1010-00002 · Client 1010 · Tax

tax-memo-use-of-proceeds-credit-facility.docx DOCUMENT Capital Markets

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PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP TAX MEMORANDUM

TO: Theodore Langston, Responsible Partner, Capital Markets Eric Johannsen, Lead Associate, Capital Markets

FROM: Sylvia Hartwell, Specialist Partner, Tax

DATE: February 10, 2024

RE: Arbor Health Technologies Inc. — Tax Treatment of Repayment of Keypoint National Bank Revolving Credit Facility from IPO Proceeds

MATTER NO.: 1010-00002

CLIENT: Arbor Health Technologies Inc.

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I. Executive Summary

The purpose of this memorandum is to analyze the United States federal income tax consequences — and, in summary fashion, the state income tax consequences — to Arbor Health Technologies Inc. ("AHT" or the "Company"), a Delaware C-corporation (EIN: 47-3891205), of using approximately $65,000,000 of the net proceeds from its February 2024 initial public offering on the New York Stock Exchange (the "IPO") to repay the outstanding balance on its senior secured revolving credit facility with Keypoint National Bank, N.A. ("Keypoint"), as Administrative Agent, and Stonemill Capital Bank ("Stonemill"), as syndicate lender (the "Credit Facility" or the "Facility").

IPO Transaction Summary. The IPO closed on February 13, 2024. The Company sold 20,000,000 shares of its common stock, par value $0.001 per share, at a public offering price of $20.00 per share, yielding base gross proceeds of $400,000,000. The aggregate underwriting discount was $24,000,000 (representing 6.0% of the gross proceeds), resulting in net proceeds to the Company, before offering expenses, of $376,000,000. Estimated offering expenses (exclusive of the underwriting discount) — including SEC registration fees, FINRA filing fees, NYSE listing fees, printing and engraving expenses, legal fees, accounting fees, transfer agent fees, and miscellaneous costs — total approximately $4,200,000. Accordingly, net proceeds to the Company after all expenses on the base offering are approximately $371,800,000. The underwriters exercised their overallotment option in full on February 27, 2024 (with settlement occurring on March 1, 2024) with respect to an additional 3,000,000 shares, bringing total gross proceeds to $460,000,000, total underwriting discount to $27,600,000, and total net proceeds (before estimated offering expenses) to approximately $432,400,000.

Prospectus Disclosure. The use of proceeds disclosure included in the Company's Registration Statement on Form S-1 (as amended) and the Rule 424(b)(4) final prospectus (filed with the Securities and Exchange Commission on February 9, 2024) specifically identifies the repayment of approximately $65,000,000 of outstanding borrowings under the Keypoint Credit Facility as a primary intended use of the net IPO proceeds. The remaining net proceeds are identified for general corporate purposes, including research and development expenditures, sales and marketing activities, working capital, and potential strategic acquisitions.

Summary of Conclusions. Based on the analysis set forth in detail below, we reach the following conclusions with respect to the federal income tax treatment of the repayment:

1. Principal Repayment. The repayment of approximately $65,000,000 of outstanding principal on the Credit Facility does not give rise to taxable income or a deductible expense to AHT. The repayment is a return of borrowed capital and has neutral tax consequences.

2. Accrued Interest. Accrued but unpaid interest on the Credit Facility through the payoff date is deductible upon accrual (AHT being an accrual-method taxpayer) as business interest expense under Section 163 of the Internal Revenue Code of 1986, as amended (the "Code"), subject to the business interest expense limitation under Section 163(j). Based on available financial data, the interest expense is expected to be fully deductible.

3. Original Issue discount. No original issue discount ("OID") issues arise under the revolving credit facility structure, as each draw was made at par with no discount, warrant coverage, or conversion features.

4. Prepayment Premium. No prepayment premium or make-whole amount is payable under the terms of the Facility, and therefore no associated tax consequence arises.

5. UCC Lien Release. The release of liens securing the Credit Facility has no federal income tax consequences to AHT. No gain, loss, or basis adjustment results from the release.

6. State Tax. State income tax treatment across AHT's ten nexus states generally conforms to the federal treatment described herein, with certain state-specific considerations noted below.

Each of these conclusions is discussed in greater detail in the sections that follow.

II. Background: The Keypoint Credit Facility

A. Facility Terms

The Credit Facility was entered into on March 15, 2022 pursuant to that certain Credit Agreement, dated as of March 15, 2022 (the "Credit Agreement"), by and among:

• Borrower: Arbor Health Technologies Inc., a Delaware corporation;

• Administrative Agent: Keypoint National Bank, N.A., a national banking association organized under the laws of the United States, with its principal office at 200 Public Square, Cleveland, Ohio 44114; and

• Lender / Syndicate Member: Stonemill Capital Bank, a New York state-chartered bank, with its principal office at 140 Broadway, New York, New York 10005.

The principal terms of the Credit Facility are summarized as follows:

The Credit Facility is documented pursuant to a customary syndicated credit agreement containing representations and warranties, affirmative and negative covenants, events of default, and related provisions. Keypoint serves as administrative agent and also holds a portion of the revolving commitment. Stonemill Capital Bank holds the remaining portion of the revolving commitment as a syndicate lender. The respective commitment allocations between Keypoint and Stonemill are set forth in the Credit Agreement and are not material to the tax analysis herein.

B. First Amendment to Credit Agreement

On January 18, 2024, the parties entered into the First Amendment to Credit Agreement (the "First Amendment"), which was prepared and negotiated by Calderwood & Harkness LLP on behalf of the Company. The First Amendment was executed in anticipation of the IPO and implemented several modifications to the Credit Agreement necessary to accommodate the public offering transaction. The key changes effected by the First Amendment are as follows:

(i) Change of Control Definition. The definition of "Change of Control" in the Credit Agreement was amended to exclude the IPO — and any subsequent sales of shares by pre-IPO stockholders following the IPO — from constituting a "Change of Control" that would trigger an event of default or mandatory prepayment obligation, provided that specified ownership thresholds are maintained during a defined transition period.

(ii) Permitted Equity Issuance. A new carve-out was added to the definition of "Permitted Equity Issuance" to expressly permit the IPO, including the issuance of shares upon exercise of the underwriters' overallotment option, without triggering any restrictions on equity issuances contained in the negative covenants of the Credit Agreement.

(iii) Mandatory Prepayment Provisions. The mandatory prepayment provisions of the Credit Agreement were updated to address the treatment of IPO proceeds, clarifying that net cash proceeds from the IPO are not subject to mandatory prepayment obligations (which, under the original Credit Agreement, applied to certain asset disposition proceeds and excess cash flow sweeps, but were not intended to capture equity issuance proceeds).

No changes were made to the interest rate, maturity date, commitment amount, or collateral package. The significance of the First Amendment for purposes of the tax analysis — particularly with respect to the "significant modification" analysis under Treasury Regulation Section 1.1001-3 — is addressed in Section IX below.

C. Outstanding Balance and Payoff

As of the anticipated payoff date of February 13, 2024 (the closing date of the IPO), the outstanding drawn amount on the Credit Facility is approximately $65,000,000. Interest continues to accrue on this outstanding balance on a daily basis at a floating rate equal to SOFR plus 200 basis points. Based on the then-prevailing SOFR rate, the current all-in interest rate on the drawn balance is estimated at approximately 7.3% per annum.

A payoff letter (the "Payoff Letter") has been received from Keypoint National Bank, in its capacity as Administrative Agent, confirming the following:

• The aggregate outstanding principal balance on the revolving loans as of the anticipated payoff date;

• The per diem interest amount accruing on such balance;

• Wire instructions for remittance of the payoff amount;

• The agreement of the Administrative Agent and the Lenders to release all liens, security interests, and encumbrances on AHT's assets, and to file or authorize the filing of UCC-3 termination statements and other release documentation, promptly upon receipt of the payoff funds in full; and

• A confirmation that no prepayment premium, penalty, make-whole amount, yield maintenance fee, or breakage cost is payable by AHT in connection with the voluntary prepayment of the outstanding revolving loans.

It is important to note that the Credit Facility permits voluntary prepayment of outstanding revolving loans without premium or penalty, which is consistent with standard market terms for revolving credit facilities. This should be distinguished from certain term loan facilities or fixed-rate debt instruments, which may impose prepayment premiums or make-whole amounts designed to compensate lenders for lost future interest income or interest rate swap breakage costs. No such provisions apply to the Keypoint revolving Credit Facility.

Furthermore, because the Company is repaying the outstanding drawn balance but is not terminating the revolving commitment itself, the $150,000,000 revolving commitment will remain in place following the repayment, and AHT will retain the ability to draw on the Facility in the future, subject to compliance with applicable conditions precedent and covenants, through the maturity date of March 15, 2027.

III. Tax Treatment of Principal Repayment

A. General Rule — Non-Deductibility of Principal Repayments

Under fundamental and well-established principles of federal income tax law, the repayment of loan principal does not constitute a deductible expense to the borrower. This principle derives from the basic symmetry of debt in the tax system: because a borrower does not include the proceeds of a loan in gross income when borrowed (the receipt of loan proceeds is not an accession to wealth because it is offset by the obligation to repay), the borrower correspondingly does not receive a deduction when the loan is repaid. See Commissioner v. Tufts, 461 U.S. 300 (1983); see also Old Colony R.R. Co. v. Commissioner, 284 U.S. 552 (1932).

No provision of the Code — including Section 162 (ordinary and necessary business expenses), Section 163 (interest), or any other deduction provision — permits a deduction for the repayment of principal on a loan. The repayment of principal is a balance-sheet transaction: AHT's cash (an asset) is reduced by approximately $65,000,000, and AHT's outstanding indebtedness (a liability) is correspondingly reduced by the same amount. The net effect on AHT's equity is zero (ignoring any associated interest payment), and no taxable income or deductible loss results.

Accordingly, the repayment of the approximately $65,000,000 principal balance outstanding under the Keypoint Credit Facility is a return of borrowed capital. AHT did not include the loan proceeds in gross income when amounts were drawn under the Facility, and AHT does not receive a deduction upon repayment. The repayment reduces AHT's outstanding liabilities on a balance-sheet basis but does not generate taxable income or loss to the Company.

B. Source of Funds — IPO Proceeds

The source of the funds used for the repayment — namely, the net proceeds of the IPO — does not alter the tax treatment of the repayment itself. Under Section 1032(a) of the Code, no gain or loss is recognized by a corporation on the receipt of money or other property in exchange for its own stock (including treasury stock). The issuance by AHT of 20,000,000 shares (base offering) and 3,000,000 shares (overallotment) of its common stock, par value $0.001 per share, in the IPO is a nonrecognition transaction. The IPO proceeds are not taxable income to AHT.

The fact that equity proceeds are used to retire outstanding indebtedness does not create any independent tax consequence beyond the interest deduction analysis set forth in Section IV below. There is no provision of the Code or Treasury Regulations that imposes a tax or denies a deduction based solely on the use of equity proceeds to repay debt. The character of the repayment transaction (i.e., the retirement of debt) is determined by the nature of the obligation being discharged, not by the source of the funds used to discharge it. Whether AHT repays the Credit Facility with IPO proceeds, operating cash flow, proceeds from an asset sale, or any other source, the federal income tax treatment of the principal repayment is the same.

