclusion of such language requires negotiation with Apex's counsel. Victoria Stanton of Hargrove, Tate & Bennington LLP should be consulted on whether this characterization is acceptable to Apex. As noted above, Apex may have competing tax preferences: for example, if Apex prefers to characterize the lump-sum as consideration for a capital asset (the license grant), it may seek capital gains treatment on the receipt. However, because the license is a non-exclusive license (not a transfer of "all substantial rights" in the patents), Apex is unlikely to qualify for capital gains treatment under IRC § 1235 in any event, which may reduce Apex's resistance to a damages-based allocation.
We are prepared to draft appropriate recital and operative language for inclusion in the Definitive Settlement Agreement and to coordinate with Ms. Stanton on the final formulation.
B. Entity-Level Payment Routing
We recommend that Solstice Biomedical, Inc. (the U.S. Subsidiary) make both the lump-sum and running royalty payments directly to Apex. This recommendation is driven by the following considerations:
1. Avoidance of U.S. withholding tax complexity. If the payments are routed through or made by the Irish Parent, the payments may be subject to U.S. withholding tax analysis under IRC §§ 1441 and 1442, requiring the filing of treaty claims and IRS Forms W-8BEN-E. By routing all payments from Solstice US (a U.S. domestic corporation) to Apex (another U.S. domestic corporation), the payment remains entirely within the domestic sphere, and no withholding tax issues arise.
2. Alignment of deduction with revenue. Solstice US generates the U.S. revenue from the accused PrecisionEdge™ products. Allowing Solstice US to deduct the settlement and royalty payments against its U.S. revenue produces the most efficient tax result, because the deduction offsets income taxed at the 21% U.S. corporate rate.
3. Simplicity and audit trail. Direct payment from Solstice US to Apex through the Tidewater escrow account provides a clean audit trail and minimizes the complexity of intercompany flows.
To implement this recommendation:
• All wire transfers to the escrow account at Tidewater Fiduciary Services, Inc. should originate from Solstice Biomedical, Inc.'s U.S. bank accounts.
• The wire transfer instructions letter to Jennifer Hsu at Tidewater should identify Solstice Biomedical, Inc. as the payor entity.
• Brendan Molloy (CFO) should ensure that the internal accounting records of Solstice US reflect the lump-sum and royalty payments as expenses of the U.S. Subsidiary.
C. Reporting and Compliance
The following reporting and compliance actions should be taken to ensure proper tax treatment:
Solstice Biomedical, Inc. (U.S. Subsidiary):
• Deduct the lump-sum payment on its U.S. federal corporate income tax return (IRS Form 1120) for the taxable year ending December 31, 2025.
• Deduct the running royalty payments on its IRS Form 1120 for the taxable year in which each royalty payment accrues.
• Issue IRS Form 1099-MISC to Apex Surgical Innovations, Inc. for royalty payments exceeding $10 in any calendar year, reporting the royalty amount in box 2 (Royalties).
• Obtain and retain a completed IRS Form W-9 from Apex prior to the initial escrow deposit.
Solstice Biomedical Devices Ltd. (Irish Parent):
• Report any intercompany recharges related to the settlement costs on its Irish corporation tax return (Form CT1) for the relevant accounting period.
• Maintain a complete transfer pricing documentation file supporting the arm's-length nature of any intercompany cost allocation, including a Master File and Local File in compliance with Section 835E, TCA 1997.
• Coordinate with Glenmore & Byrne LLP (Dublin) on the IFRS accounting treatment of the settlement liability and royalty obligation. Under IFRS, the settlement obligation will likely be recognized as a provision (or an accrued liability) upon execution of the Definitive Settlement Agreement, having previously been disclosed as a contingent liability in the notes to the financial statements. The transition from contingent liability to actual liability should be reflected in the financial statements for the period in which the Settlement Agreement is executed.
D. VAT / Sales Tax Considerations
U.S. Federal Sales Tax. There is no U.S. federal sales tax, and no U.S. federal value-added tax. The settlement payments and royalty payments are not subject to any U.S. federal consumption tax.
Irish VAT. Patent license royalties may be subject to reverse-charge VAT under the EU VAT Directive provisions for business-to-business cross-border supplies of services. Under the general rule for B2B services (Article 44 of the VAT Directive, implemented in Ireland by Section 34 of the Value-Added Tax Consolidation Act 2010), the place of supply is the place where the recipient of the service is established. If the Irish Parent is treated as the recipient of a patent license service from Apex (a U.S. supplier), the Irish Parent would be required to self-account for Irish VAT under the reverse-charge mechanism at the standard rate of 23%.
However, in the present case, the direct license is from Apex (a U.S. entity) to both the Irish Parent and the U.S. Subsidiary as co-licensees, and the primary payor is the U.S. Subsidiary. To the extent the license is used primarily in the United States (for the sale of PrecisionEdge™ products in the U.S. market), the Irish VAT exposure is minimized. We recommend that this issue be reviewed in greater detail with Glenmore & Byrne LLP if any portion of the license cost is recharged to the Irish Parent.
Delaware Gross Receipts Tax. As noted above, Delaware's gross receipts tax could potentially apply to Apex's receipt of the settlement and royalty payments as a Delaware-domiciled corporation. This is Apex's tax issue and not Solstice's obligation, but we note it here for completeness.
VIII. Impact on Insurance and Covered Costs
The $8,750,000 lump-sum settlement payment and all running royalty payments under the proposed settlement are explicitly not covered by Solstice's intellectual property insurance policy maintained with Halcyon Specialty Insurance Co. (Policy No. HSI-IP-2023-04891). The Halcyon policy provides coverage only for defense fees and costs incurred in connection with the defense of intellectual property infringement claims; it does not cover indemnity payments, settlement amounts, or license royalties.
As of June 1, 2025, total fees and costs billed in connection with the defense of the Litigation are as follows:
Of this amount, $2,597,319.42 has been covered by Halcyon, after application of the $250,000 self-insured retention ("SIR") borne by Solstice. The SIR was exhausted by invoices submitted through October 2024.
The insurance recovery is generally includable in Solstice's gross income for U.S. federal income tax purposes, unless it represents reimbursement of a previously deducted expense. Under the tax benefit rule of IRC § 111, if a taxpayer receives a recovery of an amount that was previously deducted (such as a refund of attorney fees that were deducted as business expenses in a prior year), the recovery is includable in gross income to the extent the prior deduction produced a tax benefit. Conversely, if the defense costs were deducted in the same year that the insurance reimbursement is received, the net effect is a wash (the deduction reduces income, and the reimbursement increases income).
The timing of insurance receipts relative to the deduction of defense costs is therefore relevant. We recommend that Brendan Molloy coordinate with Sandra Keene, the

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