Contract analysis

Section 280G Parachute Payment Analysis: Potential Excess Parachute Payments to VeloPay Systems, Inc. Executives in Connection with the Merger Right-click to update Table of Contents

I. Executive Summary The purpose of this memorandum is to set forth our analysis of the potential "excess parachute payments" under Internal Revenue Code ("IRC" or the "Code") Section 280G that may be triggered by the change of control of VeloPay Systems, Inc. ("VeloPay" or the "Company") resulting from the reverse triangular merger of Harrowgate Velocity Merger Sub Inc. ("Merger Sub"), a wholly-owned subsidiary of H

II. Background A. Transaction Structure The Transaction is structured as a reverse triangular merger under DGCL Section 251. Merger Sub, a Delaware corporation and wholly-owned subsidiary of HPE Fund IV formed solely for the purpose of effecting the Merger, will merge with and into VeloPay. VeloPay will be the surviving corporation in the Merger and will become a wholly-owned subsidiary of HPE Fund IV. The aggregate

III. Legal Framework — Section 280G and Section 4999 A. Overview of Section 280G IRC Section 280G denies a corporate tax deduction for any "excess parachute payment" made by a corporation to a "disqualified individual." The provision was enacted as part of the Deficit Reduction Act of 1984 and was intended to discourage excessive compensation payments made in connection with corporate changes of control — commonly re

Section 280G disallows the corporate deduction for the excess parachute payment amount. This deduction disallowance applies to the payor corporation (here, VeloPay as the surviving entity post-Merger) regardless of the form of the payment. B. Section 4999 Excise Tax In addition to the corporate-level deduction disallowance under Section 280G, IRC Section 4999 imposes a nondeductible excise tax of 20% on the recipient

IV. Calculation of Base Amounts A. Base Period The change of control is expected to occur at the closing of the Merger, which is currently targeted for mid-2025. For purposes of calculating each disqualified individual's base amount, the base period consists of the five most recent taxable years of the individual ending before the date of the change of control. Assuming the closing occurs in calendar year 2025, the b

V. Identification and Quantification of Parachute Payments A. Categories of Payments Contingent on Change of Control For each of the four disqualified individuals, we have identified the following categories of payments that are potentially contingent on the change of control and must be included in the Section 280G parachute payment analysis: Category 1 — Accelerated Vesting of Unvested Stock Options. As described i

Section 4999 Excise Tax (20%): $8,895,000 × 20% = $1,779,000 (high); $7,170,000 × 20% = $1,434,000 (low). C. Sonia Reyes-Watkins — Detailed Parachute Payment Calculation Accelerated Stock Options (50% of Unvested). Ms. Reyes-Watkins holds approximately 1,100,000 unvested stock options. Fifty percent (approximately 550,000 shares) will accelerate at closing. The Accelerated Option Spread is $7.16 per share, yielding a

Section 4999 Excise Tax (20%): $7,215,000 × 20% = $1,443,000 (high); $5,730,000 × 20% = $1,146,000 (low). D. Marcus Langford — Detailed Parachute Payment Calculation Accelerated Stock Options (50% of Unvested). Mr. Langford holds approximately 650,000 unvested stock options. Fifty percent (approximately 325,000 shares) will accelerate. The Accelerated Option Spread is $7.16 per share, yielding a gross acceleration va

Section 4999 Excise Tax (20%): $3,777,500 × 20% = $755,500 (high); $2,315,000 × 20% = $463,000 (low). E. Danielle Moreau — Detailed Parachute Payment Calculation Accelerated Stock Options (50% of Unvested). Ms. Moreau holds approximately 500,000 unvested stock options. Fifty percent (approximately 250,000 shares) will accelerate. The Accelerated Option Spread is $7.16 per share, yielding a gross acceleration value of

Section 4999 Excise Tax (20%): $3,037,500 × 20% = $607,500 (high); $1,915,000 × 20% = $383,000 (low). F. Summary Table — All Disqualified Individuals The following table summarizes the preliminary parachute payment analysis for all four disqualified individuals. For purposes of this summary, we have used the conservative (low) estimates, which exclude double-trigger severance payments and apply favorable reasonable c

VI. Mitigation Strategies A. Shareholder Vote Safe Harbor — Section 280G(b)(5)(B) Availability. The shareholder vote safe harbor under Section 280G(b)(5) is available for corporations that do not have a class of securities that is readily tradeable on an established securities market or otherwise. Because VeloPay is a privately held corporation and no class of its securities is publicly traded, VeloPay satisfies this