We note that, in certain limited circumstances, the repayment of debt can give rise to cancellation of indebtedness ("COD") income under Section 61(a)(11) and Section 108 of the Code — for example, if a debtor repurchases its own debt instrument at a discount. However, no COD income arises here because AHT is repaying the Credit Facility at par (i.e., the full outstanding principal amount plus accrued interest), not at a discount. The payoff amount confirmed in the Payoff Letter equals the aggregate outstanding principal balance plus accrued and unpaid interest through the payoff date, with no discount or forgiveness of any portion of the obligation.

IV. Tax Treatment of Accrued Interest

A. AHT's Method of Accounting for Interest

AHT is an accrual-method taxpayer for federal income tax purposes. Under the accrual method of accounting, an expense is deductible in the taxable year in which all three requirements of the "all events test" are satisfied: (1) all events have occurred that establish the fact of the liability; (2) the amount of the liability can be determined with reasonable accuracy; and (3) economic performance has occurred with respect to the liability. See Code § 461(a); Code § 461(h); Treas. Reg. § 1.461-1(a)(2).

For liabilities arising out of the provision of services or the use of property by the taxpayer, economic performance occurs as the services or property are provided to the taxpayer. In the specific case of interest on borrowed funds, economic performance occurs ratably as the borrower has use of the lender's funds — that is, economic performance occurs with the passage of time. See Treas. Reg. § 1.461-4(e) (the "time-based" economic performance rule). Accordingly, for an accrual-method taxpayer such as AHT, interest expense on the Keypoint Credit Facility is properly deductible as it accrues, regardless of when payment is actually made.

This method of accounting has two practical consequences relevant to the Credit Facility repayment:

First, interest that accrued on the Credit Facility during AHT's fiscal year ending December 31, 2023 ("FY2023"), and that was properly deducted on AHT's FY2023 federal income tax return, is not affected by the February 2024 repayment. The deductibility of such interest was established in FY2023 when all events establishing the liability occurred and economic performance took place with the passage of time during that year.

Second, interest accruing on the Credit Facility during the period from January 1, 2024 through the payoff date (anticipated to be approximately February 13, 2024) — a period of approximately 44 days — will be deductible in AHT's fiscal year ending December 31, 2024 ("FY2024"). Based on the outstanding drawn balance of approximately $65,000,000 and an estimated all-in interest rate of approximately 7.3% per annum, the estimated stub-period interest for this 44-day period is approximately $572,000, calculated as follows:

$65,000,000 × 7.3% × (44 / 365) = approximately $572,274

This stub-period interest amount will be included in AHT's total business interest expense for FY2024 and will be subject to the Section 163(j) limitation discussed in Section IV.B below. Upon payment of the payoff amount (which includes both principal and accrued interest), AHT will have satisfied its obligation with respect to this accrued interest, and no further interest will accrue on the repaid portion of the Credit Facility.

B. Section 163(j) Business Interest Expense Limitation

Section 163(j) of the Code, as substantially amended by the Tax Cuts and Jobs Act of 2017 ("TCJA"), Pub. L. No. 115-97, imposes a limitation on the deduction for "business interest expense" for each taxable year. Under Section 163(j)(1), the deduction for business interest expense is limited to the sum of:

(i) the taxpayer's "business interest income" for the taxable year;

(ii) 30% of the taxpayer's "adjusted taxable income" ("ATI") for the taxable year; and

(iii) the taxpayer's "floor plan financing interest" for the taxable year (not applicable to AHT, as AHT is not a motor vehicle dealer).

For taxable years beginning after December 31, 2021, ATI is computed by reference to taxable income without regard to business interest expense, business interest income, net operating loss deductions, and the deduction under Section 199A (if applicable) — but, critically, with a subtraction for depreciation, amortization, and depletion. This represents a reversion to the more restrictive computation originally enacted by the TCJA. During taxable years beginning in 2018 through 2021, ATI was computed on an EBITDA-like basis (i.e., depreciation, amortization, and depletion were added back to taxable income in computing ATI), which provided a more generous limitation. The post-2021 computation, which effectively uses an EBIT-based measure of ATI, makes the Section 163(j) limitation more restrictive and potentially more consequential for capital-intensive taxpayers.

AHT has reported the following financial results for FY2023 (based on information provided by AHT management, specifically David Halderman, Chief Financial Officer):

While the Section 163(j) limitation is computed on a tax-return basis (not on the basis of GAAP or Adjusted EBITDA figures), the financial data provided by AHT management suggests that the Company's estimated FY2023 taxable income (before the interest deduction) is likely sufficient to support full deductibility of interest expense on the $65,000,000 drawn balance under the Credit Facility, as well as any other business interest expense incurred by AHT during FY2023. The total annual interest expense on the drawn balance of $65,000,000 at an all-in rate of approximately 7.3% would be approximately $4,745,000 — a figure that is modest relative to AHT's reported earnings.

We note, however, that the formal Section 163(j) computation must be performed on the FY2023 and FY2024 federal income tax returns by the Company's independent auditors, Kellerman & Associates LLP, located at 345 Park Avenue, New York, New York 10154, and AHT's tax return preparer. The computation requires a precise determination of ATI based on AHT's taxable income (with the prescribed adjustments), total business interest expense, and total business interest income for each taxable year, which involves detail beyond the scope of this memorandum.

Any business interest expense that is disallowed under Section 163(j) in a given taxable year is not permanently lost. Under Section 163(j)(2), disallowed business interest expense is carried forward to the succeeding taxable year and treated as business interest expense paid or accrued in that succeeding year. This carryforward continues indefinitely until the disallowed interest is absorbed.

Conclusion. Based on the financial data currently available, the interest expense on the Keypoint Credit Facility — both the amount properly accrued and deductible in FY2023 and the estimated stub-period amount of approximately $572,000 deductible in FY2024 — is expected to be fully deductible under Section 163, subject to confirmation through the formal Section 163(j) computation on each year's federal income tax return. Even in the unlikely event that a portion of the interest expense were disallowed under Section 163(j), such disallowed amount would carry forward indefinitely to future taxable years.

C. Capitalization vs. Deduction of Interest — Section 263A Considerations

Section 263A of the Code requires the capitalization of certain costs, including interest, that are allocable to the production of "designated property." Designated property includes real property and tangible personal property with an estimated production period exceeding two years, or tangible personal property with an estimated production period exceeding one year and a cost exceeding $1,000,000. See Code § 263A(f)(1). The interest capitalization requirement under Section 263A(f) is intended to match the cost of financing the production of property with the income generated from that property.

AHT is primarily a healthcare services and software-as-a-service ("SaaS") company. Its principal operations involve providing cloud-based clinical decision support, population health management, and revenue cycle management services to hospitals, health systems, physician groups, and other healthcare organizations. AHT does not manufacture tangible personal property and does not engage in real property construction activities. Accordingly, AHT does not appear to produce tangible personal property or engage in construction activities that would subject interest expense to mandatory capitalization under Section 263A(f).

We note that AHT does engage in software development activities in connection with its SaaS platform. To the extent AHT develops internal-use software that qualifies as "specified research or experimental expenditures" within the meaning of Section 174 of the Code (as amended by the TCJA, effective for amounts paid or incurred in taxable years beginning after December 31, 2021), such expenditures are now subject to mandatory capitalization and amortization over a five-year period (or fifteen years for foreign research). However, the interest capitalization analysis under Section 263A is distinct from the Section 174 capitalization requirement. The borrowings under the Keypoint Credit Facility are general corporate borrowings — they were not traced or allocated to specific software development projects or other production activities. The Credit Facility is a general-purpose revolving credit facility used for working capital and general corporate purposes, and the interest thereon should not be subject to capitalization under Section 263A.

Conclusion. Interest on the Keypoint Credit Facility is properly treated as deductible business interest under Section 163, and is not required to be capitalized under Section 263A or any other provision of the Code. To the extent AHT incurs interest that is specifically allocable to the production of designated property (which does not appear to be the case with respect to the Credit Facility), such interest would need to be analyzed separately under Section 263A(f).

V. Original Issue discount Analysis

A. General OID Framework

Sections 1271 through 1275 of the Code set forth the rules governing the treatment of original issue discount. OID arises when a debt instrument is issued at a price below its "stated redemption price at maturity" (generally, the sum of all payments due under the instrument other than "qualified stated interest"). See Code § 1273(a). Where OID exists, the lender (holder) is required to include OID in income over the life of the debt instrument on a constant-yield (economic accrual) basis, and the borrower (issuer) is entitled to deduct OID as interest over the same period, also on a constant-yield basis. See Code § 163(e); Code § 1272.

The amount of OID on a debt instrument is equal to the excess of the stated redemption price at maturity over the issue price of the instrument. See Code § 1273(a)(1). If a debt instrument is issued at par (i.e., the issue price equals the stated redemption price at maturity), no OID exists.

B. Application to Revolving Credit Facility

The Keypoint Credit Facility is a revolving credit facility under which AHT may draw down amounts, repay such amounts, and re-borrow from time to time, subject to the total commitment amount and applicable conditions precedent. It is not a term loan with a fixed principal amount issued at a specified price. This distinction is critical for OID purposes.

Under Treasury Regulation Section 1.1275-2(c), each draw on a revolving credit facility is generally treated as a separate debt instrument for purposes of the OID rules. Accordingly, each time AHT draws on the Keypoint Credit Facility, a new debt instrument is deemed to be issued, and each such deemed instrument must be separately analyzed for OID.

Each draw under the Keypoint Credit Facility was made at par — that is, the amount of cash received by AHT upon each draw was equal to 100% of the face amount of the borrowing. There was no discount applied to any draw. The Credit Facility bears interest at a floating rate (SOFR plus 200 basis points), and all interest payments constitute "qualified stated interest" because they are unconditionally payable in cash at least annually at a single fixed or variable rate. See Treas. Reg. § 1.1273-1(c).

Furthermore, there is no warrant coverage, conversion feature, equity kicker, or other equity-linked component attached to the Credit Facility or any draw thereunder that could create OID or cause any draw to be treated as issued at a discount. Equity-linked features can create OID by reducing the "issue price" of a debt instrument (because the value attributable to the equity component is subtracted from the total consideration received by the issuer in determining the issue price of the debt instrument). No such features exist here.

Conclusion. No OID arises in connection with the Keypoint revolving Credit Facility, any individual draw thereunder, or the repayment of outstanding draws from IPO proceeds. The OID rules are not implicated by this transaction.

VI. Prepayment Premium / Make-Whole Analysis

A. Facility Terms — No Prepayment Premium

The Keypoint revolving Credit Facility, as originally entered into on March 15, 2022, and as amended by the First Amendment dated January 18, 2024, does not impose any prepayment premium, make-whole payment, yield maintenance fee, or other charge in connection with the voluntary prepayment of outstanding revolving loans. Section [●] of the Credit Agreement expressly provides that the Borrower may voluntarily prepay outstanding revolving loans, in whole or in part, at any time and from time to time, without premium or penalty, upon prior notice to the Administrative Agent.

This is consistent with standard market terms for revolving credit facilities. Revolving credit facilities, by their nature, contemplate that borrowers will draw down and repay amounts on a recurring basis, and the imposition of a prepayment premium on a revolving facility would be contrary to this revolving feature. By contrast, term loans — particularly those bearing fixed interest rates or those where the lender has entered into interest rate hedging arrangements — sometimes include prepayment premiums or make-whole provisions designed to compensate the lender for lost interest income or swap breakage costs. No such provisions apply to the Keypoint revolving Credit Facility.

The Payoff Letter received from Keypoint National Bank, in its capacity as Administrative Agent, expressly confirms that no prepayment premium, penalty, breakage fee, or other charge (other than the outstanding principal balance and accrued and unpaid interest through the payoff date) is payable by AHT in connection with the repayment.

B. Tax Treatment if a Prepayment Premium Were Payable

Although not applicable to the transaction at hand, we note for completeness the general tax treatment of prepayment premiums. If a borrower is required to pay a premium to a lender in connection with the early retirement of debt, such premium is generally deductible as additional interest expense under Section 163 of the Code in the taxable year in which the premium is paid. See Revenue Ruling 57-198, 1957-1 C.B. 94 (holding that a premium paid by a borrower for the privilege of prepaying a mortgage loan constitutes interest and is deductible as such). Courts have similarly treated prepayment premiums as a substitute for the future interest that the lender would have received had the loan remained outstanding, and thus as deductible interest. See, e.g., L-R Heat Treating Co. v. Commissioner, 28 T.C.M. 1137 (1969).

Any such prepayment premium, if it were deductible as interest, would also be subject to the Section 163(j) business interest expense limitation described in Section IV.B above.

Because no prepayment premium is payable in connection with the repayment of the Keypoint Credit Facility, this analysis is academic with respect to the current transaction. No tax consequence arises from the absence of a prepayment premium.

VII. Treatment of Loan Origination Costs and Unamortized Debt Issuance Costs

A. AHT's Deferred Financing Costs

AHT incurred loan origination fees, commitment fees, legal fees, and other transaction costs in connection with the establishment of the Keypoint revolving Credit Facility on March 15, 2022. These costs include, among others, arrangement fees paid to the Administrative Agent, upfront commitment fees paid to the lenders, legal fees incurred for the preparation and negotiation of the Credit Agreement and related security documents, and other customary closing costs.

Under Section 461 of the Code and Revenue Ruling 70-360, 1970-2 C.B. 103, loan origination fees paid by a borrower in connection with a revolving credit facility are generally amortizable (i.e., deductible ratably) over the term of the facility. This treatment reflects the principle that such costs provide a benefit to the borrower over the life of the credit facility — specifically, the ongoing availability of the revolving commitment — and should therefore be matched against income over the period during which that benefit is received.

The Keypoint Credit Facility has a five-year term, with an effective date of March 15, 2022 and a maturity date of March 15, 2027 (a total of 60 months). As of the anticipated repayment date of February 13, 2024, approximately 23 months of the 60-month facility term will have elapsed. Accordingly, approximately 37 months of unamortized deferred financing costs remain to be amortized over the period from February 2024 through March 2027.

B. Effect of Partial Repayment on Amortization

A critical point in this analysis is that the repayment of the $65,000,000 outstanding drawn balance does not terminate the Credit Facility. The $150,000,000 revolving commitment remains in place and available to AHT (subject to compliance with the conditions precedent and financial covenants) through the maturity date of March 15, 2027. AHT retains the ability to re-borrow under the Facility at any time during the remaining term.

Because the Facility is not being terminated, AHT should continue to amortize the remaining deferred financing costs on a ratable basis over the remaining term of the Facility through March 15, 2027. The repayment of the outstanding drawn balance — even if it represents the entirety of the current outstanding borrowings — does not affect the continued existence of the revolving commitment and therefore does not accelerate the amortization of deferred financing costs.

This result is consistent with the treatment of deferred financing costs under GAAP (ASC 835-30) for revolving credit arrangements, where such costs are presented as an asset and amortized ratably over the term of the arrangement regardless of the outstanding borrowing level at any given time.

If, in the future, AHT were to terminate the entire revolving commitment prior to maturity (which is not contemplated as of the date of this memorandum), the then-remaining unamortized deferred financing costs would be deductible in full in the taxable year in which the commitment is terminated. See Treas. Reg. § 1.446-5 (regarding the treatment of deferred financing costs upon termination of a lending arrangement). However, this contingency does not arise under the current facts.

Conclusion. AHT should continue to amortize deferred financing costs on the Keypoint Credit Facility on a ratable basis over the remaining term of the Facility through March 15, 2027. The repayment of the outstanding drawn balance from IPO proceeds does not accelerate this amortization because the revolving commitment remains in place.

VIII. UCC Lien Release — Tax Implications

A. Nature of the Liens

The Keypoint revolving Credit Facility is secured by liens and security interests in substantially all assets of AHT. These security interests were granted by AHT to the Administrative Agent (for the benefit of the lenders) pursuant to a Security Agreement entered into concurrently with the Credit Agreement on March 15, 2022. The collateral includes, without limitation, all accounts receivable, chattel paper, deposit accounts, equipment, fixtures, general intangibles (including intellectual property), goods, instruments, inventory, investment property, letter-of-credit rights, commercial tort claims, and all proceeds and products of the foregoing.

The security interests in AHT's personal property were perfected by the filing of UCC-1 financing statements in the State of Delaware (AHT's state of incorporation) and, to the extent required by applicable law, in other jurisdictions where filing was necessary to perfect security interests in specific categories of collateral.

Pursuant to the Payoff Letter, upon receipt of the payoff amount in full, Keypoint National Bank (as Administrative Agent) has agreed to release all liens and security interests on AHT's assets, including by filing or authorizing the filing of UCC-3 termination statements with the appropriate filing offices and executing such other release documentation as may be reasonably requested by AHT.

B. Federal Income Tax Treatment

The granting of a security interest by a borrower to a lender does not constitute a sale, exchange, or other taxable disposition of property by the borrower for federal income tax purposes. A security interest is a contingent right of the secured party to foreclose upon and liquidate the collateral in the event of a default; it does not transfer ownership or beneficial enjoyment of the collateral to the lender. Accordingly, the grant of the security interest by AHT to the Administrative Agent in connection with the Credit Facility did not give rise to any gain, loss, or other taxable event when the lien was originally granted.

Symmetrically, the release of a security interest — whether upon repayment of the secured obligation, termination of the credit facility, or otherwise — does not constitute a taxable event for the borrower. No gain or loss is recognized by AHT upon the release of the liens securing the Keypoint Credit Facility. The release of the security interest does not change the tax basis of any of AHT's assets, nor does it alter the character (ordinary or capital) of any asset. The collateral that was subject to the lien retains its pre-existing tax basis and holding period in the hands of AHT, unaffected by the grant or release of the security interest.

Conclusion. The UCC lien release in connection with the repayment of the Keypoint Credit Facility has no federal income tax consequences to AHT. No gain, loss, income, deduction, or basis adjustment results from the release.

IX. Treatment of Costs Incurred in Connection with the First Amendment

A. Amendment Costs

In connection with the negotiation and execution of the First Amendment to the Credit Agreement dated January 18, 2024, AHT incurred the following categories of costs:

• Legal fees paid to Calderwood & Harkness LLP (125 Broad Street, New York, New York 10004) for the preparation, negotiation, and documentation of the First Amendment;

• Lender consent fees paid to Keypoint National Bank and Stonemill Capital Bank in consideration of their agreement to the modifications set forth in the First Amendment; and

• Other professional fees and expenses associated with the amendment process.

The tax treatment of these costs depends on whether the First Amendment constitutes a "significant modification" of the Credit Facility within the meaning of Treasury Regulation Section 1.1001-3.

Under Treas. Reg. § 1.1001-3, a "modification" of a debt instrument occurs when there is any alteration, including any deletion or addition, in whole or in part, of a legal right or obligation of the issuer (borrower) or holder (lender), whether the alteration is evidenced by an express agreement, a course of performance, or otherwise. A modification is "significant" if, based on all facts and circumstances, the legal rights or obligations that are altered are economically significant. Certain modifications are specifically identified in the regulations as significant (e.g., a change in yield that exceeds specified thresholds, a change in timing of payments that results in a material deferral, a change in the obligor or the collateral that results in a change in payment expectations). If a modification is significant, the modified debt instrument is treated as exchanged for a new debt instrument — a deemed exchange — which can result in gain or loss recognition and the restart of OID computations.

The modifications effected by the First Amendment are as follows:

(i) An amendment to the definition of "Change of Control" to exclude the IPO;

(ii) The addition of a carve-out to the definition of "Permitted Equity Issuance" for the IPO; and

(iii) An update to the mandatory prepayment provisions to clarify the treatment of IPO proceeds.

None of these changes alter the economic terms of the Credit Facility in a manner that would constitute a significant modification. The interest rate (SOFR + 200 bps) is unchanged. The maturity date (March 15, 2027) is unchanged. The commitment amount ($150,000,000) is unchanged. The collateral package is unchanged. No principal amount has been forgiven, deferred, or restructured. The changes are purely accommodative — they facilitate the IPO by ensuring that the IPO does not trigger adverse consequences under the Credit Agreement's covenant and default provisions. These are the types of consent and waiver provisions that are routinely implemented in credit facility amendments preceding a borrower's IPO.

Because the First Amendment does not alter the yield, maturity, principal amount, obligor, collateral, or any other economically significant term of the Credit Facility, it does not rise to the level of a "significant modification" under Treas. Reg. § 1.1001-3. No deemed exchange of old debt for new debt occurs.

B. Deductibility of Amendment Costs

Because the First Amendment does not result in a significant modification or deemed exchange, no gain or loss is recognized, and no new OID calculation is triggered. The amendment-related costs incurred by AHT are generally treated as additional deferred financing costs, amortizable over the remaining term of the Credit Facility (i.e., through the maturity date of March 15, 2027), consistent with the treatment of the original loan origination costs discussed in Section VII above.

However, an important allocation issue arises. Certain costs incurred by AHT in connection with the First Amendment may be more properly characterized as costs attributable to the IPO itself, rather than to the Credit Facility amendment. For example, to the extent legal fees reflect work performed in connection with the structuring and documentation of the IPO (as opposed to the amendment of the Credit Agreement), such costs may be treated as equity issuance costs. Under established authority, equity issuance costs — costs incurred by a corporation in connection with the issuance of its own stock — are capital expenditures that are neither deductible under Section 162 nor amortizable over any period. Instead, they reduce the net proceeds of the offering for book purposes and are treated as a charge to additional paid-in capital. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992); Treas. Reg. § 1.263(a)-5(a).

We recommend that AHT, in consultation with its tax return preparer, make a reasonable allocation of the costs incurred in connection with the First Amendment between (a) costs attributable to the amendment of the Credit Facility (amortizable as deferred financing costs over the remaining facility term) and (b) costs attributable to the IPO (treated as non-deductible equity issuance costs). The allocation should be made on the basis of the relative purpose of each expenditure, taking into account the nature of the services rendered, the time records and invoices of the professionals involved, and any other relevant facts and circumstances.

X. State Income Tax Considerations

AHT has established nexus and files income or franchise tax returns in the following ten states:

1. Massachusetts

2. New York

3. California

4. Texas

5. Illinois

6. Florida

7. Pennsylvania

8. Ohio

9. New Jersey

10. Georgia

The state income tax treatment of the Credit Facility repayment and associated interest deduction is summarized as follows:

Principal Repayment. The repayment of the approximately $65,000,000 principal balance on the Keypoint Credit Facility has no state income tax consequence in any of the ten nexus states listed above. This is consistent with federal treatment. No state imposes an income tax on the repayment of loan principal, and no state provides a deduction for such repayment.

Interest Expense Deductibility. The deductibility of interest expense at the state level varies across jurisdictions. Key considerations include the following:

• Federal Conformity. Most states compute state taxable income by starting with federal taxable income (or federal adjusted gross income, in the case of individual taxpayers) and making state-specific additions and subtractions. States that conform to the federal computation of taxable income will generally follow the federal treatment of business interest expense, including the Section 163(j) limitation, unless the state has specifically decoupled from or modified the federal provision.

• Section 163(j) Conformity. Several states have adopted the Section 163(j) limitation as amended by the TCJA, while others have decoupled or adopted modified versions of the limitation. AHT's state tax return preparer should confirm the conformity status of each nexus state for FY2023 and FY2024. States that have decoupled from Section 163(j) (or that conform to a pre-TCJA version of Section 163(j)) may allow a larger interest expense deduction at the state level than is allowed federally.

• Related-Party Interest Addback. A number of states have enacted addback statutes that require taxpayers to add back interest expense paid to related parties (e.g., affiliated entities) in computing state taxable income. These addback requirements are designed to prevent the erosion of the state tax base through intercompany lending arrangements. However, these provisions are not applicable to AHT's interest expense on the Keypoint Credit Facility, because Keypoint National Bank and Stonemill Capital Bank are unrelated third-party lenders, not affiliates or related parties of AHT.

• Texas Franchise / Margin Tax. Texas imposes a franchise tax (commonly referred to as the "margin tax") computed on a base of total revenue less either cost of goods sold or compensation (at the taxpayer's election), or on a simplified computation of 70% of total revenue. Interest expense is not directly deductible in computing the Texas margin tax base. Accordingly, the repayment of the Credit Facility and the associated interest expense are largely irrelevant for Texas franchise tax purposes.

Recommendation. AHT's state tax return preparer should confirm the conformity of each nexus state to the federal Section 163(j) limitation for FY2023 and FY2024 returns, and should prepare any required state modifications to federal taxable income to reflect differences in the state treatment of business interest expense. No special state tax filing or reporting obligation arises solely from the repayment of the Credit Facility from IPO proceeds.

XI. Impact on Use of Proceeds Disclosure

The Company's Registration Statement on Form S-1 (as amended) and the Rule 424(b)(4) final prospectus, filed with the Securities and Exchange Commission on February 9, 2024, include a "Use of Proceeds" section that specifically discloses the Company's intention to use approximately $65,000,000 of the net IPO proceeds for the repayment of the outstanding balance on the Keypoint revolving Credit Facility. The prospectus also discloses the material terms of the Credit Facility, including the interest rate, maturity date, and the nature of the security interests granted thereunder.

The tax treatment described in this memorandum is fully consistent with the use of proceeds disclosure set forth in the prospectus. No special tax disclosure regarding the repayment is required in the prospectus beyond the general description already included. We note that the "Material U.S. Federal Income Tax Consequences to Non-U.S. Holders" section of the prospectus addresses the tax treatment of purchasers of shares in the IPO (i.e., the tax consequences to investors), not the corporate-level tax treatment of the Company's use of proceeds. The corporate-level tax analysis set forth in this memorandum need not be, and appropriately is not, disclosed in the prospectus.

Additionally, no Current Report on Form 8-K reporting obligation arises solely from the repayment of the Credit Facility from IPO proceeds. The Credit Facility remains in place (the revolving commitment is not being terminated), and the repayment of outstanding borrowings under an existing credit facility in the ordinary course does not trigger an 8-K filing obligation under any item of Form 8-K. To the extent the IPO closing itself triggers 8-K filing obligations (e.g., under Item 3.02 — Unregistered Sales of Equity Securities, if applicable, or Item 9.01 — Financial Statements and Exhibits), those obligations are addressed separately by the capital markets team and are not affected by the tax analysis herein.

XII. Summary of Conclusions

Based on the foregoing analysis, our conclusions with respect to the federal income tax treatment of the repayment of the Keypoint revolving Credit Facility from IPO proceeds are as follows:

1. Principal Repayment (approximately $65,000,000). The repayment of principal is not deductible and does not give rise to taxable income. The treatment is tax-neutral, consistent with the general principle that the repayment of borrowed capital is neither income nor deduction. The source of funds (equity proceeds from the IPO) does not alter this conclusion, as the IPO proceeds are not taxable income to AHT under Section 1032.

2. Accrued Interest (estimated approximately $572,000 for the January 1 – February 13, 2024 stub period). Accrued interest is deductible as business interest expense under Section 163 in AHT's FY2024 taxable year (interest accrued in FY2023 was properly deductible in FY2023), subject to the Section 163(j) business interest expense limitation. Based on AHT's financial profile — FY2023 Adjusted EBITDA of $138,700,000 and FY2023 net income of $41,300,000 — full deductibility of the interest expense is expected, subject to final Section 163(j) calculations on the applicable tax returns.

3. Original Issue discount. No OID arises. Each draw under the revolving Credit Facility was made at par (100% of face value), with no discount, warrant coverage, conversion feature, or other equity-linked component.

4. Prepayment Premium. No prepayment premium, make-whole payment, or yield maintenance fee is payable under the terms of the Keypoint Credit Facility. Accordingly, no tax consequence arises from this aspect of the transaction.

5. Unamortized Debt Issuance Costs. AHT should continue to amortize deferred financing costs associated with the Credit Facility on a ratable basis over the remaining facility term through March 15, 2027. The partial repayment of the drawn balance does not terminate the revolving commitment and therefore does not accelerate the amortization of deferred financing costs.

6. UCC Lien Release. The release of liens and security interests on AHT's assets in connection with the repayment has no federal income tax consequences. No gain, loss, income, deduction, or basis adjustment results from the release.

7. First Amendment Costs. Costs incurred in connection with the First Amendment to the Credit Agreement are generally amortizable as additional deferred financing costs over the remaining facility term through March 15, 2027, to the extent attributable to the credit facility amendment. Costs attributable to the IPO itself should be treated as non-deductible equity issuance costs. A reasonable allocation should be made based on the relative purpose of each expenditure.

8. State Income Tax. State income tax treatment generally conforms to the federal treatment described above across AHT's ten nexus states. State-specific conformity to Section 163(j) should be confirmed by AHT's state tax return preparer for FY2023 and FY2024. Related-party interest addback provisions are not applicable (Keypoint and Stonemill are unrelated third-party lenders). The Texas margin tax does not allow a direct deduction for interest expense, making the repayment and interest expense largely irrelevant for Texas franchise tax purposes.

XIII. Limitations and Qualifications

This memorandum has been prepared by Calderwood & Harkness LLP for the internal use of the AHT IPO deal team at Calderwood & Harkness LLP and Arbor Health Technologies Inc. The analysis and conclusions set forth herein are subject to the following limitations and qualifications:

1. Scope. This memorandum addresses the United States federal income tax consequences of the repayment of the Keypoint Credit Facility from IPO proceeds and provides a general overview of state income tax considerations in the ten states in which AHT has established nexus. This memorandum does not address foreign, local, payroll, excise, sales, use, transfer, stamp, or other non-income tax consequences that may arise in connection with the repayment or the IPO.

2. Authorities. The analysis set forth herein is based on the Internal Revenue Code of 1986, as amended, Treasury Regulations promulgated thereunder, published rulings and administrative pronouncements of the Internal Revenue Service, and judicial authorities, in each case as in effect as of the date of this memorandum. These authorities are subject to change, possibly with retroactive effect, which could affect the validity of the conclusions expressed herein. No assurance can be given that the Internal Revenue Service would agree with the conclusions set forth in this memorandum, or that a court would sustain such conclusions if challenged.

3. Factual Assumptions. The estimated financial figures used in this memorandum — including the outstanding drawn balance of approximately $65,000,000, the per diem interest rate, the estimated stub-period interest of approximately $572,000, and AHT's FY2023 financial results (Adjusted EBITDA of $138,700,000 and net income of $41,300,000) — are based on information provided by AHT management (David Halderman, Chief Financial Officer) and the Payoff Letter received from Keypoint National Bank. Final amounts should be confirmed at or following the closing of the IPO and the repayment of the Credit Facility.

4. Section 163(j) Computation. The formal Section 163(j) computation for FY2023 and FY2024 must be prepared by AHT's tax return preparer based on the Company's complete taxable income and the prescribed adjustments. The expectation of full deductibility expressed in this memorandum is based on currently available financial data and is subject to confirmation through the formal computation.

5. Not a Tax Opinion. This memorandum does not constitute a formal tax opinion rendered by Calderwood & Harkness LLP. It is an internal analytical memorandum prepared for the benefit of the deal team and the client. This memorandum should not be relied upon by any third party, and no third-party beneficiary rights are created hereby.

•

We trust this memorandum is helpful. Please do not hesitate to contact us if you have any questions or require additional analysis on any of the matters discussed herein.

Sylvia Hartwell Partner, Tax Calderwood & Harkness LLP 125 Broad Street New York, New York 10004

cc: Vivienne St. Claire, Calderwood & Harkness LLP Claire Dempsey, Calderwood & Harkness LLP Rachel Moynihan, Arbor Health Technologies Inc. David Halderman, Arbor Health Technologies Inc.

PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT This memorandum is prepared by Calderwood & Harkness LLP for the internal use of the deal team and client. It is not intended for distribution to, or reliance by, any third party.

Term	Description
Type	Senior Secured Revolving Credit Facility
Total Commitment	$150,000,000
Effective Date	March 15, 2022
Maturity Date	March 15, 2027
Interest Rate	Secured Overnight Financing Rate ("SOFR") plus 200 basis points (floating rate)
Security	Senior secured lien on substantially all assets of AHT, including accounts receivable, inventory, equipment, intellectual property, deposit accounts, investment property, general intangibles, and proceeds thereof
Financial Covenants	(i) Total Net Leverage Ratio not to exceed 3.50 to 1.00; (ii) Fixed Charge Coverage Ratio of not less than 1.25 to 1.00, in each case tested on a trailing four-quarter basis
Revolving Feature	Amounts may be drawn, repaid, and re-borrowed during the revolving period, subject to the total commitment amount and compliance with all conditions precedent to borrowing
Financial Metric	FY2023 Amount
Adjusted EBITDA	$138,700,000
Net Income	$41,300,000

PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP TAX MEMORANDUM
TO: Theodore Langston, Responsible Partner, Capital Markets Eric Johannsen, Lead Associate, Capital Markets
FROM: Sylvia Hartwell, Specialist Partner, Tax
DATE: February 10, 2024
RE: Arbor Health Technologies Inc. — Tax Treatment of Repayment of Keypoint National Bank Revolving Credit Facility from IPO Proceeds
MATTER NO.: 1010-00002
CLIENT: Arbor Health Technologies Inc.
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I. Executive Summary
The purpose of this memorandum is to analyze the United States federal income tax consequences — and, in summary fashion, the state income tax consequences — to Arbor Health Technologies Inc. ("AHT" or the "Company"), a Delaware C-corporation (EIN: 47-3891205), of using approximately $65,000,000 of the net proceeds from its February 2024 initial public offering on the New York Stock Exchange (the "IPO") to repay the outstanding balance on its senior secured revolving credit facility with Keypoint National Bank, N.A. ("Keypoint"), as Administrative Agent, and Stonemill Capital Bank ("Stonemill"), as syndicate lender (the "Credit Facility" or the "Facility").
IPO Transaction Summary. The IPO closed on February 13, 2024. The Company sold 20,000,000 shares of its common stock, par value $0.001 per share, at a public offering price of $20.00 per share, yielding base gross proceeds of $400,000,000. The aggregate underwriting discount was $24,000,000 (representing 6.0% of the gross proceeds), resulting in net proceeds to the Company, before offering expenses, of $376,000,000. Estimated offering expenses (exclusive of the underwriting discount) — including SEC registration fees, FINRA filing fees, NYSE listing fees, printing and engraving expenses, legal fees, accounting fees, transfer agent fees, and miscellaneous costs — total approximately $4,200,000. Accordingly, net proceeds to the Company after all expenses on the base offering are approximately $371,800,000. The underwriters exercised their overallotment option in full on February 27, 2024 (with settlement occurring on March 1, 2024) with respect to an additional 3,000,000 shares, bringing total gross proceeds to $460,000,000, total underwriting discount to $27,600,000, and total net proceeds (before estimated offering expenses) to approximately $432,400,000.
Prospectus Disclosure. The use of proceeds disclosure included in the Company's Registration Statement on Form S-1 (as amended) and the Rule 424(b)(4) final prospectus (filed with the Securities and Exchange Commission on February 9, 2024) specifically identifies the repayment of approximately $65,000,000 of outstanding borrowings under the Keypoint Credit Facility as a primary intended use of the net IPO proceeds. The remaining net proceeds are identified for general corporate purposes, including research and development expenditures, sales and marketing activities, working capital, and potential strategic acquisitions.
Summary of Conclusions. Based on the analysis set forth in detail below, we reach the following conclusions with respect to the federal income tax treatment of the repayment:
1. Principal Repayment. The repayment of approximately $65,000,000 of outstanding principal on the Credit Facility does not give rise to taxable income or a deductible expense to AHT. The repayment is a return of borrowed capital and has neutral tax consequences.
2. Accrued Interest. Accrued but unpaid interest on the Credit Facility through the payoff date is deductible upon accrual (AHT being an accrual-method taxpayer) as business interest expense under Section 163 of the Internal Revenue Code of 1986, as amended (the "Code"), subject to the business interest expense limitation under Section 163(j). Based on available financial data, the interest expense is expected to be fully deductible.
3. Original Issue discount. No original issue discount ("OID") issues arise under the revolving credit facility structure, as each draw was made at par with no discount, warrant coverage, or conversion features.
4. Prepayment Premium. No prepayment premium or make-whole amount is payable under the terms of the Facility, and therefore no associated tax consequence arises.
5. UCC Lien Release. The release of liens securing the Credit Facility has no federal income tax consequences to AHT. No gain, loss, or basis adjustment results from the release.
6. State Tax. State income tax treatment across AHT's ten nexus states generally conforms to the federal treatment described herein, with certain state-specific considerations noted below.
Each of these conclusions is discussed in greater detail in the sections that follow.
II. Background: The Keypoint Credit Facility
A. Facility Terms
The Credit Facility was entered into on March 15, 2022 pursuant to that certain Credit Agreement, dated as of March 15, 2022 (the "Credit Agreement"), by and among:
• Borrower: Arbor Health Technologies Inc., a Delaware corporation;
• Administrative Agent: Keypoint National Bank, N.A., a national banking association organized under the laws of the United States, with its principal office at 200 Public Square, Cleveland, Ohio 44114; and
• Lender / Syndicate Member: Stonemill Capital Bank, a New York state-chartered bank, with its principal office at 140 Broadway, New York, New York 10005.
The principal terms of the Credit Facility are summarized as follows:
The Credit Facility is documented pursuant to a customary syndicated credit agreement containing representations and warranties, affirmative and negative covenants, events of default, and related provisions. Keypoint serves as administrative agent and also holds a portion of the revolving commitment. Stonemill Capital Bank holds the remaining portion of the revolving commitment as a syndicate lender. The respective commitment allocations between Keypoint and Stonemill are set forth in the Credit Agreement and are not material to the tax analysis herein.
B. First Amendment to Credit Agreement
On January 18, 2024, the parties entered into the First Amendment to Credit Agreement (the "First Amendment"), which was prepared and negotiated by Calderwood & Harkness LLP on behalf of the Company. The First Amendment was executed in anticipation of the IPO and implemented several modifications to the Credit Agreement necessary to accommodate the public offering transaction. The key changes effected by the First Amendment are as follows:
(i) Change of Control Definition. The definition of "Change of Control" in the Credit Agreement was amended to exclude the IPO — and any subsequent sales of shares by pre-IPO stockholders following the IPO — from constituting a "Change of Control" that would trigger an event of default or mandatory prepayment obligation, provided that specified ownership thresholds are maintained during a defined transition period.
(ii) Permitted Equity Issuance. A new carve-out was added to the definition of "Permitted Equity Issuance" to expressly permit the IPO, including the issuance of shares upon exercise of the underwriters' overallotment option, without triggering any restrictions on equity issuances contained in the negative covenants of the Credit Agreement.
(iii) Mandatory Prepayment Provisions. The mandatory prepayment provisions of the Credit Agreement were updated to address the treatment of IPO proceeds, clarifying that net cash proceeds from the IPO are not subject to mandatory prepayment obligations (which, under the original Credit Agreement, applied to certain asset disposition proceeds and excess cash flow sweeps, but were not intended to capture equity issuance proceeds).
No changes were made to the interest rate, maturity date, commitment amount, or collateral package. The significance of the First Amendment for purposes of the tax analysis — particularly with respect to the "significant modification" analysis under Treasury Regulation Section 1.1001-3 — is addressed in Section IX below.
C. Outstanding Balance and Payoff
As of the anticipated payoff date of February 13, 2024 (the closing date of the IPO), the outstanding drawn amount on the Credit Facility is approximately $65,000,000. Interest continues to accrue on this outstanding balance on a daily basis at a floating rate equal to SOFR plus 200 basis points. Based on the then-prevailing SOFR rate, the current all-in interest rate on the drawn balance is estimated at approximately 7.3% per annum.
A payoff letter (the "Payoff Letter") has been received from Keypoint National Bank, in its capacity as Administrative Agent, confirming the following:
• The aggregate outstanding principal balance on the revolving loans as of the anticipated payoff date;
• The per diem interest amount accruing on such balance;
• Wire instructions for remittance of the payoff amount;
• The agreement of the Administrative Agent and the Lenders to release all liens, security interests, and encumbrances on AHT's assets, and to file or authorize the filing of UCC-3 termination statements and other release documentation, promptly upon receipt of the payoff funds in full; and
• A confirmation that no prepayment premium, penalty, make-whole amount, yield maintenance fee, or breakage cost is payable by AHT in connection with the voluntary prepayment of the outstanding revolving loans.
It is important to note that the Credit Facility permits voluntary prepayment of outstanding revolving loans without premium or penalty, which is consistent with standard market terms for revolving credit facilities. This should be distinguished from certain term loan facilities or fixed-rate debt instruments, which may impose prepayment premiums or make-whole amounts designed to compensate lenders for lost future interest income or interest rate swap breakage costs. No such provisions apply to the Keypoint revolving Credit Facility.
Furthermore, because the Company is repaying the outstanding drawn balance but is not terminating the revolving commitment itself, the $150,000,000 revolving commitment will remain in place following the repayment, and AHT will retain the ability to draw on the Facility in the future, subject to compliance with applicable conditions precedent and covenants, through the maturity date of March 15, 2027.
III. Tax Treatment of Principal Repayment
A. General Rule — Non-Deductibility of Principal Repayments
Under fundamental and well-established principles of federal income tax law, the repayment of loan principal does not constitute a deductible expense to the borrower. This principle derives from the basic symmetry of debt in the tax system: because a borrower does not include the proceeds of a loan in gross income when borrowed (the receipt of loan proceeds is not an accession to wealth because it is offset by the obligation to repay), the borrower correspondingly does not receive a deduction when the loan is repaid. See Commissioner v. Tufts, 461 U.S. 300 (1983); see also Old Colony R.R. Co. v. Commissioner, 284 U.S. 552 (1932).
No provision of the Code — including Section 162 (ordinary and necessary business expenses), Section 163 (interest), or any other deduction provision — permits a deduction for the repayment of principal on a loan. The repayment of principal is a balance-sheet transaction: AHT's cash (an asset) is reduced by approximately $65,000,000, and AHT's outstanding indebtedness (a liability) is correspondingly reduced by the same amount. The net effect on AHT's equity is zero (ignoring any associated interest payment), and no taxable income or deductible loss results.
Accordingly, the repayment of the approximately $65,000,000 principal balance outstanding under the Keypoint Credit Facility is a return of borrowed capital. AHT did not include the loan proceeds in gross income when amounts were drawn under the Facility, and AHT does not receive a deduction upon repayment. The repayment reduces AHT's outstanding liabilities on a balance-sheet basis but does not generate taxable income or loss to the Company.
B. Source of Funds — IPO Proceeds
The source of the funds used for the repayment — namely, the net proceeds of the IPO — does not alter the tax treatment of the repayment itself. Under Section 1032(a) of the Code, no gain or loss is recognized by a corporation on the receipt of money or other property in exchange for its own stock (including treasury stock). The issuance by AHT of 20,000,000 shares (base offering) and 3,000,000 shares (overallotment) of its common stock, par value $0.001 per share, in the IPO is a nonrecognition transaction. The IPO proceeds are not taxable income to AHT.
The fact that equity proceeds are used to retire outstanding indebtedness does not create any independent tax consequence beyond the interest deduction analysis set forth in Section IV below. There is no provision of the Code or Treasury Regulations that imposes a tax or denies a deduction based solely on the use of equity proceeds to repay debt. The character of the repayment transaction (i.e., the retirement of debt) is determined by the nature of the obligation being discharged, not by the source of the funds used to discharge it. Whether AHT repays the Credit Facility with IPO proceeds, operating cash flow, proceeds from an asset sale, or any other source, the federal income tax treatment of the principal repayment is the same.
We note that, in certain limited circumstances, the repayment of debt can give rise to cancellation of indebtedness ("COD") income under Section 61(a)(11) and Section 108 of the Code — for example, if a debtor repurchases its own debt instrument at a discount. However, no COD income arises here because AHT is repaying the Credit Facility at par (i.e., the full outstanding principal amount plus accrued interest), not at a discount. The payoff amount confirmed in the Payoff Letter equals the aggregate outstanding principal balance plus accrued and unpaid interest through the payoff date, with no discount or forgiveness of any portion of the obligation.
IV. Tax Treatment of Accrued Interest
A. AHT's Method of Accounting for Interest
AHT is an accrual-method taxpayer for federal income tax purposes. Under the accrual method of accounting, an expense is deductible in the taxable year in which all three requirements of the "all events test" are satisfied: (1) all events have occurred that establish the fact of the liability; (2) the amount of the liability can be determined with reasonable accuracy; and (3) economic performance has occurred with respect to the liability. See Code § 461(a); Code § 461(h); Treas. Reg. § 1.461-1(a)(2).
For liabilities arising out of the provision of services or the use of property by the taxpayer, economic performance occurs as the services or property are provided to the taxpayer. In the specific case of interest on borrowed funds, economic performance occurs ratably as the borrower has use of the lender's funds — that is, economic performance occurs with the passage of time. See Treas. Reg. § 1.461-4(e) (the "time-based" economic performance rule). Accordingly, for an accrual-method taxpayer such as AHT, interest expense on the Keypoint Credit Facility is properly deductible as it accrues, regardless of when payment is actually made.
This method of accounting has two practical consequences relevant to the Credit Facility repayment:
First, interest that accrued on the Credit Facility during AHT's fiscal year ending December 31, 2023 ("FY2023"), and that was properly deducted on AHT's FY2023 federal income tax return, is not affected by the February 2024 repayment. The deductibility of such interest was established in FY2023 when all events establishing the liability occurred and economic performance took place with the passage of time during that year.
Second, interest accruing on the Credit Facility during the period from January 1, 2024 through the payoff date (anticipated to be approximately February 13, 2024) — a period of approximately 44 days — will be deductible in AHT's fiscal year ending December 31, 2024 ("FY2024"). Based on the outstanding drawn balance of approximately $65,000,000 and an estimated all-in interest rate of approximately 7.3% per annum, the estimated stub-period interest for this 44-day period is approximately $572,000, calculated as follows:
$65,000,000 × 7.3% × (44 / 365) = approximately $572,274
This stub-period interest amount will be included in AHT's total business interest expense for FY2024 and will be subject to the Section 163(j) limitation discussed in Section IV.B below. Upon payment of the payoff amount (which includes both principal and accrued interest), AHT will have satisfied its obligation with respect to this accrued interest, and no further interest will accrue on the repaid portion of the Credit Facility.
B. Section 163(j) Business Interest Expense Limitation
Section 163(j) of the Code, as substantially amended by the Tax Cuts and Jobs Act of 2017 ("TCJA"), Pub. L. No. 115-97, imposes a limitation on the deduction for "business interest expense" for each taxable year. Under Section 163(j)(1), the deduction for business interest expense is limited to the sum of:
(i) the taxpayer's "business interest income" for the taxable year;
(ii) 30% of the taxpayer's "adjusted taxable income" ("ATI") for the taxable year; and
(iii) the taxpayer's "floor plan financing interest" for the taxable year (not applicable to AHT, as AHT is not a motor vehicle dealer).
For taxable years beginning after December 31, 2021, ATI is computed by reference to taxable income without regard to business interest expense, business interest income, net operating loss deductions, and the deduction under Section 199A (if applicable) — but, critically, with a subtraction for depreciation, amortization, and depletion. This represents a reversion to the more restrictive computation originally enacted by the TCJA. During taxable years beginning in 2018 through 2021, ATI was computed on an EBITDA-like basis (i.e., depreciation, amortization, and depletion were added back to taxable income in computing ATI), which provided a more generous limitation. The post-2021 computation, which effectively uses an EBIT-based measure of ATI, makes the Section 163(j) limitation more restrictive and potentially more consequential for capital-intensive taxpayers.
AHT has reported the following financial results for FY2023 (based on information provided by AHT management, specifically David Halderman, Chief Financial Officer):
While the Section 163(j) limitation is computed on a tax-return basis (not on the basis of GAAP or Adjusted EBITDA figures), the financial data provided by AHT management suggests that the Company's estimated FY2023 taxable income (before the interest deduction) is likely sufficient to support full deductibility of interest expense on the $65,000,000 drawn balance under the Credit Facility, as well as any other business interest expense incurred by AHT during FY2023. The total annual interest expense on the drawn balance of $65,000,000 at an all-in rate of approximately 7.3% would be approximately $4,745,000 — a figure that is modest relative to AHT's reported earnings.
We note, however, that the formal Section 163(j) computation must be performed on the FY2023 and FY2024 federal income tax returns by the Company's independent auditors, Kellerman & Associates LLP, located at 345 Park Avenue, New York, New York 10154, and AHT's tax return preparer. The computation requires a precise determination of ATI based on AHT's taxable income (with the prescribed adjustments), total business interest expense, and total business interest income for each taxable year, which involves detail beyond the scope of this memorandum.
Any business interest expense that is disallowed under Section 163(j) in a given taxable year is not permanently lost. Under Section 163(j)(2), disallowed business interest expense is carried forward to the succeeding taxable year and treated as business interest expense paid or accrued in that succeeding year. This carryforward continues indefinitely until the disallowed interest is absorbed.
Conclusion. Based on the financial data currently available, the interest expense on the Keypoint Credit Facility — both the amount properly accrued and deductible in FY2023 and the estimated stub-period amount of approximately $572,000 deductible in FY2024 — is expected to be fully deductible under Section 163, subject to confirmation through the formal Section 163(j) computation on each year's federal income tax return. Even in the unlikely event that a portion of the interest expense were disallowed under Section 163(j), such disallowed amount would carry forward indefinitely to future taxable years.
C. Capitalization vs. Deduction of Interest — Section 263A Considerations
Section 263A of the Code requires the capitalization of certain costs, including interest, that are allocable to the production of "designated property." Designated property includes real property and tangible personal property with an estimated production period exceeding two years, or tangible personal property with an estimated production period exceeding one year and a cost exceeding $1,000,000. See Code § 263A(f)(1). The interest capitalization requirement under Section 263A(f) is intended to match the cost of financing the production of property with the income generated from that property.
AHT is primarily a healthcare services and software-as-a-service ("SaaS") company. Its principal operations involve providing cloud-based clinical decision support, population health management, and revenue cycle management services to hospitals, health systems, physician groups, and other healthcare organizations. AHT does not manufacture tangible personal property and does not engage in real property construction activities. Accordingly, AHT does not appear to produce tangible personal property or engage in construction activities that would subject interest expense to mandatory capitalization under Section 263A(f).
We note that AHT does engage in software development activities in connection with its SaaS platform. To the extent AHT develops internal-use software that qualifies as "specified research or experimental expenditures" within the meaning of Section 174 of the Code (as amended by the TCJA, effective for amounts paid or incurred in taxable years beginning after December 31, 2021), such expenditures are now subject to mandatory capitalization and amortization over a five-year period (or fifteen years for foreign research). However, the interest capitalization analysis under Section 263A is distinct from the Section 174 capitalization requirement. The borrowings under the Keypoint Credit Facility are general corporate borrowings — they were not traced or allocated to specific software development projects or other production activities. The Credit Facility is a general-purpose revolving credit facility used for working capital and general corporate purposes, and the interest thereon should not be subject to capitalization under Section 263A.
Conclusion. Interest on the Keypoint Credit Facility is properly treated as deductible business interest under Section 163, and is not required to be capitalized under Section 263A or any other provision of the Code. To the extent AHT incurs interest that is specifically allocable to the production of designated property (which does not appear to be the case with respect to the Credit Facility), such interest would need to be analyzed separately under Section 263A(f).
V. Original Issue discount Analysis
A. General OID Framework
Sections 1271 through 1275 of the Code set forth the rules governing the treatment of original issue discount. OID arises when a debt instrument is issued at a price below its "stated redemption price at maturity" (generally, the sum of all payments due under the instrument other than "qualified stated interest"). See Code § 1273(a). Where OID exists, the lender (holder) is required to include OID in income over the life of the debt instrument on a constant-yield (economic accrual) basis, and the borrower (issuer) is entitled to deduct OID as interest over the same period, also on a constant-yield basis. See Code § 163(e); Code § 1272.
The amount of OID on a debt instrument is equal to the excess of the stated redemption price at maturity over the issue price of the instrument. See Code § 1273(a)(1). If a debt instrument is issued at par (i.e., the issue price equals the stated redemption price at maturity), no OID exists.
B. Application to Revolving Credit Facility
The Keypoint Credit Facility is a revolving credit facility under which AHT may draw down amounts, repay such amounts, and re-borrow from time to time, subject to the total commitment amount and applicable conditions precedent. It is not a term loan with a fixed principal amount issued at a specified price. This distinction is critical for OID purposes.
Under Treasury Regulation Section 1.1275-2(c), each draw on a revolving credit facility is generally treated as a separate debt instrument for purposes of the OID rules. Accordingly, each time AHT draws on the Keypoint Credit Facility, a new debt instrument is deemed to be issued, and each such deemed instrument must be separately analyzed for OID.
Each draw under the Keypoint Credit Facility was made at par — that is, the amount of cash received by AHT upon each draw was equal to 100% of the face amount of the borrowing. There was no discount applied to any draw. The Credit Facility bears interest at a floating rate (SOFR plus 200 basis points), and all interest payments constitute "qualified stated interest" because they are unconditionally payable in cash at least annually at a single fixed or variable rate. See Treas. Reg. § 1.1273-1(c).
Furthermore, there is no warrant coverage, conversion feature, equity kicker, or other equity-linked component attached to the Credit Facility or any draw thereunder that could create OID or cause any draw to be treated as issued at a discount. Equity-linked features can create OID by reducing the "issue price" of a debt instrument (because the value attributable to the equity component is subtracted from the total consideration received by the issuer in determining the issue price of the debt instrument). No such features exist here.
Conclusion. No OID arises in connection with the Keypoint revolving Credit Facility, any individual draw thereunder, or the repayment of outstanding draws from IPO proceeds. The OID rules are not implicated by this transaction.
VI. Prepayment Premium / Make-Whole Analysis
A. Facility Terms — No Prepayment Premium
The Keypoint revolving Credit Facility, as originally entered into on March 15, 2022, and as amended by the First Amendment dated January 18, 2024, does not impose any prepayment premium, make-whole payment, yield maintenance fee, or other charge in connection with the voluntary prepayment of outstanding revolving loans. Section [●] of the Credit Agreement expressly provides that the Borrower may voluntarily prepay outstanding revolving loans, in whole or in part, at any time and from time to time, without premium or penalty, upon prior notice to the Administrative Agent.
This is consistent with standard market terms for revolving credit facilities. Revolving credit facilities, by their nature, contemplate that borrowers will draw down and repay amounts on a recurring basis, and the imposition of a prepayment premium on a revolving facility would be contrary to this revolving feature. By contrast, term loans — particularly those bearing fixed interest rates or those where the lender has entered into interest rate hedging arrangements — sometimes include prepayment premiums or make-whole provisions designed to compensate the lender for lost interest income or swap breakage costs. No such provisions apply to the Keypoint revolving Credit Facility.
The Payoff Letter received from Keypoint National Bank, in its capacity as Administrative Agent, expressly confirms that no prepayment premium, penalty, breakage fee, or other charge (other than the outstanding principal balance and accrued and unpaid interest through the payoff date) is payable by AHT in connection with the repayment.
B. Tax Treatment if a Prepayment Premium Were Payable
Although not applicable to the transaction at hand, we note for completeness the general tax treatment of prepayment premiums. If a borrower is required to pay a premium to a lender in connection with the early retirement of debt, such premium is generally deductible as additional interest expense under Section 163 of the Code in the taxable year in which the premium is paid. See Revenue Ruling 57-198, 1957-1 C.B. 94 (holding that a premium paid by a borrower for the privilege of prepaying a mortgage loan constitutes interest and is deductible as such). Courts have similarly treated prepayment premiums as a substitute for the future interest that the lender would have received had the loan remained outstanding, and thus as deductible interest. See, e.g., L-R Heat Treating Co. v. Commissioner, 28 T.C.M. 1137 (1969).
Any such prepayment premium, if it were deductible as interest, would also be subject to the Section 163(j) business interest expense limitation described in Section IV.B above.
Because no prepayment premium is payable in connection with the repayment of the Keypoint Credit Facility, this analysis is academic with respect to the current transaction. No tax consequence arises from the absence of a prepayment premium.
VII. Treatment of Loan Origination Costs and Unamortized Debt Issuance Costs
A. AHT's Deferred Financing Costs
AHT incurred loan origination fees, commitment fees, legal fees, and other transaction costs in connection with the establishment of the Keypoint revolving Credit Facility on March 15, 2022. These costs include, among others, arrangement fees paid to the Administrative Agent, upfront commitment fees paid to the lenders, legal fees incurred for the preparation and negotiation of the Credit Agreement and related security documents, and other customary closing costs.
Under Section 461 of the Code and Revenue Ruling 70-360, 1970-2 C.B. 103, loan origination fees paid by a borrower in connection with a revolving credit facility are generally amortizable (i.e., deductible ratably) over the term of the facility. This treatment reflects the principle that such costs provide a benefit to the borrower over the life of the credit facility — specifically, the ongoing availability of the revolving commitment — and should therefore be matched against income over the period during which that benefit is received.
The Keypoint Credit Facility has a five-year term, with an effective date of March 15, 2022 and a maturity date of March 15, 2027 (a total of 60 months). As of the anticipated repayment date of February 13, 2024, approximately 23 months of the 60-month facility term will have elapsed. Accordingly, approximately 37 months of unamortized deferred financing costs remain to be amortized over the period from February 2024 through March 2027.
B. Effect of Partial Repayment on Amortization
A critical point in this analysis is that the repayment of the $65,000,000 outstanding drawn balance does not terminate the Credit Facility. The $150,000,000 revolving commitment remains in place and available to AHT (subject to compliance with the conditions precedent and financial covenants) through the maturity date of March 15, 2027. AHT retains the ability to re-borrow under the Facility at any time during the remaining term.
Because the Facility is not being terminated, AHT should continue to amortize the remaining deferred financing costs on a ratable basis over the remaining term of the Facility through March 15, 2027. The repayment of the outstanding drawn balance — even if it represents the entirety of the current outstanding borrowings — does not affect the continued existence of the revolving commitment and therefore does not accelerate the amortization of deferred financing costs.
This result is consistent with the treatment of deferred financing costs under GAAP (ASC 835-30) for revolving credit arrangements, where such costs are presented as an asset and amortized ratably over the term of the arrangement regardless of the outstanding borrowing level at any given time.
If, in the future, AHT were to terminate the entire revolving commitment prior to maturity (which is not contemplated as of the date of this memorandum), the then-remaining unamortized deferred financing costs would be deductible in full in the taxable year in which the commitment is terminated. See Treas. Reg. § 1.446-5 (regarding the treatment of deferred financing costs upon termination of a lending arrangement). However, this contingency does not arise under the current facts.
Conclusion. AHT should continue to amortize deferred financing costs on the Keypoint Credit Facility on a ratable basis over the remaining term of the Facility through March 15, 2027. The repayment of the outstanding drawn balance from IPO proceeds does not accelerate this amortization because the revolving commitment remains in place.
VIII. UCC Lien Release — Tax Implications
A. Nature of the Liens
The Keypoint revolving Credit Facility is secured by liens and security interests in substantially all assets of AHT. These security interests were granted by AHT to the Administrative Agent (for the benefit of the lenders) pursuant to a Security Agreement entered into concurrently with the Credit Agreement on March 15, 2022. The collateral includes, without limitation, all accounts receivable, chattel paper, deposit accounts, equipment, fixtures, general intangibles (including intellectual property), goods, instruments, inventory, investment property, letter-of-credit rights, commercial tort claims, and all proceeds and products of the foregoing.
The security interests in AHT's personal property were perfected by the filing of UCC-1 financing statements in the State of Delaware (AHT's state of incorporation) and, to the extent required by applicable law, in other jurisdictions where filing was necessary to perfect security interests in specific categories of collateral.
Pursuant to the Payoff Letter, upon receipt of the payoff amount in full, Keypoint National Bank (as Administrative Agent) has agreed to release all liens and security interests on AHT's assets, including by filing or authorizing the filing of UCC-3 termination statements with the appropriate filing offices and executing such other release documentation as may be reasonably requested by AHT.
B. Federal Income Tax Treatment
The granting of a security interest by a borrower to a lender does not constitute a sale, exchange, or other taxable disposition of property by the borrower for federal income tax purposes. A security interest is a contingent right of the secured party to foreclose upon and liquidate the collateral in the event of a default; it does not transfer ownership or beneficial enjoyment of the collateral to the lender. Accordingly, the grant of the security interest by AHT to the Administrative Agent in connection with the Credit Facility did not give rise to any gain, loss, or other taxable event when the lien was originally granted.
Symmetrically, the release of a security interest — whether upon repayment of the secured obligation, termination of the credit facility, or otherwise — does not constitute a taxable event for the borrower. No gain or loss is recognized by AHT upon the release of the liens securing the Keypoint Credit Facility. The release of the security interest does not change the tax basis of any of AHT's assets, nor does it alter the character (ordinary or capital) of any asset. The collateral that was subject to the lien retains its pre-existing tax basis and holding period in the hands of AHT, unaffected by the grant or release of the security interest.
Conclusion. The UCC lien release in connection with the repayment of the Keypoint Credit Facility has no federal income tax consequences to AHT. No gain, loss, income, deduction, or basis adjustment results from the release.
IX. Treatment of Costs Incurred in Connection with the First Amendment
A. Amendment Costs
In connection with the negotiation and execution of the First Amendment to the Credit Agreement dated January 18, 2024, AHT incurred the following categories of costs:
• Legal fees paid to Calderwood & Harkness LLP (125 Broad Street, New York, New York 10004) for the preparation, negotiation, and documentation of the First Amendment;
• Lender consent fees paid to Keypoint National Bank and Stonemill Capital Bank in consideration of their agreement to the modifications set forth in the First Amendment; and
• Other professional fees and expenses associated with the amendment process.
The tax treatment of these costs depends on whether the First Amendment constitutes a "significant modification" of the Credit Facility within the meaning of Treasury Regulation Section 1.1001-3.
Under Treas. Reg. § 1.1001-3, a "modification" of a debt instrument occurs when there is any alteration, including any deletion or addition, in whole or in part, of a legal right or obligation of the issuer (borrower) or holder (lender), whether the alteration is evidenced by an express agreement, a course of performance, or otherwise. A modification is "significant" if, based on all facts and circumstances, the legal rights or obligations that are altered are economically significant. Certain modifications are specifically identified in the regulations as significant (e.g., a change in yield that exceeds specified thresholds, a change in timing of payments that results in a material deferral, a change in the obligor or the collateral that results in a change in payment expectations). If a modification is significant, the modified debt instrument is treated as exchanged for a new debt instrument — a deemed exchange — which can result in gain or loss recognition and the restart of OID computations.
The modifications effected by the First Amendment are as follows:
(i) An amendment to the definition of "Change of Control" to exclude the IPO;
(ii) The addition of a carve-out to the definition of "Permitted Equity Issuance" for the IPO; and
(iii) An update to the mandatory prepayment provisions to clarify the treatment of IPO proceeds.
None of these changes alter the economic terms of the Credit Facility in a manner that would constitute a significant modification. The interest rate (SOFR + 200 bps) is unchanged. The maturity date (March 15, 2027) is unchanged. The commitment amount ($150,000,000) is unchanged. The collateral package is unchanged. No principal amount has been forgiven, deferred, or restructured. The changes are purely accommodative — they facilitate the IPO by ensuring that the IPO does not trigger adverse consequences under the Credit Agreement's covenant and default provisions. These are the types of consent and waiver provisions that are routinely implemented in credit facility amendments preceding a borrower's IPO.
Because the First Amendment does not alter the yield, maturity, principal amount, obligor, collateral, or any other economically significant term of the Credit Facility, it does not rise to the level of a "significant modification" under Treas. Reg. § 1.1001-3. No deemed exchange of old debt for new debt occurs.
B. Deductibility of Amendment Costs
Because the First Amendment does not result in a significant modification or deemed exchange, no gain or loss is recognized, and no new OID calculation is triggered. The amendment-related costs incurred by AHT are generally treated as additional deferred financing costs, amortizable over the remaining term of the Credit Facility (i.e., through the maturity date of March 15, 2027), consistent with the treatment of the original loan origination costs discussed in Section VII above.
However, an important allocation issue arises. Certain costs incurred by AHT in connection with the First Amendment may be more properly characterized as costs attributable to the IPO itself, rather than to the Credit Facility amendment. For example, to the extent legal fees reflect work performed in connection with the structuring and documentation of the IPO (as opposed to the amendment of the Credit Agreement), such costs may be treated as equity issuance costs. Under established authority, equity issuance costs — costs incurred by a corporation in connection with the issuance of its own stock — are capital expenditures that are neither deductible under Section 162 nor amortizable over any period. Instead, they reduce the net proceeds of the offering for book purposes and are treated as a charge to additional paid-in capital. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992); Treas. Reg. § 1.263(a)-5(a).
We recommend that AHT, in consultation with its tax return preparer, make a reasonable allocation of the costs incurred in connection with the First Amendment between (a) costs attributable to the amendment of the Credit Facility (amortizable as deferred financing costs over the remaining facility term) and (b) costs attributable to the IPO (treated as non-deductible equity issuance costs). The allocation should be made on the basis of the relative purpose of each expenditure, taking into account the nature of the services rendered, the time records and invoices of the professionals involved, and any other relevant facts and circumstances.
X. State Income Tax Considerations
AHT has established nexus and files income or franchise tax returns in the following ten states:
1. Massachusetts
2. New York
3. California
4. Texas
5. Illinois
6. Florida
7. Pennsylvania
8. Ohio
9. New Jersey
10. Georgia
The state income tax treatment of the Credit Facility repayment and associated interest deduction is summarized as follows:
Principal Repayment. The repayment of the approximately $65,000,000 principal balance on the Keypoint Credit Facility has no state income tax consequence in any of the ten nexus states listed above. This is consistent with federal treatment. No state imposes an income tax on the repayment of loan principal, and no state provides a deduction for such repayment.
Interest Expense Deductibility. The deductibility of interest expense at the state level varies across jurisdictions. Key considerations include the following:
• Federal Conformity. Most states compute state taxable income by starting with federal taxable income (or federal adjusted gross income, in the case of individual taxpayers) and making state-specific additions and subtractions. States that conform to the federal computation of taxable income will generally follow the federal treatment of business interest expense, including the Section 163(j) limitation, unless the state has specifically decoupled from or modified the federal provision.
• Section 163(j) Conformity. Several states have adopted the Section 163(j) limitation as amended by the TCJA, while others have decoupled or adopted modified versions of the limitation. AHT's state tax return preparer should confirm the conformity status of each nexus state for FY2023 and FY2024. States that have decoupled from Section 163(j) (or that conform to a pre-TCJA version of Section 163(j)) may allow a larger interest expense deduction at the state level than is allowed federally.
• Related-Party Interest Addback. A number of states have enacted addback statutes that require taxpayers to add back interest expense paid to related parties (e.g., affiliated entities) in computing state taxable income. These addback requirements are designed to prevent the erosion of the state tax base through intercompany lending arrangements. However, these provisions are not applicable to AHT's interest expense on the Keypoint Credit Facility, because Keypoint National Bank and Stonemill Capital Bank are unrelated third-party lenders, not affiliates or related parties of AHT.
• Texas Franchise / Margin Tax. Texas imposes a franchise tax (commonly referred to as the "margin tax") computed on a base of total revenue less either cost of goods sold or compensation (at the taxpayer's election), or on a simplified computation of 70% of total revenue. Interest expense is not directly deductible in computing the Texas margin tax base. Accordingly, the repayment of the Credit Facility and the associated interest expense are largely irrelevant for Texas franchise tax purposes.
Recommendation. AHT's state tax return preparer should confirm the conformity of each nexus state to the federal Section 163(j) limitation for FY2023 and FY2024 returns, and should prepare any required state modifications to federal taxable income to reflect differences in the state treatment of business interest expense. No special state tax filing or reporting obligation arises solely from the repayment of the Credit Facility from IPO proceeds.
XI. Impact on Use of Proceeds Disclosure
The Company's Registration Statement on Form S-1 (as amended) and the Rule 424(b)(4) final prospectus, filed with the Securities and Exchange Commission on February 9, 2024, include a "Use of Proceeds" section that specifically discloses the Company's intention to use approximately $65,000,000 of the net IPO proceeds for the repayment of the outstanding balance on the Keypoint revolving Credit Facility. The prospectus also discloses the material terms of the Credit Facility, including the interest rate, maturity date, and the nature of the security interests granted thereunder.
The tax treatment described in this memorandum is fully consistent with the use of proceeds disclosure set forth in the prospectus. No special tax disclosure regarding the repayment is required in the prospectus beyond the general description already included. We note that the "Material U.S. Federal Income Tax Consequences to Non-U.S. Holders" section of the prospectus addresses the tax treatment of purchasers of shares in the IPO (i.e., the tax consequences to investors), not the corporate-level tax treatment of the Company's use of proceeds. The corporate-level tax analysis set forth in this memorandum need not be, and appropriately is not, disclosed in the prospectus.
Additionally, no Current Report on Form 8-K reporting obligation arises solely from the repayment of the Credit Facility from IPO proceeds. The Credit Facility remains in place (the revolving commitment is not being terminated), and the repayment of outstanding borrowings under an existing credit facility in the ordinary course does not trigger an 8-K filing obligation under any item of Form 8-K. To the extent the IPO closing itself triggers 8-K filing obligations (e.g., under Item 3.02 — Unregistered Sales of Equity Securities, if applicable, or Item 9.01 — Financial Statements and Exhibits), those obligations are addressed separately by the capital markets team and are not affected by the tax analysis herein.
XII. Summary of Conclusions
Based on the foregoing analysis, our conclusions with respect to the federal income tax treatment of the repayment of the Keypoint revolving Credit Facility from IPO proceeds are as follows:
1. Principal Repayment (approximately $65,000,000). The repayment of principal is not deductible and does not give rise to taxable income. The treatment is tax-neutral, consistent with the general principle that the repayment of borrowed capital is neither income nor deduction. The source of funds (equity proceeds from the IPO) does not alter this conclusion, as the IPO proceeds are not taxable income to AHT under Section 1032.
2. Accrued Interest (estimated approximately $572,000 for the January 1 – February 13, 2024 stub period). Accrued interest is deductible as business interest expense under Section 163 in AHT's FY2024 taxable year (interest accrued in FY2023 was properly deductible in FY2023), subject to the Section 163(j) business interest expense limitation. Based on AHT's financial profile — FY2023 Adjusted EBITDA of $138,700,000 and FY2023 net income of $41,300,000 — full deductibility of the interest expense is expected, subject to final Section 163(j) calculations on the applicable tax returns.
3. Original Issue discount. No OID arises. Each draw under the revolving Credit Facility was made at par (100% of face value), with no discount, warrant coverage, conversion feature, or other equity-linked component.
4. Prepayment Premium. No prepayment premium, make-whole payment, or yield maintenance fee is payable under the terms of the Keypoint Credit Facility. Accordingly, no tax consequence arises from this aspect of the transaction.
5. Unamortized Debt Issuance Costs. AHT should continue to amortize deferred financing costs associated with the Credit Facility on a ratable basis over the remaining facility term through March 15, 2027. The partial repayment of the drawn balance does not terminate the revolving commitment and therefore does not accelerate the amortization of deferred financing costs.
6. UCC Lien Release. The release of liens and security interests on AHT's assets in connection with the repayment has no federal income tax consequences. No gain, loss, income, deduction, or basis adjustment results from the release.
7. First Amendment Costs. Costs incurred in connection with the First Amendment to the Credit Agreement are generally amortizable as additional deferred financing costs over the remaining facility term through March 15, 2027, to the extent attributable to the credit facility amendment. Costs attributable to the IPO itself should be treated as non-deductible equity issuance costs. A reasonable allocation should be made based on the relative purpose of each expenditure.
8. State Income Tax. State income tax treatment generally conforms to the federal treatment described above across AHT's ten nexus states. State-specific conformity to Section 163(j) should be confirmed by AHT's state tax return preparer for FY2023 and FY2024. Related-party interest addback provisions are not applicable (Keypoint and Stonemill are unrelated third-party lenders). The Texas margin tax does not allow a direct deduction for interest expense, making the repayment and interest expense largely irrelevant for Texas franchise tax purposes.
XIII. Limitations and Qualifications
This memorandum has been prepared by Calderwood & Harkness LLP for the internal use of the AHT IPO deal team at Calderwood & Harkness LLP and Arbor Health Technologies Inc. The analysis and conclusions set forth herein are subject to the following limitations and qualifications:
1. Scope. This memorandum addresses the United States federal income tax consequences of the repayment of the Keypoint Credit Facility from IPO proceeds and provides a general overview of state income tax considerations in the ten states in which AHT has established nexus. This memorandum does not address foreign, local, payroll, excise, sales, use, transfer, stamp, or other non-income tax consequences that may arise in connection with the repayment or the IPO.
2. Authorities. The analysis set forth herein is based on the Internal Revenue Code of 1986, as amended, Treasury Regulations promulgated thereunder, published rulings and administrative pronouncements of the Internal Revenue Service, and judicial authorities, in each case as in effect as of the date of this memorandum. These authorities are subject to change, possibly with retroactive effect, which could affect the validity of the conclusions expressed herein. No assurance can be given that the Internal Revenue Service would agree with the conclusions set forth in this memorandum, or that a court would sustain such conclusions if challenged.
3. Factual Assumptions. The estimated financial figures used in this memorandum — including the outstanding drawn balance of approximately $65,000,000, the per diem interest rate, the estimated stub-period interest of approximately $572,000, and AHT's FY2023 financial results (Adjusted EBITDA of $138,700,000 and net income of $41,300,000) — are based on information provided by AHT management (David Halderman, Chief Financial Officer) and the Payoff Letter received from Keypoint National Bank. Final amounts should be confirmed at or following the closing of the IPO and the repayment of the Credit Facility.
4. Section 163(j) Computation. The formal Section 163(j) computation for FY2023 and FY2024 must be prepared by AHT's tax return preparer based on the Company's complete taxable income and the prescribed adjustments. The expectation of full deductibility expressed in this memorandum is based on currently available financial data and is subject to confirmation through the formal computation.
5. Not a Tax Opinion. This memorandum does not constitute a formal tax opinion rendered by Calderwood & Harkness LLP. It is an internal analytical memorandum prepared for the benefit of the deal team and the client. This memorandum should not be relied upon by any third party, and no third-party beneficiary rights are created hereby.
•
We trust this memorandum is helpful. Please do not hesitate to contact us if you have any questions or require additional analysis on any of the matters discussed herein.
Sylvia Hartwell Partner, Tax Calderwood & Harkness LLP 125 Broad Street New York, New York 10004
cc: Vivienne St. Claire, Calderwood & Harkness LLP Claire Dempsey, Calderwood & Harkness LLP Rachel Moynihan, Arbor Health Technologies Inc. David Halderman, Arbor Health Technologies Inc.
PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT This memorandum is prepared by Calderwood & Harkness LLP for the internal use of the deal team and client. It is not intended for distribution to, or reliance by, any third party.
Term | Description
Type | Senior Secured Revolving Credit Facility
Total Commitment | $150,000,000
Effective Date | March 15, 2022
Maturity Date | March 15, 2027
Interest Rate | Secured Overnight Financing Rate ("SOFR") plus 200 basis points (floating rate)
Security | Senior secured lien on substantially all assets of AHT, including accounts receivable, inventory, equipment, intellectual property, deposit accounts, investment property, general intangibles, and proceeds thereof
Financial Covenants | (i) Total Net Leverage Ratio not to exceed 3.50 to 1.00; (ii) Fixed Charge Coverage Ratio of not less than 1.25 to 1.00, in each case tested on a trailing four-quarter basis
Revolving Feature | Amounts may be drawn, repaid, and re-borrowed during the revolving period, subject to the total commitment amount and compliance with all conditions precedent to borrowing
Financial Metric | FY2023 Amount
Adjusted EBITDA | $138,700,000
Net Income | $41,300,000

PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP TAX MEMORANDUM

MATTER NO.: 1010-00002

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